Red River State Bank v. Reierson

• Decision Date: 27 June 1995
• Docket Number: No. 930359,930359
• Citation: 533 N.W.2d 683
• Parties: 27 UCC Rep.Serv.2d 44 RED RIVER STATE BANK, Plaintiff, Appellant and Cross-Appellee v. Don A. REIERSON, Husband, and Adele M. Reierson, Also Known as Adele Reierson, His Wife, Defendants, Appellees and Cross-Appellants. Civ.
• Court: North Dakota Supreme Court

Page 683

533 N.W.2d 683

27 UCC Rep.Serv.2d 44

RED RIVER STATE BANK, Plaintiff, Appellant and Cross-Appellee v. Don A. REIERSON, Husband, and Adele M. Reierson, Also Known as Adele Reierson, His Wife, Defendants, Appellees and Cross-Appellants.

Civ. No. 930359.

Supreme Court of North Dakota.

June 27, 1995.

Roger J. Minch, of Serkland, Lundberg, Erickson, Marcil & McLean, Ltd., Fargo, for plaintiff, appellant and cross-appellee.

Lowell P. Bottrell, of Anderson & Bailly, Fargo, for defendants, appellees and cross-appellants.

SANDSTROM, Justice.

Red River State Bank appeals from a judgment invalidating its mortgage against homestead property of Don A. and Adele M. Reierson, and from an amended judgment granting the bank a conditional equitable lien on that property. The Reiersons cross-appeal from the amended judgment. We conclude the trial court correctly ruled the mortgage was unenforceable against the Reiersons' homestead property because the homestead exemption waiver clause in the mortgage was not printed in a conspicuous manner, and the trial court did not abuse its discretion in granting the bank N.D.R.Civ.P. 60(b) relief to impose an equitable lien on the property subject to the Reiersons' homestead exemption so long as they occupy the property as a homestead. We therefore affirm.

I

On June 1, 1990, the Reiersons borrowed $54,000 from the bank to pay for farm operating expenses. To secure the debt, the Reiersons granted the bank a mortgage on their Cass County homestead property which they had purchased in 1977. In February 1993, after the Reiersons failed to make the first two of 20 annual installment payments under the promissory note, the bank began this foreclosure action.

In their answer, the Reiersons asserted, as an affirmative defense, the bank's complaint failed to state a claim upon which relief could be granted because the bank did not comply with N.D.C.C. Sec. 47-18-05.1(1), which requires a homestead exemption waiver to be printed in a conspicuous manner.

The trial court granted the Reiersons' motion for summary judgment and dismissed the foreclosure action. The trial court held the mortgage "is invalid in total and not a lien against the property ... because ... [it] did not contain a conspicuous notice as to the waiver of the homestead exemption." The court reasoned the clause was not conspicuous because it "was not different in size of type or print nor bold or contrasting such that the eye would catch the waiver language [which] ... was of the same type of print as the rest of the mortgage document."

After substituting counsel, the bank moved under N.D.R.Civ.P. 60(b) for relief from the judgment, asserting it should be entitled to an equitable lien on the property in accordance with this Court's decision in Gust v. Peoples and Enderlin State Bank, 447 N.W.2d 914 (N.D.1989), which had not been brought to the trial court's attention. The bank also filed an appeal from the summary judgment of dismissal. We subsequently granted the bank's motion to temporarily suspend the appeal and remand the case to the trial court for consideration of the pending Rule 60(b) motion.

After a hearing, the trial court granted the bank's motion for relief from the judgment. The court ruled the Reiersons "would be unduly enriched by the court's previous order." The court noted "the purpose of the waiver of the homestead exemption statute was to inform borrowers that they were signing away their homestead exemption rights," and held "[t]o prevent unjust enrichment, an equitable lien must be applied against" the property "subject to [the Reiersons'] homestead exemption so long as the property is occupied by [the Reiersons] as a homestead." An amended judgment was entered incorporating and altering the initial summary judgment in this fashion. The court denied the bank's later motion for reconsideration. Both the bank and the Reiersons have appealed.

The trial court had jurisdiction under Art. VI, Secs. 1 and 8, N.D. Const., and N.D.C.C. Sec. 27-05-06. This Court has jurisdiction under Art. VI, Secs. 1 and 2, N.D. Const., and N.D.C.C. Sec. 28-27-01. The appeals are timely under N.D.R.App.P. 4(a).

II

The version of N.D.C.C. Sec. 47-18-05.1(1) in effect when this mortgage was executed provided:

"All mortgages on homesteads executed after June 30, 1987, which are not purchase money agreements must contain the following statement printed in a conspicuous manner and must be signed and dated by the person waiving the exemption at the time the contract is executed:

"I understand that homestead property is in many cases protected from the claims of creditors and exempt from judicial sale and that, by signing this contract, I voluntarily give up my right to this protection for this property with respect to claims based upon this contract."

The mortgage here is a typed, legal-sized, three-page document. In addition to the acknowledgment, the mortgage contains eight paragraphs. Six of the eight paragraphs have capitalized introductions: "THIS INDENTURE;" "WITNESSETH;" "TO HAVE AND TO HOLD THE SAME;" "PROVIDED, NEVERTHELESS;" "WAIVER OF HOMESTEAD EXEMPTION;" and "HIGHLY ERODIBLE LAND AND WETLAND CONSERVATION AGREEMENT." The remainder of each paragraph is typed in the same sized lower-case print. The homestead exemption waiver clause appears below the middle of the second page and contains, in lower-case type, the exact language required by the statute.

Because N.D.C.C. Chapter 47-18 does not define the term "conspicuous," the bank asserts we should adopt the Uniform Commercial Code definition of the term:

"A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NONNEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is 'conspicuous' if it is in larger or other contrasting type or color. But in a telegram any stated term is 'conspicuous'. Whether a term or clause is 'conspicuous' or not is for decision by the court."

N.D.C.C. Sec. 41-01-11(10) (U.C.C. Sec. 1-201). See also N.D.C.C. Sec. 51-14.1-01(5). The Official Comment to U.C.C. Sec. 1-201 states this definition "is intended to indicate some of the methods of making a term attention-calling. But the test is whether attention can reasonably be expected to be called to it." 1 Uniform Laws Annotated, Uniform Commercial Code, at p. 71 (1989). See also 1 R. Anderson, Uniform Commercial Code Sec. 1-201:57, at p. 211 (3rd ed. 1981) ("attention-attracting capacity is the criterion of conspicuousness").

Decisions construing the U.C.C. definition of "conspicuous" in the context of exclusions or modifications of the implied warranty of merchantability are collected and described in Stevenson v. TRW Inc., 987 F.2d 288, 296 (5th Cir.1993):

"A contract's warranty disclaimer satisfies the conspicuous requirement when it is printed in all capital letters, when it appears in a larger type than the terms around it, or when it is in a larger and boldface type.... Likewise, a disclaimer in boldface type, printed in all capitals on the face of the warranty above the buyer's signature meets the definition of conspicuousness.... A disclaimer is not conspicuous, however, when it is printed in small print on the back of the document, when it is the same size and typeface as the terms around it, or when it is not in boldface or capital lettering."

(Citations omitted).

The homestead exemption waiver clause is imbedded within the body of the mortgage and is set forth in the same sized print as the remaining contract language. The clause is in no way highlighted or emphasized any differently than the other paragraphs. See Keblish v. Thomas Equipment, Ltd., 427 Pa.Super. 93, 628 A.2d 840, 846 (1993). Even though the language is not hidden, a clause is not conspicuous if "there is nothing to draw the reader's attention to it." Kelley Metal Trading Co. v. Al-Jon/United, Inc., 812 F.Supp. 185, 189 (D.Kan.1993). If we were to accept the bank's argument, the entire mortgage would have to be considered conspicuous. But this mortgage is not so short, like a telegram, that every term must be considered conspicuous. See Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex.1993). We conclude as a matter of law the homestead exemption waiver clause is not "printed in a conspicuous manner" as required by N.D.C.C. Sec. 47-18-05.1(1).

The bank asserts, even if the clause is not conspicuous, the purpose of the statutory requirement was met because Don Reierson, in deposition testimony, indicated he and his wife knew they were mortgaging their homestead to the bank. We reject this argument for several reasons.

First, the homestead exemption waiver clause is obviously intended to inform borrowers that homestead property is often protected from claims of creditors and exempt from judicial sale under the law and, by signing the mortgage, borrowers are waiving that exemption right. That borrowers know they are mortgaging their homestead is not the same as knowing they are waiving homestead exemption rights by doing so. The Reiersons claimed by affidavit they knew nothing about their homestead rights at the time the mortgage was executed.

Second, the bank's reliance on Thompson v. Danner, 507 N.W.2d 550 (N.D.1993), and F.D.I.C. v. Jahner, 506 N.W.2d 57 (N.D.1993), for the proposition actual notice relieves parties from specific notice requirements, is misplaced. In Thompson, we were faced with the reasonable identification requirements for descriptions of land for purposes of a security agreement and financing statement. In Jahner, we were faced with the reasonable notice requirements for a creditor's intended disposition of collateral. In both cases, we ruled the debtors' actual knowledge could satisfy the reasonable identification and reasonable notice requirements. In this case, Sec. 47-18-05.1(1) does not impose upon lenders an...