First Valley Bank v. First Sav. and Loan Ass'n of Central Indiana

• Decision Date: 01 December 1980
• Docket Number: No. 2-1175A323,2-1175A323
• Parties: 32 UCC Rep.Serv. 145 FIRST VALLEY BANK, Appellant (Defendant Below), v. FIRST SAVINGS AND LOAN ASSOCIATION OF CENTRAL INDIANA, Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 1237

412 N.E.2d 1237

32 UCC Rep.Serv. 145

FIRST VALLEY BANK, Appellant (Defendant Below), v. FIRST SAVINGS AND LOAN ASSOCIATION OF CENTRAL INDIANA,

Appellee (Plaintiff Below).

No. 2-1175A323.

Court of Appeals of Indiana, Second District.

Dec. 1, 1980.

Fred G. Donnersberger, Hammond, for appellant; Wilson, Donnersberger & Reid, Hammond, of counsel.

Charles H. Dickmann, James E. Freeman, Jr., Anderson, for appellee; Sansberry, Dickmann, Dickmann & Freeman, Anderson, of counsel.

BUCHANAN, Chief Judge.

CASE SUMMARY

First Valley Bank (Bank) brings a consolidated appeal from eighteen separate summary judgments in three different courts, all holding the Bank liable as an endorser with recourse of mortgage notes which the Bank had assigned to First Savings & Loan Association of Central Indiana (Association), claiming real estate mortgage notes are not negotiable instruments, that there was a genuine issue of material fact as to recourse against it, that an unsolicited form of judgment should not have been used and attorneys fees were improperly awarded.

We affirm.

FACTS

Throughout the decade 1960 to 1969, the Bank, then doing business as Twin City State Bank in Gas City, Indiana, made loans secured by real estate mortgages. In that same period, the Bank sold to the Association, then doing business as First Savings & Loan Association of Madison County, some six million dollars worth of those mortgages. It appears that such sales were made at least once in every year from 1962 to 1968.

The transfer of the mortgages was accomplished by an assignment in the following words:

FOR VALUE RECEIVED, the undersigned TWIN CITY STATE BANK, hereby sells, transfers, sets over and assigns to the ANDERSON LOAN ASSOCIATION, its entire right, title, and interest in and to each and all of the following described bona fide mortgages executed to or held by the undersigned, all prior mortgages held by the undersigned, all prior mortgages held by the assignor having been fully paid and released, together with all of the promissory notes and any other indebtedness thereby secured which said mortgages are hereinafter described and identified by the names of the mortgagors, the dates of execution, and the amounts of the original loans, the book and page of recordings in Grant County, Indiana, and the exact principal balances due on each at this transfer date as follows: (a list then followed)

The promissory notes secured by the mortgages were endorsed:

"We hereby assign the within note to First Savings & Loan Ass'n.

(Date)

Twin City State Bank

/s/ Donald F. Hundley

/s/ Donald F. Hundley, Pres."

Under a separate agreement, the Bank continued to service the loans for the Association. The Bank did not carry any indication on its books that the notes were negotiated with or without recourse, and the Bank repeatedly informed the examiners of the State Department of Financial Institutions that the Bank had no liabilities that did not appear on its books, and that the Bank had not guaranteed any obligation, except as noted on its books. In the course of the examination of the Bank conducted in 1969, the Department of Financial Institutions transmitted to the Association a list of the real estate mortgages which the Association had purchased from the Bank. The Department asked that the list be verified, and that the Association "Indicate how each loan was purchased as to RECOURSE, REPURCHASE or WITHOUT RECOURSE agreement." The Association's answer to this request contained nothing that was responsive to the question on recourse. In his deposition, the president of the Association said that he did not know the answer to that question, and simply forwarded copies of a mortgage assignment and the servicing agreement, in the hope that this would satisfy the Department.

At least thirty-five of these mortgages became delinquent, and over a period running from June 12, 1972, to January 9, 1973, the Association filed complaints in the eighteen cases before us in the Grant Circuit Court seeking foreclosure of the mortgages With respect to the Bank, all of these cases were disposed of by summary judgment in favor of the Association. In all cases, it was found that the Bank had endorsed the mortgage notes without qualification, and that its liability to the Association was governed solely by the applicable law of negotiable instruments. As to those mortgage notes which were transferred after July 1, 1964, the applicable law was § 3-414(1) of the Indiana Uniform Commercial Code (UCC). Ind.Code 1971, § 26-1-3-414(1). As to notes transferred before that date, the applicable law was § 66 of the Indiana Uniform Negotiable Instruments Law (NIL). Indiana Annot. Statutes § 19-507 (Burns, 1950). Judgments were therefore entered in the Association's favor in the amount of the unpaid balance on the mortgage notes, plus "interest, taxes, insurance, attorney fees and other accrued costs as provided in" the notes and mortgages. See, e. g., Transcript Volume 6, page 246.

and judgment on the notes. In all but the first few cases, the Association named the Bank as a defendant, on the theory that the Association had recourse against the Bank as an endorser of the notes; the first few complaints did not mention the Bank, but were amended to do so. All eighteen cases were re-venued, as follows: Six to the Tipton Circuit Court; seven to the Miami Circuit Court; and five to the Wells Circuit Court.

The findings of fact, conclusions of law, and entries of judgment were in most of the cases entered by forms supplied to the courts by the Association. The findings and judgments of the trial courts in these cases are therefore identical, with the exceptions of names, dates, dollar amounts, and citations to the UCC and NIL. These details were supplied by the Association, and the forms were signed by the three respective judges. Nothing in the record indicates that any of the trial judges solicited proposed findings of fact and conclusions of law from either party.

ISSUES

The Bank presents four issues:

1. Are notes which are secured by mortgages of real estate negotiable instruments within the purview of the Uniform Commercial Code?

2. Did the Bank present a genuine issue of material fact by presenting to the court evidence that it did not intend that its endorsement of the notes should give the Association recourse against it?

3. Was it proper for the court to award attorney's fees to the Association?

4. Was it reversible error, under Ind. Rules of Procedure, Trial Rule 58, for the trial courts to accept an unsolicited form of judgment from the Association?

The contentions of the parties will be dealt with as each issue is resolved.

DECISION

ISSUE ONE -Are notes which are secured by mortgages of real estate negotiable instruments within the purview of the Uniform Commercial Code?

PARTIES' CONTENTIONS -The Bank contends that as Article 3 of the UCC declares itself subject to the provisions of Article 9, ¹ and as Article 9 does not apply to liens on real estate, ² it follows that mortgage notes, which are secured by liens on real estate, lie entirely outside the coverage of the Uniform Commercial Code.

The Association responds that the cited provisions of the UCC show only that the UCC does not regulate mortgages as a method of security; they do not show that the UCC does not apply to promissory notes secured by mortgages.

CONCLUSION -So far as Article 3 of the Uniform Commercial Code is concerned, a promissory note secured by a mortgage is a negotiable instrument. The UCC provides the rules for the execution, transfer, and discharge of mortgage notes.

There is no question that the notes in the instant case are, and are intended to be negotiable instruments. They bear the signatures of their makers; ³ the notes contain unconditional promises to pay sums certain in money, and no other promises; ⁴ and they are made payable to the order of the Bank. ⁵ Further, the notes contain language which obviously contemplates that they should be negotiable. ⁶

The Bank argues that while the notes are negotiable in form, the Uniform Commercial Code has exempted mortgage notes from its provisions.

To the contrary, Indiana courts have held that mortgage notes are subject to the general law of negotiable instruments, including the Uniform Negotiable Instruments Law, without regard to the fact that they are affected with an interest in real property. Egbert v. Egbert (1948), 226 Ind. 346, 351, 80 N.E.2d 104, 106.

Mortgage notes were subject to the general law on negotiable instruments before the Uniform Commercial Code, and we do not read the UCC as changing that state of affairs. Article 3 of the UCC is made "subject to the provisions of" Article 9, which governs secured transactions. UCC § 3-103(2). Section 9-104(j) says that "This article does not apply ... to the creation or transfer of an interest or lien on real estate." (Emphasis added). The plain meaning of this language is that Article 9 of the UCC has no provisions relating to mortgages of real property. UCC § 9-104(j) silences Article 9 as to real estate mortgages; it does not purport to silence the entire Code. And because Article 9 says nothing about real estate mortgages, it cannot help the Bank to plead that the law of negotiable instruments is "subject to" Article 9.

That mortgage notes are still to be treated as negotiable instruments subject to the general law is made plain by the Indiana Commissioners' comment to § 9-104(j):

The rights of a mortgagee of real estate are represented by the chose in action secured, and therefore, a security interest given by the mortgagee in the chose in action will be governed by the Code. Accord: Walner v. Capron, 224 Ind. 267, 66 N.E. (2d) 64 (1946) (pledge of note and mortgage extended to realty purchased on foreclosure); Wheeler v. St. Paul Crushed Stone Co., 191 Ind. 75, 132 N.E. 1 (1921). Existing law will control claims of such secured party to the real estate....