First Interstate Bank of Fargo, N.A. v. Larson

• Decision Date: 17 September 1991
• Docket Number: No. 900386,900386
• Citation: 475 N.W.2d 538
• Parties: FIRST INTERSTATE BANK OF FARGO, N.A., Plaintiff, Appellee and Cross-Appellant, v. Richard W. LARSON, Gayle L. Larson, Bernard M. Altenburg, Lois Ivers Altenburg, Thomas D. Nagle, Robert L. Sutton, Claudette Sutton, Alfred P. Krahn and Dorothy S. Krahn, Defendants, Appellants and Cross-Appellees. Civ.
• Court: North Dakota Supreme Court

Page 538

475 N.W.2d 538

FIRST INTERSTATE BANK OF FARGO, N.A., Plaintiff, Appellee and Cross-Appellant, v. Richard W. LARSON, Gayle L. Larson, Bernard M. Altenburg Lois Ivers Altenburg, Thomas D. Nagle, Robert L. Sutton Claudette Sutton, Alfred P. Krahn and Dorothy S. Krahn Defendants, Appellants and Cross-Appellees.

Civ. No. 900386.

Supreme Court of North Dakota.

Sept. 17, 1991.

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

Anderson & Bailly, Fargo, for defendants, appellants and cross-appellees; argued by Gregory L. Thompson. Appearance by Lowell Bottrell.

MESCHKE, Justice.

The nine general partners of Village Apartments, a North Dakota general partnership, appeal from a judgment enforcing their personal guaranties of the partnership's second mortgage debt with First Interstate Bank of Fargo, N.A. First Interstate cross-appeals from the denial of its motion to amend its complaint to seek recovery of losses from the resale of the mortgaged property. We overrule Mandan Security Bank v. Heinsohn, 320 N.W.2d 494 (N.D.1982), and hold that the anti-deficiency statutes apply to the general partners' personal guaranties of a general partnership's mortgage debt; however, we apply our decision prospectively. We therefore affirm the judgment.

On June 30, 1975, Gate City Savings and Loan Association loaned H & H Investment Company $260,000 to construct two apartment buildings in Wahpeton, North Dakota. The loan was secured by Short-Term Mortgage Redemption Act mortgages of $130,000 on each building. See NDCC Ch. 32-19.1. H & H later conveyed the two buildings to Village Apartments subject to the mortgages.

On April 30, 1982, First Interstate loaned Village Apartments $175,000. As security for the loan Village Apartments gave First Interstate a second mortgage on the two buildings. First Interstate and Village Apartments renewed the loan on January 31, 1983. On September 11, 1987, First Interstate and Village Apartments again renewed the loan and extended the mortgage. The loan renewal documents included a $90,000 unsecured promissory note, a $142,448.45 promissory note secured by the second mortgage, and continuing, unconditional guaranties of payment of the partnership's debt by the partners. All the partners signed the loan renewal agreement, the promissory notes, and the personal guaranties.

Village Apartments defaulted on its loans with Gate City and with First Interstate, and Gate City sued Village Apartments to foreclose the 1975 mortgages. On October 18, 1988, foreclosure judgment was entered. At a sheriff's foreclosure sale on December 15, 1988, Gate City bought the two buildings for the amount of the partnership's debt with it and obtained Sheriff's Certificates of Sale on Foreclosure for the two buildings.

On January 15, 1989, First Interstate sued the partners on their personal guaranties. The partners answered and, on two separate occasions, moved to amend their answer to assert that the anti-deficiency statutes precluded First Interstate from enforcing the guaranties without first foreclosing its second mortgage. The trial court denied the partners' motions, concluding that existing law did not support that claim.

On June 15, 1989, First Interstate purchased the Sheriff's Certificates of Sale on Foreclosure from Gate City for $221,053.63 and in September 1989 sold the buildings for $197,044.54. First Interstate then moved to amend its complaint to seek recovery of $23,109.09, the difference between the price it paid Gate City and the price it received for the apartment buildings. The court denied First Interstate's motion. The partners moved to dismiss First Interstate's complaint, contending that, by taking the assignment from Gate City, First Interstate stood in Gate City's shoes and because Gate City bought the apartment buildings for the amount of the partnership's debt with it, First Interstate took the property in satisfaction of all mortgage indebtedness. The court denied the partners' motion and subsequently ordered judgment for $162,741.42 against the partners, jointly and severally, as the balance due on their personal guaranties. The partners appealed, and First Interstate cross-appealed.

The partners argue that the anti-deficiency statutes preclude First Interstate from enforcing the guaranties without first foreclosing its second mortgage, and that the trial court abused its discretion in denying their motions to amend their answer to raise that claim. Their argument depends on the continued validity of Mandan Security Bank v. Heinsohn, 320 N.W.2d 494 (N.D.1982). Our analysis of their argument requires a brief description of the anti-deficiency statutes and their application to personal guaranties of mortgage debts.

The development, purpose, and history of the anti-deficiency statutes and the procedures for foreclosing real estate mortgages have been described in First State Bank of Cooperstown v. Ihringer, 217 N.W.2d 857 (N.D.1974). See also East Grand Forks Federal Savings & Loan Ass'n v. Mueller, 198 N.W.2d 124 (N.D.1972) [Teigen, J., dissenting]. NDCC Ch. 32-19 and 32-19.1 prescribe the procedures for foreclosing real estate mortgages and obtaining deficiency judgments.

Under the anti-deficiency statutes when a lender takes a mortgage on real property as security for a promissory note, the lender foregoes the right to proceed directly against the mortgagor on the note and instead receives the added protection of an interest in the property. Mischel v. Austin, 374 N.W.2d 599 (N.D.1985); H & F Hogs v. Huwe, 368 N.W.2d 553 (N.D.1985). The Legislature has prohibited deficiency judgments for real estate mortgages given under the Short-Term Mortgage Redemption Act. NDCC 32-19.1-07. ¹ For other real estate mortgages, NDCC 32-19-04, 32-19-06, and 32-19-07, ² direct that a court shall not render a deficiency judgment except under very limited circumstances in a separate action against the parties personally liable for that part of the debt, with recovery limited to the difference between the amount due and the fair value of the land.

In First State Bank of Cooperstown v. Ihringer, 217 N.W.2d 857 (N.D.1974), we considered the applicability of the anti-deficiency statutes to a non-mortgagor debtor. In Ihringer a husband and wife executed a note but only the husband executed the mortgage as security for the note. The mortgagee did not foreclose on the mortgage, but sued the wife on the note. Based on the language of NDCC 32-19-06, authorizing an action for a deficiency judgment "against the party or parties personally liable for that part of the debt," we held that the anti-deficiency statutes applied to the non-mortgagor debtor and concluded that the mortgagee could:

(1) foreclose without asking for a deficiency judgment, or (2) foreclose, asking for a deficiency judgment in a separate action after the sale of the property, and obtain a judgment for only the difference between the mortgage debt plus costs and the fair value determined by a jury against both mortgagors and nonmortgagors personally liable on the note, or (3) sue on the note without foreclosure but with recovery limited to the difference between the amount due on the note plus costs and the fair value of the property determined by a jury.

Ihringer, 217 N.W.2d at 864. Ihringer thus requires a mortgagee to comply with the anti-deficiency statutes when bringing an action against the parties personally liable for the debt.

In Bank of Kirkwood Plaza v. Mueller, 294 N.W.2d 640 (N.D.1980), we considered the interrelationship of personal guaranties of a mortgage debt of a corporation and the anti-deficiency statutes. There a bank and a corporation executed three promissory notes secured by real estate mortgages. Four individuals also personally guarantied payment of the corporation's debt. When the corporation defaulted, the bank brought a foreclosure action against it and also independently sued the individual guarantors on their personal guaranties. We concluded that the anti-deficiency statutes did not apply to the independent action against the individual guarantors because those statutes did not clearly cover guarantors and because the action was based on a separate and distinct contract of guaranty and not on an obligation imposed by the notes or the mortgages.

Later, in Heinsohn, 320 N.W.2d 494, we applied a similar analysis to guaranties of a partnership mortgage debt by four partners. A majority of this court held that the anti-deficiency statutes did not preclude a mortgagee from recovering on the partners' personal guaranties of a partnership's mortgage debt. The majority concluded that the partners had changed the nature of their obligation on the partnership's debt from joint liability as a partner to joint and several liability as a guarantor. Relying on Bank of Kirkwood Plaza, the majority held that the partners' individual guaranties were valid, separate obligations to pay the partnership debt, and that recovery on the guaranties was not precluded by the anti-deficiency statutes because liability was predicated on the separate guaranties and not on the mortgage debt.

Here, the partners of Village Apartments argue that Heinsohn should be overruled. They assert that because a partnership is an association of persons and not a separate legal entity, they were already jointly liable for the partnership's mortgage debt and their personal guaranties added nothing to their liability. They contend that the distinction made in Heinsohn, between partners' joint liability for a partnership's mortgage debt and partners' joint and several liability on their personal guaranties, is inappropriate to allow circumvention of the anti-deficiency statutes. Relying on Hagan v. Havnvik, 421 N.W.2d 56 (N.D.1988), and First National Bank & Trust of Williston v. Ashton, 436 N.W.2d 215 (N.D.1989), the partners argue that because they were...