## Facts

- R. & R. Construction Co. owned real property in Pawtucket, Rhode Island, subject to a first mortgage held by Pawtucket Institution for Savings.
- After R. & R. defaulted, the first mortgagee foreclosed and held a public auction on October 26, 1967.
- Lawrence E. Gagnon, the second mortgagee of record, bought the property at the foreclosure sale for $81,000.
- After satisfaction of the first-mortgage debt and foreclosure expenses, a surplus of $10,153.95 remained and was deposited into the Superior Court registry through an interpleader action to determine entitlement among junior claimants.
- Gagnon’s second mortgage arose from a written construction-and-sale contract under which R. & R. agreed to build and sell a nine-unit apartment building to Gagnon for $82,000; Gagnon advanced $25,000 to R. & R.
- R. & R. executed a mortgage deed to Gagnon, recorded September 7, 1966, intended to secure R. & R.’s obligations under the construction contract.
- The mortgage deed used a statutory standard form and included boilerplate language referencing a promissory note that did not exist, while also stating it secured performance of the construction contract.
- R. & R. failed to complete construction; Gagnon completed the project himself and kept itemized records of his completion expenses.
- F.D. McKendall Lumber Co., the third mortgagee, argued Gagnon’s mortgage was invalid and that McKendall should receive the surplus.

## Issues

1. Whether a mortgage is enforceable when a standard-form deed references a promissory note that does not exist, and the secured obligation is described by reference to a construction contract rather than a note.
2. Whether the second mortgagee carried the burden of proving a secured claim sufficient to take the foreclosure surplus ahead of a junior third mortgagee.

## Decision

- The Rhode Island Supreme Court affirmed the Superior Court judgment awarding the entire surplus to Gagnon.
- The court held Gagnon’s mortgage was valid and enforceable despite the inaccurate reference to a promissory note, because the secured obligation (the construction-contract obligations and related advances) was reasonably identifiable.
- The court held the evidence supported the trial justice’s finding that Gagnon’s documented completion costs and advances established a claim exceeding the surplus, and McKendall failed to rebut that showing.

## Legal Principles

- A real estate mortgage may secure obligations that are not stated with technical precision if the underlying obligation can be reasonably identified from the instrument and surrounding circumstances.
- An erroneous or surplus reference in a standard-form mortgage to a nonexistent promissory note does not invalidate the mortgage when the instrument otherwise makes clear it secures a real, enforceable obligation.
- Consideration supporting a mortgage may be shown by actual advances of funds and enforceable contractual undertakings secured by the mortgage.
- A claimant to foreclosure surplus may establish entitlement through prima facie proof of the amount due under the secured obligation (including itemized completion costs), shifting the burden to competing claimants to rebut.

## Conclusion

The court upheld a second mortgage securing construction-contract obligations even though the deed mistakenly referenced a nonexistent promissory note, and it affirmed awarding the foreclosure surplus to the second mortgagee based on unrebutted evidence that his secured claim exceeded the surplus.


Pawtucket Inst. for Sav. v. Gagnon, 475 A.2d 1028 (R.I. 1984)