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14. Does the second bank continue to have a valid mortgage on the farm?
Several months later, the original farmer repurchased her farm from the buyer, who executed a warranty deed transferring the farm to her. After the farmer promptly recorded that deed, the second bank commenced foreclosure proceedings on the farm. The farmer denied the validity of the second bank's mortgage.
Subsequently, the farmer defaulted on her obligation to the first bank, which then validly accelerated the debt and instituted nonjudicial foreclosure proceedings as permitted by the jurisdiction. The second bank received notice of the foreclosure sale but did not send a representative to the sale. At the foreclosure sale, a buyer who was not acting in collusion with the farmer outbid all other bidders and received a deed to the farm.
A few years later, the farmer borrowed $5,000 from a second bank and gave that bank a promissory note secured by a mortgage on her farm. The bank promptly recorded the mortgage.
A farmer borrowed $100,000 from a bank and gave the bank a promissory note secured by a mortgage on the farm that she owned. The bank promptly recorded the mortgage, which contained a due-on-sale provision.
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A is incorrect. The doctrine of estoppel by deed arises when a person executes a deed purporting to convey an estate that either the person does not have or is larger than what the person has. If that person later acquires that estate, then the subsequently acquired estate passes to the grantee. The farmer owned the farm at the time when she executed both mortgages. The mortgages were liens on the property. The first bank properly foreclosed its mortgage, after giving notice to the second bank. The second bank, as a necessary party to the foreclosure action, was given notice. The buyer at the sale acquired the title that the farmer had at the time the mortgage was given to the first bank, which was a title free of any other mortgage liens, and the buyer then conveyed that title when he sold the property back to the farmer.
B is incorrect. The second bank's failure to appear, the buyer at the sale received title free and clear. The buyer being the farmer does not change this result.
D is incorrect. This answer correctly concludes that the second bank does not have a valid mortgage on the farm but misstates the reasoning for this conclusion. The due-on-sale clause allowed the first bank to accelerate the debt in the event the farmer sold the farm. The farmer never sold the property, and thus the due-on-sale clause was not involved. The property was sold at a foreclosure sale after the farmer went into default. The first bank had priority. The second bank was a necessary party to the foreclosure proceeding and was given notice of the sale. When the second bank failed to appear at the foreclosure proceeding or to take any other action, the buyer at the sale received the title the farmer had at the time the mortgage was given to the first bank, which was a title free of any other mortgage liens.