Bailey v. Hansen

• Decision Date: 06 December 1937
• Docket Number: 7736.
• Citation: 74 P.2d 438,105 Mont. 552
• Parties: BAILEY v. HANSEN.
• Court: Montana Supreme Court

74 P.2d 438

105 Mont. 552

BAILEY v. HANSEN.

No. 7736.

Supreme Court of Montana

December 6, 1937

Appeal from District Court, Rosebud County, Sixteenth District Rudolph Nelstead, Judge.

Action by Henry N. Bailey against Harold E. Hansen. From an order for defendant, plaintiff appeals.

Reversed.

F. F Haynes, of Forsyth, for appellant.

George W. Farr, of Miles City, for respondent.

ANGSTMAN Justice.

This appeal is from an order dissolving an attachment. Plaintiff's action is on a promissory note in the sum of $2,000 for money loaned to defendant, which he alleges was secured by a mortgage on two sections of land as one tract and a quarter section as another tract. Plaintiff alleges that at the time of the loan defendant fraudulently represented that the first tract was free and clear of encumbrance, whereas it was mortgaged to another party long before; the amount of the indebtedness at the time of the filing of the complaint being $1,484.60. The other tract had an existing prior mortgage in the sum of $6,000 which was in the process of foreclosure when this action was commenced. He alleges further that in making the loan he relied upon the representations that the first tract was free and clear of encumbrances.

Plaintiff filed an affidavit for attachment stating, in substance and effect, that the mortgage security was worthless and valueless, through no fault of his. He reiterated the allegations of fraud with reference to the representations of defendant that the first tract was unencumbered, and asserted that the lands upon foreclosure and sale would not bring enough to satisfy the first mortgage and that, in consequence, his security had become valueless. A writ of attachment was issued and levied. Defendant filed a motion to dissolve the attachment upon the following grounds: "1. That the plaintiff's complaint does not state facts sufficient to constitute a cause of action against the defendant. 2. That this action cannot be maintained against the defendant for the reason that it is prohibited by section 9467 of the Revised Codes of Montana, the plaintiff's note and indebtedness therein sued upon being secured by a mortgage upon real property and said mortgage has not been foreclosed. 3. That plaintiff is not entitled to have a writ of attachment issued, served or levied upon the property of the defendant until he has first exhausted the mortgage security held and possessed by him as security for the payment of the indebtedness sued upon. 4. That it does not sufficiently or at all appear from plaintiff's complaint or by the plaintiff's affidavit for attachment that the plaintiff's mortgage security held and possessed by him as security for the payment of the indebtedness sued upon has, without any act of the plaintiff, the person to whom the security was given, become valueless."

At the hearing on the motion evidence was introduced by plaintiff showing that the lands in question were not worth the amount of the first mortgage indebtedness. Defendant did not testify at the hearing and filed no counter affidavit. The only evidence offered by him was the assessment records showing the assessed valuation of the lands. The trial judge sustained the motion, basing his decision upon the ground that plaintiff must exhaust his security by foreclosure proceedings before he is in a situation to show that his security has become valueless.

In considering the propriety of the court's decision, two sections of our statute require consideration. Section 9467, Revised Codes, provides in part: "There is but one action for the recovery of debt, or the enforcement of any right secured by mortgage upon real estate or personal property, which action must be in accordance with the provisions of this chapter." The chapter then deals with proceedings for the foreclosure of the mortgage. The other section involved is section 9256, which authorizes an attachment in certain contract actions, "where the contract is not secured by any mortgage or lien upon real or personal property, or any pledge of personal property, or, if originally secured, such security has, without any act of the plaintiff, or the person to whom the security was given, become valueless."

The purpose of section 9467 is to compel one who has taken security for his debt to exhaust the security before resorting to the general assets of the debtor. Lepper v. Jackson, 102 Mont. 259, 57 P.2d 768. In order to harmonize sections 9467 and 9256, this court has held that section 9467 does not prohibit a personal action when the mortgage security has become valueless (Barth v. Ely, 85 Mont. 310, 278 P. 1002; Vande Veegaete v. Vande Veegaete, 75 Mont. 52, 243 P. 1082), and has held that it is no bar to a personal action in all cases even though the act of the mortgagee may have caused the security to become valueless. Richardson v. Lloyd, 90 Mont. 127, 300 P. 254; Leffek v. Luedeman, 95 Mont. 457, 27 P.2d 511, 91 A.L.R. 286.

The Supreme Court of Idaho, under a statute like our section 9467, has also held that a personal action may be maintained if the security has become valueless. Edminister v. Van Eaton (Idaho) 63 P.2d 154, 108 A.L.R. 393.

Obviously, to prove that the security has become valueless under section 9467, it would not be necessary to first foreclose the mortgage.

We then come to the question whether it is necessary, under section 9256, to foreclose the mortgage in order to prove that the security has become valueless so as to authorize an attachment, or may that be proven otherwise than by foreclosure proceedings? We think it is clear that if plaintiff must foreclose his mortgage before he can prove that his security is valueless under section 9256, then that part of the statute authorizing attachment when the security has, without the act of plaintiff, become valueless, becomes meaningless. After the foreclosure of the mortgage, the balance remaining due is unsecured so far as the mortgage is concerned. Union Bank & Trust Co. v. Himmelbauer, 56 Mont. 82, 181 P. 332. Plaintiff would then have a deficiency judgment on which execution could issue, and there then would be no occasion to determine whether the security was valueless, or whether an attachment could issue. At that stage of the case, there is no security to be valued.

The statute clearly contemplates that a plaintiff may, without foreclosing, attach property by showing that the security has become valueless through no act of his. Adjudicated cases are not in harmony on this general subject. We think the better reasoned cases support the view that, where there has been a change of circumstances, after the taking of the mortgage resulting in the fact that it has become valueless, this fact may be shown without resorting to the useless procedure of foreclosure.

Thus in McPhee v. Townsend, 139 Cal. 638, 73 P. 584, a debt was secured by bonds of a projected railroad company. The railroad was never constructed and the company never had or acquired any property of any value, and thus the bonds had no value. The court said: "If, as here pleaded, and as the evidence substantiates, the bonds given as security were at the time of their delivery valueless, it follows that there was no contract of security; that no property in truth was hypothecated or pledged, and that the creditor stands in precisely the position as would one whose debtor had made no pretense of securing the debt."

In Republic Truck Sales Corporation v. Peak, 194 Cal. 492, 229 P. 331, it was held that plaintiff could show by affidavit and without foreclosure proceedings, that its mortgage had become valueless because it covered property that was not mortgageable, and that attachments subsequently issued, but for debts antedating the mortgage, were for sums of money in excess of the value of the property.

In Bennett v. Superior Court, 218 Cal. 153, 21 P.2d 946, the court held that where plaintiff alleged that his security had become valueless without any act or fault of his, due to the fact that his security was subordinate to a prior encumbrance, an attachment was proper, and this without being compelled to first foreclose his lien.

There are cases holding that where plaintiff voluntarily takes security for a debt, whether a first or second mortgage, and there is no change of circumstances, he must foreclose and cannot assert that the security has become valueless. Among such cases are the following: Barbieri v. Ramelli, 84 Cal. 154, 23 P. 1086, cited approvingly in Largey v. Chapman, 18 Mont. 563, 46 P. 808, and in Barth v. Ely, supra; Yorks v. Roberts, 47 Idaho 312, 274 P. 799; Giandeini v. Ramirez, 11 Cal.App.2d 469, 54 P.2d 91. The decision of the trial court is based upon these decisions. In effect, these cases hold that when plaintiff takes security he is precluded from thereafter asserting that it had no value when taken, and unless there has been a change of circumstances thereafter affecting its value as security, he must foreclose. They are based primarily upon estoppel. Compare Giandeini v. Ramirez, supra. But here plaintiff did not knowingly take a second mortgage so far as the two sections of land were concerned. He thought he was getting a first mortgage on them, as the defendant, according to plaintiff's allegations, represented. This fact is not disputed here. It is the same, in legal effect, as if defendant had given a mortgage on property which he did not own. At least, so far as the two sections of land were concerned, defendant did not own the property right therein which he led plaintiff to believe he did, and had no right to give to plaintiff a first mortgage thereon.

Plaintiff is not estopped from showing that...