Burney & Snadon v. McLaughlin

• Decision Date: 08 September 2001
• Docket Number: SD24004
• Citation: 63 S.W.3d 223
• Parties: Gary and Martha Burney and Gary and Patsy Snadon, Respondents, v. Patrick T. McLaughlin, Trustee, and Bank of America, N.A., Appellants. 24004 Missouri Court of Appeals Southern District 0
• Court: Missouri Court of Appeals

Gary and Martha Burney and Gary and Patsy Snadon, Respondents v Patrick T. McLaughlin, Trustee, and Bank of America, N.A., Appellants

24004

Missouri Court of Appeals Southern District

09/28/2001

Appeal From: Circuit Court of Taney County, Hon. James L. Eiffert

Counsel for Appellant: Robert J. Will and Larry E. Parres

Counsel for Respondent: Vincent F. O'Flauherty and Julie J. Gibson

Opinion Summary: None

Montgomery and Rahmeyer, JJ., concur.

Robert S. Barney, Chief Judge

This appeal primarily involves the relative priority of two deeds of trust held, respectively, by Respondents, Gary and Martha Burney and Gary and Patsy Snadon (hereinafter "Respondents") and Appellant, Bank of America, N.A. ("Bank") on a parcel of land located in Taney County, Missouri.¹ Although Respondents had subordinated their deed of trust to that of Bank's, they contended at trial that the subsequent material modification of the Bank's note so impaired Respondents' security that a court of equity was justified in reordering the priority of the parties' deeds of trust. The circuit court agreed with Respondents and Bank now appeals.²

The record shows that at the commencement of the litigation the Foxborough Inn (the "Inn") was a 178 room hotel in Branson, Missouri. The land on which it was located was comprised of two parcels, a "front parcel" and a "back parcel" consisting of two tracts. The front parcel is the smaller of the two parcels.

In early 1992, Respondents constructed 77 units of the Inn on the front parcel which they owned. They borrowed over one million dollars from Ozark Mountain Bank ("OMB") to pay for this construction. The loan was secured by a deed of trust on the front parcel.

Later in the year, Respondents sold the front parcel and the Inn's 77 units to C&J Properties, Inc. ("C&J") for a total purchase price of $3.3 million. The terms were, generally, as follows: C&J paid Respondents nearly $l million in cash at closing; paid off Respondents' existing note on the property by borrowing $1.1 million from OMB and giving OMB a first deed of trust on the front parcel; and gave Respondents a note ("Respondents' Note") for the remaining $1.2 million of the purchase price secured by the lien of a second deed of trust on the front parcel ("Respondents' Deed of Trust").

Less than a year later, C&J borrowed approximately $3.2 million from Bank in order to refinance the existing OMB debt and fund C&J's efforts to construct an additional 101 units, located on the back parcel, which C&J purchased. This was accomplished in three steps:

First, on June 23, 1993, Bank loaned C&J $1.077 million to pay the balance of the note secured by the first deed of trust held by OMB. This new note ("Bank's Note No. 1") was secured by a deed of trust against the front parcel only ("Bank's Deed of Trust No. 1"). It had a maturity date of December 23, 1993, and bore interest of 7% before maturity and 13% in the event of default. No principal payments before maturity were required. The monthly payments were to be interest only and the maker agreed to pay "all costs of collection when incurred, including reasonable attorneys' fees."

Second, on the same date Respondents executed a Subordination Agreement in favor of Bank. It provided, in pertinent part, that Respondents subordinated their Note and Deed of Trust (on the front parcel) to Bank's Deed of Trust No. 1, "to the end that the [Bank's Deed of Trust No. 1] shall be superior to [Respondents' Deed of Trust]." The subordination agreement contained no other significant provisions.

Third, Bank loaned C&J $2.117 million ("Bank's Note No. 2") to fund the construction of 101 additional units on the back parcel. This note was secured by a deed of trust placed against the back parcel only ("Bank's Deed of Trust No. 2"). On June 2, 1994, C&J granted Bank another deed of trust ("Bank's Deed of Trust No. 3") securing both Bank's Note No. 1 and Bank's Note No. 2. This latter deed of trust placed a lien against both the front parcel and the back parcels.

Almost immediately after expansion of the Inn, C&J experienced financial problems which persisted over a number of years. As best we can glean from the record, an economic downturn occurred in the Branson area due to a glut of motel rooms. As a result, between December 1993 and December 1999, Bank and C&J (and a third party in some instances) entered into a series of eight separate modification agreements, which resulted in extending the maturity date and other terms and conditions of Bank's Note No. 1 and Bank's Deed of Trust No. 1, and the last three modifications extended maturity date and other terms of Bank's Notes No. 1 and No. 2.³ Each modification was duly recorded. Respondents contend that they were never notified of any of these modifications nor was their consent obtained for any of these modifications.

During December of 1999, C&J terminated its payments to Bank on Bank's Note No. 1 and Bank's Note No. 2 and notified Bank that the Inn would not reopen following the annual winter closing period in 1999-2000. Bank subsequently instructed the trustee(s) of its three deeds of trust to commence foreclosure proceedings. Two days prior to the foreclosure sale Respondents filed a three-count petition for equitable relief. Respondents sought, in pertinent part: (a) temporary injunctive relief prohibiting Bank from conducting the foreclosure sale; (b) a declaration that their deed of trust, i.e., Respondents' Deed of Trust (secured by the front parcel), was prior and superior to Bank's Deed of Trust No. 1, as well as to any other deeds of trust Bank held against the front parcel; and (c) requested judicial foreclosure of Respondents' Deed of Trust, pursuant to section 443.190, RSMo 1994, et seq.

Respondents argued that their interest in the front parcel should be declared "superior to and take[ ] priority over any interest asserted by Bank" because the "actions and conduct of Bank . . . so materially adversely affected and impaired [Respondents'] collateral and/or destroyed the original economics of the subject property, so as to render the Subordination Agreement of June 23, 1993[,] null and void."

The circuit court seasonably entered an order granting a temporary restraining order enjoining Bank from conducting its foreclosure sales on June 9, 2000, provided Respondents posted an injunction bond of $100,000.00, which Respondents did.

Review of this non-jury matter is set forth in Rule 84.13(d). In such a review, this Court views the evidence and permissible inferences drawn therefrom in the light most favorable to the judgment and affirms the judgment unless it is against the weight of the evidence, there is insufficient evidence to support it, or it erroneously declares or applies the law.

Ridgway v. TTnT Dev. Corp., 26 S.W.3d 428, 430 (Mo.App. 2000). In applying this standard of review, we give due regard to the trial court's opportunity to judge the credibility of witnesses. If there is conflicting evidence, this Court will defer to the trial court's determination. However, we do not defer to the trial court's determination of law. See Empire Dist. Elec. Co. v. Gaar, 26 S.W.3d 370, 373 (Mo.App. 2000). Furthermore, "when the facts are not controverted or the case involves admitted facts, or where the evidence is not in conflict, there is no deference due the trial court's judgment." Jones v. Jones, 891 S.W.2d 551, 553 (Mo.App. 1995).

In its Point One, Bank asseverates circuit court error in declaring Bank's Deed of Trust No. l (on the front parcel) junior to that of Respondents' Deed of Trust. Bank maintains that Respondents do not dispute that in executing their subordination agreement they took a junior position to that of Bank. Bank maintains that the circuit court was not justified in altering the priority of the two deeds of trust because Respondents failed to show that Bank's modification agreements relating to Bank's Note No. 1 and Bank's Deed of Trust No. 1 "effectively destroyed the collateral" that Respondents held. On the contrary, Bank contends that as a result of these modification agreements C&J was able to avoid default for several years during which time Respondents were able to collect on a portion of their loan to C&J.

Furthermore, Bank argues that even if this Court were to conclude that the modification agreements "substantially impaired" the junior lienholders' interests and were invalid for lack of Respondents' consent, this Court should, nonetheless, reverse the decision of the circuit court which entirely disregarded the subordination agreement and afforded complete priority to Respondents. Citing Restatement (Third) of the Law of Property, Mortgages, section 7.3 (1997), Bank insists that under these conditions it would lose priority only to the extent of the modifications.

Respondents counter that the "remedy awarded when there is prejudice to the junior lienor--partial or complete loss of priority--depends on the degree of prejudice." They assert that Bank's Note No. 1 went from one page of text to seven in the final modification; that no one ever notified them of these modifications; that there were eight extensions of the maturity date of the note and multiple increases in the interest rate charged by over 50% (from 7% to 10 %), which resulted in over $200,000.00 in additional interest payments to the Bank.

Furthermore, Respondents maintain that the introduction of cross-collateralization provisions added two tracts of property to the collateral contemplated by the original note and tripled the amount of debt collateralized from $1.2 million to over $3.4 million. They also point to the introduction of cross-default provisions, waiver of bankruptcy stay provisions, and the addition of appraisal fees, loan extension and renewal fees, and payment of collection fees which together "'substantially impaired' the value of [their] security interest--the motel property--and 'effectively destroyed' the...