First Com. Bank of Prestonsburg v. West

• Decision Date: 08 September 2000
• Docket Number: No. 1998-CA-001203-MR.,1998-CA-001203-MR.
• Citation: 55 S.W.3d 829
• Parties: FIRST COMMONWEALTH BANK OF PRESTONSBURG, Appellant, v. Shelia WEST; Thurman West; Thurman West Trucking Company; United States of America Department of the Treasury, Internal Revenue Service; and Floyd County, Kentucky, Appellees.
• Court: Kentucky Court of Appeals

Page 829

55 S.W.3d 829

FIRST COMMONWEALTH BANK OF PRESTONSBURG, Appellant, v. Shelia WEST; Thurman West; Thurman West Trucking Company; United States of America Department of the Treasury, Internal Revenue Service; and Floyd County, Kentucky, Appellees.

No. 1998-CA-001203-MR.

Court of Appeals of Kentucky.

September 8, 2000.

Discretionary Review Denied August 15, 2001.

Richard E. Fitzpatrick, Martin L. Osborne, Prestonsburg, KY, for Appellant.

Shelia West, Gregory A. Isaac, Prestonsburg, KY, for Appellee.

Before: GUIDUGLI, JOHNSON and KNOPF, Judges.

OPINION

GUIDUGLI, Judge.

First Commonwealth Bank of Prestonsburg, Inc. (FCB), appeals from an order of the Floyd Circuit Court which denied its motion for summary judgment against Shelia West (Shelia).¹ We reverse and remand this matter with instructions to enter summary judgment in favor of FCB.

This case presents an issue of first impression — namely whether a co-mortgagor can obligate another co-mortgagor's interest in real property covered by a mortgage containing a future advance clause by incurring additional indebtedness with the mortgagee without the knowledge or consent of the other co-mortgagor. The facts in this case are fairly straightforward and, for the most part, undisputed.

Shelia and Thurman West (Thurman) were married in 1978. Throughout their marriage, Thurman operated a trucking company. During their marriage, Shelia and Thurman purchased a house in Ivel, Kentucky (the residential property) and a piece of property from which the trucking business was operated (the commercial property). It appears from the record that FCB financed the purchase of the commercial property.

On April 8, 1991, Shelia and Thurman executed a promissory note in favor of FCB in the amount of $75,010.50. The note indicated on its face that the purpose of the loan was "ref & business exp." The note was secured by a mortgage executed on the same date covering both the residential and commercial property as well as a third tract of land. The mortgage contained the following future advance clause:

It is understood and agreed that this mortgage is given not only to secure the above indebtedness, and all extensions, modifications and renewals of same, but also any and all financial obligations, however arising, whether direct or indirect, and any extensions, modifications and renewals thereof which the Mortgagor or the Borrower or any of them, may now owe or hereafter incur to the Lender, or its successors in title, so long as this mortgage shall remain unreleased of record, even though the original indebtedness referred to herein shall have been reduced or fully paid, but the maximum amount, exclusive of interest, attorney fees and costs, secured hereunder shall not at any one time exceed $115,000.00.

On December 21, 1992, Shelia and Thurman executed a second promissory note in favor of FCB in the amount of $74,454.62. The note indicated on its face that the purpose of the loan was "refinance balloon balance." According to an affidavit submitted by Greg Wilson, Senior Vice-President of FCB, the purpose of this loan was to refinance a five year note executed in 1987 to purchase the commercial property. The note was secured by a mortgage executed on the same date covering only the commercial property. This mortgage contained a future advance clause identical to the one contained in the first mortgage, the only difference being that the maximum amount secured was not to exceed $122,000.

Aside from the previously-described notes and mortgages, Thurman had some financial dealings with FCB of which Shelia was unaware. On December 23, 1991, Thurman executed a note in favor of FCB in the amount of $25,021 which was secured by a 1987 Mack tractor and a 1987 R and S trailer. Thurman signed the note as "Thurman West d/b/a Thurman West Trucking Co." This note was later modified under a loan modification agreement dated March 31, 1995, between FCB and Thurman West d/b/a Thurman West Trucking Company. It is undisputed that Shelia did not sign this note.

On June 8, 1994, Thurman executed another note in favor of FCB, this one in the amount of $50,000. Once again, Thurman signed the note as "Thurman West d/b/a Thurman West Trucking Co." No security was listed on the face of the note. On the loan application, Thurman indicated that the purpose of the loan was "business purposes — ins. & tires." The same purpose was listed on a loan memorandum form. The loan application also provided that the loan was unsecured. This loan was also modified by a loan modification agreement dated March 31, 1995, between FCB and Thurman West d/b/a Thurman West Trucking Co. Once again, it is undisputed that Shelia did not sign this note.

Shelia and Thurman separated in 1995 and eventually divorced. At some point in time either before or after their separation, all four notes fell into default and on September 10, 1996, FCB instituted foreclosure proceedings and asked that the mortgaged property be sold to satisfy the debt on all four notes. In her answer, Shelia argued that the future advance clauses contained in the 1991 and 1992 mortgages "were not applicable to her undivided interest in the real property described therein since she did not personally obligate herself upon any subsequent debts or other obligations to [FCB]." Thurman failed to answer FCB's complaint.²

FCB filed its first motion for summary judgment and order of sale on November 11, 1996. In response to Shelia's answer, FCB argued that future advance clauses such as those contained in the two mortgages were valid in Kentucky. On the same day, FCB filed a combined motion for default judgment/summary judgment and order of sale in which it argued that some of the defendants had not answered and that the defendants which had answered had raised no genuine issue of material fact. In her response, Shelia argued that future advance clauses cannot be used to subject mortgaged property to subsequent debt incurred by a joint mortgagor unless the other mortgagor was aware of the subsequent debt and executed the additional documents. Shelia indicated that other jurisdictions had held that a single co-mortgagor could bind both mortgages to subsequent debt due to the operation of a future advance clause, but argued that in those cases there was a "clear and explicit intent shown within the ... clause that it was to cover all subsequent indebtedness." Shelia further argued that even if the trial court adopted this position, summary judgment would still be improper because there would be a factual issue as to whether the future advance clauses "contained clear and explicit language that all future obligations would be covered." FCB responded to Shelia's argument by noting that the question of whether the language of the future advance clauses was ambiguous was a question of law for the trial court to decide.

On January 21, 1997, the trial court entered the first of two orders regarding FCB's motions for summary judgment. In this order, the trial court denied FCB's motion for summary judgment, apparently as to Shelia alone, finding that factual issues existed and needed to be addressed. In the order, the trial court also added sua sponte that "an issue has been raised as to whether Shelia West executed the original mortgage notes as an accommodation party for the business ... and that as such the discharge provisions of KRS 355.3-605(4) may be relevant to this action[.]"

In a second order entered February 25, 1997, the trial court entered a default judgment/partial summary judgment and provisional order of sale in favor of FCB. However, the trial court noted:

The only contested issue in this litigation is whether or not the undivided ownership interest of Defendant Shelia West, in the subject real property, is subject to two (2) notes made individually by the Defendant Thurman West by reason of a [future advance] clause as contained in the mortgages herein sued upon. That issue is not herein addressed and is reserved for a later determination.

The order also provided that the property was to be sold "only upon supplemental order or amended judgment of this Court directing such sale."

FCB filed its second motion for summary judgment on January 12, 1998. FCB argued that the language of the future advance clauses was clear and unambiguous and that the clauses should be enforced as written. In regard to the issue of whether Shelia was an accommodation party, FCB argued that because she did not sign the two notes made by Thurman she could not be an accommodation party as defined in the Uniform Commercial Code, and that even if she was she waived her status as such when she executed the mortgages containing the future advance clauses.

In her reply, Shelia addressed the issues concerning accommodation status and enforceability of the future advance clauses. Additionally, Shelia argued that the future advance clauses could not attach to Thurman's 1991 note because it was secured by other consideration, namely the 1987 tractor and trailer.

In an order entered March 3, 1998, the trial court denied FCB's motion for summary judgment. The trial court subsequently amended its order on April 17, 1998, and stated as follows:

[I]t appearing to the Court that the sole issue presented was whether the dragnet clause in the two (2) mortgages signed by Shelia West, were, as a matter of law so clear and unambiguous that it should have been clear to Shelia West that her co-mortgagor (her now ex-husband Thurman West) can subsequently and unilaterally obligate her undivided interest in the mortgaged real property by executing additional promissory notes with the Plaintiff and without the knowledge or signature of Shelia West, and it appearing to the Court that Shelia West denies she had any knowledge of the subsequent promissory notes and all parties have agreed that Shelia West did not execute the subsequent promissory notes, and it further appearing to the...