First State Bank of Forsyth v. Chunkapura

• Decision Date: 17 April 1987
• Docket Number: No. 86-216,86-216
• Citation: 226 Mont. 54,734 P.2d 1203,44 St.Rep. 451
• Parties: FIRST STATE BANK OF FORSYTH, a Montana corp., Beneficiary, and William F. Meisburger, Trustee, Plaintiffs and Appellants, v. Thomas J. CHUNKAPURA and Cicily Chunkapura, husband and wife, Defendants and Respondents.
• Court: Montana Supreme Court

Page 1203

734 P.2d 1203

226 Mont. 54

FIRST STATE BANK OF FORSYTH, a Montana corp., Beneficiary and William F. Meisburger, Trustee, Plaintiffs and Appellants, v. Thomas J. CHUNKAPURA and Cicily Chunkapura, husband and wife, Defendants and Respondents.

No. 86-216.

Supreme Court of Montana.

Submitted Feb. 10, 1987.

Decided March 10, 1987.

Rehearing Denied April 17, 1987.

[226 Mont. 54] William F. Meisburger (argued), Forsyth, for plaintiffs and appellants.

John Houtz (argued), Forsyth, for defendants and respondents.

William F. Conklin (argued), Great Falls, amicus curiae for Concerned Citizens.

George T. Bennett, Helena, amicus curiae for Montana Bankers Association.

David J. Dietrich, Missoula, amicus curiae, for First Interstate Bank of Missoula.

John Paul, Great Falls, amicus curiae, United Sav. Bank.

George Goodrich, Missoula, amicus curiae, for First Bank & Western Bank.

SHEEHY, Justice.

We hold in this case that a lender, electing to foreclose on its security under a trust deed by judicial procedure, is not entitled to remedies inconsistent with the Small Tract Financing Act of Montana, Title 71, Chapter 1, Part 3, MCA. Specifically, the lender (mortgagee) may not recover a deficiency judgment against the borrower (mortgagor), and the borrower has no right of redemption as is accorded borrowers in judicial foreclosures of conventional mortgages.

First State Bank of Forsyth and William F. Meisburger appealed from an order of the District Court, Sixteenth Judicial District, Rosebud County, the Honorable C.B. Sande, District Judge, presiding, that Sec. 71-1-317, MCA, prohibits the Bank from recovering a deficiency judgment on judicial foreclosure. No final judgment has been entered in the cause pending this appeal, and the cause has been properly certified to us for appeal under Rule 54(b), Montana Rules of Civil Procedure.

On October 20, 1980, the Chunkapuras executed a promissory note to the First State Bank of Forsyth in the amount of $17,000 with interest on the unpaid principal thereon accruing at the rate of 14% per annum to be paid by the Chunkapuras in monthly payments. The note was secured by a deed of trust executed the same day from the Chunkapuras to First Montana Title Insurance Company as trustee, naming Under the terms of the note the Chunkapuras would have paid to the Bank $226.40 per month until October 20, 1995 to pay off the note, and under the terms of the deed of trust, were to provide such additional sums monthly as would be sufficient to pay taxes, assessments, insurance premiums, and other charges.

the Bank as beneficiary, covering Lots 17 and 18 in Block 54 of the original town, now city, of Forsyth, Montana.

William S. Meisburger succeeded First Montana Title Insurance Company as trustee under the deed of trust. He appears in this action as a plaintiff trustee, and as attorney for the Bank and himself as plaintiffs. (He has also made the return of sheriff's sale but no point is made in this appeal as to the validity of the return. See Sec. 25-13-404, MCA.)

The Chunkapuras made payments under the note and deed of trust to the Bank until April 20, 1985, at which time they went into default, the principal of the indebtedness having been reduced to $14,957.02. On September 11, 1985, the plaintiffs filed an action in the District Court to foreclose judicially the security interest of the Bank. Their complaint was amended on October 4, 1985. Under the amended complaint plaintiffs prayed for judgment against the defendants for the unpaid principal, accrued interest and other costs, for a sale of the real estate premises by the sheriff of Rosebud County, and for a deficiency judgment against the defendants after applying all the proceeds of the sale of the premises.

By stipulation, the parties agreed that the District Court could enter judgment, issue an order for a sheriff's sale, and proceed with the sheriff's sale, reserving until a later time the question of whether a deficiency judgment could be recovered. At the sheriff's sale, the Bank, being the only bidder, bid on the property in the sum of $10,000.00 which after deducting sheriff's fees and attorneys fees, left a net sum of $8,965.50. Thereupon the plaintiffs sought a deficiency judgment in the amount of $8,556.93.

Following this activity in the action, the matter was briefed before District Judge Sande and on January 6, 1986, District Judge Sande entered his order as aforesaid, determining that Sec. 71-1-317, MCA, prohibited the plaintiffs from recovering a deficiency judgment. Upon certification under Rule 54(b), M.R.Civ.P. by the Honorable Alfred B. Coate, District Judge, the cause came to us on appeal.

I.

The issues in this case involve interpretation of the Small Tract Financing Act of Montana, enacted in 1963. The history of the legislative adoption of that Act, not unknown to some members of this Court, needs telling at this point for perspective.

Prior to 1963, Montana was a "one action" state with respect to foreclosures of mortgages. Our statute provided that there was but one action for the recovery of debt, or the enforcement of any rights incurred by mortgage upon real estate, which action had to be in accordance with the foreclosure provisions of our statutes. Section 71-1-222, MCA (formerly Sec. 93-6001, R.C.M. (1947)). Whereas in other states with differing statutes the lender had the option of suing on the promissory note, or suing to foreclose the mortgage securing the note, our "one action" statute was construed by us to mean that a creditor could not waive the mortgage and sue on the debt but was limited to foreclosure of the mortgage indebtedness. Barth v. Ely (1929), 85 Mont. 310, 278 P.2d 1002. A mortgage instrument could and still may contain a power of sale provision to which the mortgagee could resort for foreclosure without judicial proceedings. Section 71-1-223, MCA. No provision however is made in our statutes for a deficiency judgment where foreclosure under power of sale occurs. In a judicial foreclosure, after the court entered judgment that the mortgager had defaulted on his obligations and that the mortgagee was entitled to the benefit of his security, the court could and still can order sale of the secured premises Two legal consequences attended, and still attend a judicial foreclosure of mortgaged real property. The judgment debtor has the right to redeem the property from the purchaser at the sheriff's sale any time within one year after the sale. Section 25-13-802, MCA. The purchaser was not and is not now entitled to the possession of the real property as against the judgment debtor during the period of redemption while the debtor personally occupied the land as a home for himself and his family. Section 25-13-821, MCA.

by the sheriff of the county involved. If the proceeds from the sheriff's sale are insufficient and a balance still remains due, a deficiency judgment can then be docketed against the defendant or defendants personally liable for the debt which becomes a lien upon the real estate of the judgment debtors. Section 71-1-222, MCA.

The banking and lending industry came to the legislature in 1963, contending that the "one action" rule and the attendant right of redemption and right of possession rules hampered the financing of improvements on small tracts in Montana because banks and investors were unwilling to invest in mortgages when on default their funds would be tied up during the period of redemption. A quid pro quo was proposed to the legislature: the lenders would give up their deficiency judgment rights on default, if the borrowers would give up their rights of possession and redemption. The result was the adoption by the legislature of the Small Tract Financing Act of Montana, originally limited to tracts of three acres, but now may involve tracts as large as fifteen acres.

Under the Small Tract Financing Act, instead of mortgages, trust indentures (sometimes called "deeds of trust" or "trust deeds") are authorized. Such instruments have the effect of transferring the title of the borrower to a private trustee to be held by the trustee to secure the performance of the obligation by the borrower. A power of sale is by the law granted to the trustee to be exercised after a breach of the obligation for which the trust transfer is security. Section 71-1-304(2), MCA. The trust indenture is considered to be a mortgage on real property, Sec. 71-1-305, MCA, and provisions are made in the law for the method whereby a trustee may foreclose a trust indenture by advertisement and sale. Section 71-1-313, MCA. It is certain that when a trustee conducts a foreclosure sale, a deficiency judgment is not allowed, Sec. 71-1-317, MCA, and the purchaser at the trustee sale is entitled to possession of the property on the tenth day following the sale. Section 71-1-319, MCA.

It may be safely said, although it does not appear in this record, that in the time since the enactment of the Small Tract Financing Act, the use of trust deeds for security purposes has become nearly exclusive in this state.

II.

The issues in this cause arise out of certain provisions of the Small Tract Financing Act which are subject to judicial interpretation. Section 71-1-304(3), MCA, provides that a trust indenture may be foreclosed by an advertisement and sale through the trustee, or at the option of the beneficiary (lender) by judicial procedure as provided by law for the foreclosure of mortgages on real property. The foreclosure of a trust indenture by advertisement and sale or by judicial procedure is limited to the times provided by law for the foreclosure of a mortgage on real property. Section 71-1-311, MCA. The provision prohibiting deficiency judgment states:

Deficiency judgment not allowed. When a trust indenture executed in conformity with this part is foreclosed by advertisement and sale, no other or further action, suit, or proceedings shall be taken or judgment entered...