Claims for Construction Defects Not Conveyed in Foreclosure Sale

Henderson v. Copper Ridge Homes, LLC, 273 So.3d 750 (Miss. 2019). The Hendersons and Copper Ridge entered into a home construction contract. The Hendersons also contracted with First Bank to finance the construction. The Hendersons filed suit against Copper Ridge in the Circuit Court of Pike County after a dispute arose over the price. They also sued First Bank claiming that the bank had improperly disbursed funds to Copper Ridge for the construction. The Hendersons alleged breach of contract and tort claims against both parties. After filing suit, the Hendersons defaulted on their loan with First Bank. First Bank filed a counterclaim for judicial foreclosure. The Hendersons subsequently sought leave to amend their complaint to add claims for wrongful foreclosure, fraud and breach of the duty of good faith and fair dealing. The trial court denied the Hendersons’ request to add a claim for wrongful foreclosure (because foreclosure had not yet occurred) but allowed them to add claims for fraud and breach of the duty of good faith and fair dealing. The circuit court subsequently granted First Bank’s motion for an order of judicial foreclosure. After foreclosure, the Hendersons again requested leave to amend their complaint to add a claim for wrongful foreclosure, which the trial court denied. Copper Ridge and First Bank both moved for summary judgment on all of the Hendersons’ claims arguing that the judicial foreclosure extinguished the Hendersons’ right to pursue claims related to alleged damage to their home. In response, the Hendersons argued that their claims were personal and did not belong to the real property. The circuit court granted Copper Ridge’s and First Bank’s motions finding that the Hendersons’ claims arising from alleged construction defects traveled with the title to the property. The circuit court found that the Hendersons lost their right to seek damages when they lost their interest in the property. On appeal by the Hendersons, the Mississippi Supreme Court affirmed the judicial foreclosure and reversed the circuit court’s grant of the contractor and bank’s motion for summary judgment. The Supreme Court found that the Hendersons’ claims did not travel with the title to the property upon foreclosure. In reaching its decision, the Supreme Court relied on the language of the deed of trust which only conveyed real property. The Supreme Court noted that the deed of trust did not convey any contractual rights or common-law rights. The Supreme Court further found that the circuit court had not erred in allowing First Bank to foreclose before the Hendersons’ contract-based claims had been decided although it may have been more practical for the trial court to delay granting the foreclosure until after the Hendersons’ contractual claims had been resolved.

Note 1: It is important to keep in mind that the Hendersons had three different claims: a claim against the contractor for construction defects, a claim against the bank for breach of the loan agreement arising out the bank’s disbursement of the loan proceeds, and another claim against the bank for wrongful foreclosure. The interesting question raised by this case is whether the claim for construction defects is appurtenant to the real estate that was subject to the deed of trust; it seems apparent that the claims against the bank for breach of the loan agreement and for wrongful foreclosure are not part of the real estate. The Supreme Court determined in this case that the claim for construction defects was not part of the real estate and was not conveyed to the purchaser at the foreclosure sale.

Note 2: By extension, it appears that the bank in this case will not have a claim against the builder for construction defects. As an aside, in commercial construction loans, the lender usually requires the borrower to collateral assign the construction contract so that the lender has the right to bring an action for construction defects if the lender has to take over the project.

Note 3: In this case the deed of trust, by its terms, only conveyed to the bank real property interests, which the Supreme Court held did not include the claim against the builder for construction defects. The opinion suggests that the language of the deed of trust could have been broadened to include the grantors’ claim against the builder for construction defects, and that in that case, the foreclosure would have cut off this claim. But is it really so simple? If the claim for construction defects is personal property rather than real property, how would a bank get and perfect a security interest in this personal property? Would such a claim be subject to the Uniform Commercial Code that the bank would need to perfect and enforce under the terms of the UCC? Section 9-201(d)(12) of the UCC provides that the UCC is inapplicable to an assignment of a claim arising in tort, but claims for construction defects and breach of loan agreement would be claims for breach of contract.

Note 4: In its opinion, the Supreme Court distinguished two prior Mississippi Supreme Court cases: Citizens Nat’l Bank v. Dixieland Forest Prods., LLC, 935 So.2d 1004, 1014 (Miss. 2006) and Maranatha Faith Center, Inc. v. Colonial Trust Co., 904 So.2d 1004 (Miss. 2004). First Bank cited these cases as authority for its argument that it acquired all of the Hendersons’ claims when it purchased the property at the foreclosure sale. In each of those cases, however, the lender purchased claims to satisfy a debt. The Supreme Court thus determined that the lender in those cases could be substituted as the party in interest in a pending lender-liability case. In this case, First Bank did not purchase the Hendersons’ claims to satisfy a debt. Rather, First Bank argued that the Hendersons’ lost their claims simply by virtue of the foreclosure.

To learn more about the co-authors, Rod Clement and Lindy Brown, visit Rod’s member profile or firm profile or Lindy’s firm profile.