Gust v. Peoples and Enderlin State Bank, 880378

• Decision Date: 03 November 1989
• Docket Number: No. 880378,880378
• Citation: 447 N.W.2d 914
• Parties: Ben GUST, Plaintiff, Appellant and Cross-Appellee, v. PEOPLES AND ENDERLIN STATE BANK, Defendant, Appellee and Cross-Appellant. Civ.
• Court: North Dakota Supreme Court

Page 914

447 N.W.2d 914

Ben GUST, Plaintiff, Appellant and Cross-Appellee, v. PEOPLES AND ENDERLIN STATE BANK, Defendant, Appellee and Cross-Appellant.

Civ. No. 880378.

Supreme Court of North Dakota.

Nov. 3, 1989.

DeMars, Turman & Johnson, Ltd., Fargo, for plaintiff, appellant and cross-appellee; argued by Joseph A. Turman and Jonathan R. Fay.

Serkland, Lundberg, Erickson, Marcil & McLean, Ltd., Fargo, for defendant, appellee and cross-appellant; argued by Jack G. Marcil.

GIERKE, Justice.

Ben Gust appeals from a judgment holding him liable to Peoples and Enderlin State Bank [Bank] on a promissory note for $238,651.38. The Bank has cross-appealed from a part of the judgment which rescinded a settlement agreement, promissory note, and warranty deed, and quieted title to certain real property in Gust. We affirm in part, reverse in part, and remand for further proceedings.

In April 1984, Gust, an elderly farmer from Leonard, was approached by his nephew, James Nygard, who requested that Gust borrow sufficient funds from the Bank to allow Nygard to obtain an operating line of credit and to repay other debts which were past due from his farming operation. At the time, Gust owned approximately three quarter sections and one 80-acre parcel of farmland in Cass County. The land was subject to minimal indebtedness.

On April 23, 1984, the Bank loaned Gust $174,000. To secure the loan, the Bank took a mortgage on two quarter sections of Gust's land. The standard form mortgage document had "COLLATERAL REAL ESTATE MORTGAGE" typed at the top. The Bank typed the following language at the bottom of the document: "The parties agree that this mortgage constitutes a collateral real estate mortgage pursuant to North Dakota Century Code Chapter 35-03." The stated maturity date of the promissory note and mortgage was January 15, 1985. Gust then endorsed the loan proceeds over to Nygard and took a promissory note from Nygard for $174,000.

Gust failed to pay the note on January 15, 1985, and on March 13, 1985, after Gust made a payment of interest and a partial payment of principal, the Bank extended the promissory note to January 30, 1986. On January 27, 1986, the promissory note was again extended to February 1, 1987, in consideration of Gust's payment of interest. The Bank did not file an addendum continuing the effectiveness of the mortgage lien as provided by Sec. 35-03-17, N.D.C.C. ¹ Gust did not pay the note when due in February 1987. In May 1987, Gust and the Bank entered into a settlement agreement. As part of the agreement, Gust acknowledged that he was in default and that the Bank had a mortgage on the two quarter sections of land. Gust conveyed the real estate covered by the mortgage to the Bank by warranty deed which was recorded on May 15, 1987. In exchange, the Bank credited Gust's account for $140,000, and the parties executed a new promissory note for $61,661.53 representing the balance of the amount owed by Gust to the Bank.

In September 1987, Gust commenced this action to rescind the May 1987 settlement agreement, promissory note, and warranty deed. The Bank counterclaimed for a money judgment on the original April 1984 promissory note in the event the court granted Gust's request for rescission. On February 29, 1988, the court granted Gust's motion for partial summary judgment determining that the April 1984 collateral real estate mortgage had lapsed under the provisions of Sec. 35-03-17 and was invalid and otherwise unenforceable at the time Gust entered into the settlement agreement and deeded the land to the Bank in May 1987. On May 4, 1988, the court granted Gust's motion for partial summary judgment on his rescission claim. The court determined that, because the April 1984 collateral real estate mortgage had lapsed by May 1987, Gust and the Bank had entered into the settlement agreement, promissory note, and warranty deed as a result of a mutual mistake of fact and a mutual mistake of law, and that, as a matter of law, rescission of those agreements was required. On November 4, 1988, the court granted the Bank's motion for partial summary judgment on its counterclaim to enforce the original April 1984 promissory note. The court determined that the note had not been rendered unenforceable by the lapse of the collateral real estate mortgage which secured it, and that the anti-deficiency judgment statutes, Secs. 32-19-06 and 32-19-07, N.D.C.C., were not applicable under the circumstances.

On December 1, 1988, the court incorporated the partial summary judgments into one judgment which quieted title to the two sections of farmland in Gust and awarded the Bank a money judgment for $238,651.38 on the April 1984 promissory note. Both parties have appealed.

The Bank initially asserts that the April 1984 mortgage was not a collateral real estate mortgage, but was a standard real estate mortgage because it does not comply with the technical requirements of Sec. 35-03-17. The Bank contends that because the statement, "The parties agree that this mortgage constitutes a collateral real estate mortgage pursuant to North Dakota Century Code Chapter 35-03," was typed in lower case, rather than capital letters as required by the statute, it cannot be construed as a collateral real estate mortgage. We reject this argument.

The logical purpose for the statutory requirement that the statement be printed or typed in capital letters is to provide conspicuous notice to the borrower that the mortgage is subject to the provisions of Sec. 35-03-17. There is no dispute that the Bank prepared the April 1984 mortgage and typed the challenged language in the document. The Bank, as the drafter of the document, is in no position to claim that it did not have actual notice that the mortgage constituted a collateral real estate mortgage. Cf. Hamilton Metals v. Blue Valley Metal, 763 S.W.2d 225, 227 (Mo.Ct.App.1988); Hoffman v. Halter, 417 N.W.2d 747, 750-751 (Minn.Ct.App.1988). We agree with the trial court that, under these circumstances, the Bank cannot "attack its own mortgage for its own failure to capitalize certain words within the mortgage that it utilized."

Gust asserts that the trial court erred in concluding that the Bank's direct suit on the April 1984 promissory note was not prohibited by the anti-deficiency judgment statutes. The court reasoned that because the Bank had failed to file an addendum continuing the effectiveness of the lien, the collateral real estate mortgage had terminated under the express provisions of Sec. 35-03-17. Because there was no foreclosure and the Bank was no longer technically a mortgagee, the court applied the general rule that a " 'note and mortgage are separate contracts, each with its own remedy....' " [Mischel v. Austin, 374 N.W.2d 599, 600 (N.D.1985) (quoting Lincoln Nat'l Life Ins. Co. v. Kelly, 73 N.D. 622, 628, 17 N.W.2d 906, 909 (1945)) ], and concluded that the anti-deficiency judgment statutes did not preclude the Bank from suing on the note.

The legislative history of Sec. 35-03-17 reflects that its purpose was to create a real estate mortgage which would allow lenders and borrowers more flexibility in their lending relationships. See Minutes of the Senate and House Industry, Business, and Labor Committees on Senate Bill 2343 (1983). A collateral real estate mortgage permits the lender to file one mortgage with a stated face amount with the actual debt owed during the term of the mortgage fluctuating based on the credit needs of the borrower. See Minutes, supra. Although the statute provides for various time periods with respect to the effectiveness of the mortgage, it also allows the lender to file an addendum, within a prescribed period of time, to continue the effectiveness of the lien. Neither the express terms of Sec. 35-03-17, nor the legislative history of the statute, suggests that the anti-deficiency judgment statutes were intended to be inapplicable to collateral real estate mortgages, and the Bank has acknowledged that the anti-deficiency judgment statutes would apply if its mortgage had not terminated.

When "a promissory note is executed in conjunction with the taking of a mortgage, the provisions of the State's anti-deficiency statutes apply." Mischel v. Austin, supra, 374 N.W.2d at 600. Section 32-19-07, N.D.C.C., provides in relevant part:

"Except as otherwise provided in sections 32-19-04 and 32-19-06, neither before nor after the rendition of a judgment for the foreclosure of a real estate mortgage or for the cancellation or foreclosure of a land contract made after July 1, 1951, shall the mortgagee or vendor, or the successor in interest of either, be authorized or permitted to bring any action in any court in this state for the recovery of any part of the debt secured by the mortgage or contract so foreclosed. It is the intent of this section that no deficiency judgment shall be rendered upon any note, mortgage, or contract given after July 1, 1951, to secure the payment of money loaned upon real estate or to secure the purchase price of real estate, and in case of default the holder of a real estate mortgage or land contract shall be entitled only to a foreclosure of the mortgage or the cancellation or foreclosure of the contract except as provided by sections 32-19-04 and 32-19-06." ² In Dakota Bank and Trust Co. of Fargo v. Funfar, 443 N.W.2d 289, 292 (N.D.1989), we said:

"The import of our anti-deficiency judgment statutes is clear. Except under very limited circumstances, a 'mortgagee ... shall not be permitted or authorized either before or after the rendition of a judgment for the foreclosure of a real estate mortgage ... to bring any action in any court in this state for the recovery of any part of the debt secured by the mortgage ... in excess of the amount by which such debt and the costs of the action exceed the fair value of the mortgaged premises.' Section 32-19-06, N.D.C.C. [Emphasis added.] ... In recognition of this clear...