Bank of New Glarus v. Swartwood

• Decision Date: 26 October 2006
• Docket Number: No. 2005AP647.,2005AP647.
• Citation: 725 N.W.2d 944,2006 WI App 224
• Parties: The BANK OF NEW GLARUS a Wisconsin Banking Corporation, Plaintiff-Respondent, v. Clarence Allen SWARTWOOD, Kathy Swartwood and John Doe and Jane Doe, Defendants, Ameriquest Mortgage Company, Defendant-Appellant.
• Court: Wisconsin Court of Appeals

725 N.W.2d 944

2006 WI App 224

The BANK OF NEW GLARUS a Wisconsin Banking Corporation, Plaintiff-Respondent, v. Clarence Allen SWARTWOOD, Kathy Swartwood and John Doe and Jane Doe, Defendants, Ameriquest Mortgage Company, Defendant-Appellant.

No. 2005AP647.

Court of Appeals of Wisconsin.

Submitted on Briefs September 15, 2005.

Opinion Filed October 26, 2006.

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On behalf of the defendants-appellant, the cause was submitted on the briefs of David E. McFarlane and Sheila M. Sullivan of Bell, Gierhart & Moore, S.C., Madison, and Gary B. Bodelson, Minneapolis, MN.

On behalf of the plaintiff-respondent, the cause was submitted on the brief of Todd W. Schluesche of Kittelsen, Barry, Wellington, Thompson and Schluesche, Monroe.

Before DYKMAN, VERGERONT and HIGGINBOTHAM, JJ.

¶ 1 DYKMAN, J

The dispute in this case is between Ameriquest and Bank of New Glarus, both of which claim a primary secured interest in real estate owned by Clarence and Kathy Swartwood. Ameriquest appeals from a summary judgment order determining that a real estate security agreement (RESA) held by Bank of New Glarus encumbering the Swartwood property had priority over a mortgage held by Ameriquest. Ameriquest also appeals from the circuit court's determination that the Swartwoods owed Bank of New Glarus $149,267.17.¹

¶ 2 We conclude: (1) Ameriquest's mortgage is subordinate to Bank of New Glarus's RESA; (2) Ameriquest has not waived its defenses of fraud and failure of consideration; (3) Ameriquest's fraud defense is precluded by the D'Oench doctrine,² but its failure of consideration defense is not; and (4) the issue of whether the bank is a holder in due course cannot be resolved on summary judgment. Accordingly, we affirm the summary judgment order insofar as it concludes that Bank of New Glarus's RESA has priority over Ameriquest's mortgage. We reverse that portion of the default judgment determining the amount owed to Bank of New Glarus, and remand for further proceedings.³

BACKGROUND

¶ 3 The following facts are taken from the pleadings and the parties' summary judgment submissions. In October 2002, Clarence and Kathy Swartwood obtained a loan from Ameriquest Mortgage Corporation in the amount of $78,750, secured by a mortgage encumbering their property in Blanchardville, Wisconsin. Part of the Village of Blanchardville is situated in Iowa County, while another part is in Lafayette County. The Swartwood property is on the Iowa County side of the village, but Ameriquest mistakenly recorded its mortgage in Lafayette County. Ameriquest recorded its mortgage in Iowa County on December 9, 2003.

¶ 4 Bank of New Glarus's complaint states that on March 24, 2003, the First National Bank of Blanchardville (First National) loaned the Swartwoods a total of $113,111.80, evidenced by three promissory notes in the amounts of $51,120.76, $43,211.84 and $18,779.20. These notes were secured by a RESA in favor of First National encumbering the same property described in Ameriquest's mortgage. First National properly recorded the RESA in the Iowa County Register of Deeds.

¶ 5 An affidavit of Clarence Swartwood contradicts Bank of New Glarus's account of the Swartwoods' loans from First National. Swartwood states that in early 2003 he and his wife met with First National President Mark Hardyman to discuss taking out a small business loan. He avers that Hardyman asked whether there were liens on the Swartwoods' property. Swartwood informed Hardyman that Ameriquest held a $75,000 mortgage on the property. He states that he and his wife agreed with Hardyman that the new loan would be secured by a second mortgage on the property, but that "it was understood and agreed" that this mortgage was subordinate to the Ameriquest mortgage. Swartwood states that he and his wife signed forms that Hardyman said were related to the loan, but that these forms were blank when they signed them.⁴ The documents, submitted as exhibits, contain the following notice in bold above the Swartwoods' signatures: "Notice to Customer (a) Do not sign this before you read the writing on the reverse side, even if otherwise advised. (b) Do not sign this if it contains any blank spaces."

¶ 6 Swartwood states that as a result of the 2003 meeting with Hardyman, approximately $18,000 was deposited in the Swartwoods' business checking account. Ameriquest observes that this amount approximates the $18,779.20 amount referenced in one of the three promissory notes.

¶ 7 First National was placed in receivership by the Federal Deposit Insurance Corporation (FDIC) in mid-2003. The Swartwoods' account was closed. Clarence Swartwood states that checks written on the account were returned unpaid, and that only approximately $10,000 of the $18,000 loan was expended. He avers that he and his wife never agreed to pay the amounts indicated in two of the three promissory notes.

¶ 8 FDIC was appointed as the receiver of First National, although the record contains no documentation from the Iowa County Register of Deeds showing its appointment. An affidavit of Warren Laube, president of Bank of New Glarus, states that on July 23, 2003, his bank purchased from FDIC a package of 109 loans issued by the failed First National. The loans to the Swartwoods were a part of this package. Laube states that his bank received an assignment of mortgage dated October 8, 2003, that was recorded in the Iowa County Register of Deeds on October 10, 2003. In the assignment, Bank of New Glarus received First National's interest in the RESA and the three promissory notes. Affidavits of Laube and James Schaller, a vice president of Bank of New Glarus, state that neither they nor any other employee of Bank of New Glarus had actual or constructive notice of Ameriquest's mortgage prior to their bank receiving and recording its assignment of mortgage.

¶ 9 In March 2004, Bank of New Glarus brought this foreclosure action against the Swartwoods for non-payment of its notes. The Swartwoods filed a petition in bankruptcy in October 2004. Bank of New Glarus obtained an order lifting the stay that resulted from the bankruptcy filing. It moved for summary judgment against Ameriquest on the issue of mortgage priority, and for default judgment against the Swartwoods.

¶ 10 The circuit court granted summary judgment in favor of Bank of New Glarus on the issue of mortgage priority, and granted Bank of New Glarus's motion for default judgment on its claim against the Swartwoods. As a result, it determined that the Swartwoods must pay $149,267.17 to redeem their property from the Bank of New Glarus foreclosure.

¶ 11 The court issued findings of fact and conclusions of law, a judgment of foreclosure and replevin, and a decision on the motions for summary judgment and default judgment.⁵ It found that the Swartwoods agreed to pay the three promissory notes in the amounts indicated on the notes. The court further noted that "Ameriquest ha[d] alleged that the Swartwoods gave First National Bank of Blanchardville oral notice of the existence of a mortgage to Ameriquest at the time of First National Bank of Blanchardville's RESA" but that "there [wa]s no credible basis to support Ameriquest's claim in this regard."⁶ The court concluded that Bank of New Glarus was a good-faith purchaser within the meaning of the recording statutes because at the time of purchase it could not have discovered that Ameriquest's mortgage was filed by mistake in Lafayette County by searching the Iowa County Register of Deeds. Noting the "newsworthy significance" of First National's failure in the bank's southwestern Wisconsin service area, the court "t[ook] judicial notice of [First National's] failure, and the intervention of FDIC, if it be necessary to take such judicial notice."⁷ The court further concluded that Bank of New Glarus was a holder in due course of the Swartwood loan documents.

¶ 12 Ameriquest appeals from the circuit court's order of summary judgment in favor of Bank of New Glarus on the issue of mortgage priority, and the amount of the judgment against the Swartwoods.

DISCUSSION

¶ 13 We review a grant or denial of summary judgment independently, applying the same methodology as the circuit court. Green Spring Farms v. Kersten, 136 Wis.2d 304, 315-17, 401 N.W.2d 816 (1987). Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. WIS. STAT. § 802.08(2). This case involves the interpretation of statutes and their application to a set of facts, both questions of law that we review de novo. Bill's Distributing, Ltd. v. Cormican, 2002 WI App 156, ¶ 6, 256 Wis.2d 142, 647 N.W.2d 908.

I. Interpretation of WIS. STAT. §§ 706.08 and 706.09

¶ 14 Ameriquest does not dispute that its failure to record its mortgage in the proper county until December 2003 — after First National recorded the RESA now held by Bank of New Glarus — prevents it from asserting priority based on being the first to acquire an interest in the property. Rather, Ameriquest contends that it is entitled to summary judgment on the issue of priority because Bank of New Glarus's chain of title in the Iowa County Register of Deeds contains a "gap"; the record does not show FDIC's appointment as receiver of the First National loans purchased by Bank of New Glarus. It asserts that, as a result, FDIC was a stranger to the record chain of title, and, consequently, Bank of New Glarus cannot claim the protection of the recording statutes.

¶ 15 WISCONSIN STAT. § 706.08(1)(a) protects purchasers of real estate against prior adverse claims that are not properly recorded as provided by law.⁸ See Associates Fin. Servs. Co. of Wisconsin, Inc. v. Brown, 2002 WI App 300, ¶ 9, 258 Wis.2d 915, 656 N.W.2d 56. It provides that "every conveyance that is not recorded as provided by law shall be void as against any subsequent purchaser, in good faith and for a valuable...