Hector, Inc. v. United Sav. and Loan Ass'n

• Citation: 741 P.2d 542
• Decision Date: 05 August 1987
• Docket Number: No. 19524,19524
• Parties: HECTOR, INC., a corporation, Plaintiff, Respondent and Cross-Appellant, v. UNITED SAVINGS AND LOAN ASSOCIATION, a corporation; and Land Title Company, a corporation, Defendants, Appellants and Cross-Respondents.
• Court: Supreme Court of Utah

Page 542

741 P.2d 542

HECTOR, INC., a corporation, Plaintiff, Respondent and Cross-Appellant, v. UNITED SAVINGS AND LOAN ASSOCIATION, a corporation; and Land Title Company, a corporation, Defendants Appellants and Cross-Respondents.

No. 19524.

Supreme Court of Utah.

Aug. 5, 1987.

Lester A. Perry, Salt Lake City, for Hector, Inc.

Richard L. Bird, Salt Lake City, for United Sav. & Loan, et al.

STEWART, Associate Chief Justice:

Hector, Inc., a construction company, executed a trust deed as trustor to secure an $800,000 loan from United Savings and Loan Association (United), the beneficiary of the trust deed. United appeals a judgment holding it liable for double damages and attorney fees for breaching its duty to request a reconveyance from the trustee to Hector of the real property which secured the loan under the trust deed, as required by Utah Code Ann. § 57-1-33 (1986). ¹ Hector cross-appeals from the award of damages.

On this appeal, United argues that the trial court erred in holding that (1) United breached its statutory duty to request a reconveyance; (2) Hector did not have a duty to mitigate damages; (3) § 57-1-33 allows double damages and attorney fees; and (4) each of the three lots wrongly withheld by United had a value of $20,000. Hector cross-appeals on the ground that the trial court erred in refusing to award additional damages. We affirm in part, reverse in part, and remand for a recalculation of damages.

I.

On January 10, 1978, Hector entered into a land development agreement with United and executed a promissory note and a deed of trust in favor of United to secure a loan of $800,000 to finance the development of a residential subdivision in Farmington, Utah. At approximately the same time, Hector obtained an improvement bond from Western Mortgage Loan Corporation (Western Mortgage) in favor of Farmington City to guarantee Hector's workmanlike construction of the off-site improvements in the subdivision. None of the documents executed by Hector with respect to the Western Mortgage bond provided security for the bond, although it was Western Mortgage's practice to require security on such bonds. United and Western Mortgage are separate corporations owned by the same shareholders. Both have the same directors and principal operating officers, one of whom is Mrs. LaVerne Neilson. Mrs. Neilson represented both United and Western Mortgage in the transactions with Hector.

By April 30, 1981, Hector had paid United all amounts owed under the promissory note. However, when Mrs. Neilson accepted Hector's final payment, she told Hector that the reconveyance of the property subject to the trust deed was conditioned on Farmington City's release of the Western Mortgage improvement bond.

Shortly thereafter, Farmington City released all but $17,900 of the improvement bond. That amount was to be released at the expiration of a routine six-month waiting period used by Farmington City to ensure that the off-site improvements had been installed in a workmanlike manner. All except ten lots were then released and reconveyed by the trustee to Hector. United refused to direct the trustee to release the ten lots and, instead, retained them to secure Western Mortgage's remaining $17,900 obligation on the improvement bond.

On May 27, 1981, Hector made a written request for the release and reconveyance of the remaining ten lots. When United refused to request a reconveyance, Hector filed suit, seeking the release and reconveyance of the lots and damages as provided by § 57-1-33.

The trial court found that United unconditionally offered on September 11, 1981, to request the trustee to reconvey to Hector seven of the ten lots and that Hector refused to accept the offer. On January 28, 1982, the improvement bond was finally released by Farmington City, and the same day, all ten lots were released and reconveyed to Hector.

Sometime between May 27, 1981, and September 11, 1981, Hector's president, Jim Pappas, telephoned Valley Bank & Trust Company to discuss the possibility of substituting a bond underwritten by Valley Bank for the bond underwritten by Western Mortgage. Mr. Pappas testified that Valley Bank would "gladly take the bond" for $125, but Mr. Pappas did not substitute the Valley Bank bond for the Western Mortgage bond. Mr. Pappas took no further action to minimize Hector's losses. Later, during the summer of 1981, Mr. Pappas had the opportunity to trade the ten lots for real property in West Valley City. He claimed at trial that Hector stood to make at least $200,000 profit on the swap.

The trial court ruled that United breached its duty to request a reconveyance from the trustee of all the lots when Hector had fully repaid the United promissory note. The court also held, however, that Hector should have accepted United's September 11, 1981 offer and that the profits Hector claimed it lost were too speculative to be recoverable. The court valued each lot at $20,000 and awarded Hector damages based on ten percent per annum interest on the value of all ten lots for the period June 27, 1981 (i.e., thirty days after the written notice required by § 57-1-33), to September 11, 1981, plus ten percent interest per annum on the value of the three lots for the period September 11, 1981, to January 28, 1982. Those two figures total $6,432.87, and that was doubled pursuant to the statute. Hector was also awarded $2,000 in attorney fees.

II.

We address first whether United breached its statutory duty to request a reconveyance of all the lots when Hector paid off the loan in full. Although § 57-1-33 appears to impose an absolute duty on a trust deed beneficiary to request a reconveyance from the trustee on written demand of the trustor, see supra note 1, United argues that a beneficiary's good faith in not requesting a reconveyance by the trustee of the security to the trustor should be an affirmative defense to an action brought under that section. United's argument is based on Shibata v. Bear River State Bank, 115 Utah 395, 205 P.2d 251 (1949), which held that good faith is an affirmative defense to an action brought under the predecessor to § 57-3-8, which governed the release of mortgages and was similar in wording and purpose to § 57-1-33. ²

The mortgage release statute and the trust deed reconveyance statutes are in pari materia; they serve the exact same purpose of protecting borrowers who secure their debt by an interest in real estate from lenders who refuse to return the security when the debt is discharged. The statutes hold lenders to a high degree of care and promptness in clearing title to a borrower's property when the debt is paid since the lender no longer has a legitimate interest in the security and the borrower has a great interest in freeing the property of the security interest. Like the statute at issue in Shibata, § 57-1-33 is "penal in nature and should be strictly construed," but "[i]t is not meant to penalize one who honestly, though mistakenly, refuses to release or declare a mortgage of record because he believes that there has been no full satisfaction." Id. at 403, 205 P.2d at 254. See also Annot. 56 A.L.R. 335 (1928).

In this case there was no question that the debt to United had been fully paid. Hector had paid the promissory note and fully satisfied the terms of the trust deed securing that note. United knew that, but refused to request a reconveyance of all the property. The ten lots it retained were to secure a different obligation contingently owed to a different party. United's use of the leverage of refusing to reconvey the land securing the trust deed to obtain security for another debt is not good faith by any reckoning.

Swaner v. Union Mortgage Co., 99 Utah 298, 307, 105 P.2d 342, 346 (1940), is on point on this issue. Union Mortgage sought to justify its refusal to perform under one contract with a builder because the builder had failed to comply with the terms of a different contract between the two parties. The Court rejected the proposition that one party can justifiably refuse to perform under one contract to compel the other party to the contract to perform under a second contract. Withholding performance under one contract to compel a contracting party to do an act with respect to another independent contract is not good faith.

That principle applies here. There was never an agreement that Western Mortgage would be given security on the Farmington bond. Indeed, United readily admits that none of the agreements between it and Hector conditioned the reconveyance of the property subject to the trust deed on the release of the Western Mortgage improvement bond. United had no right to attempt to force Hector to provide security for the Farmington bond.

United contends that it is industry practice to provide security for bonds and that since United and Hector had always expressly agreed in prior dealings to secure improvement bonds, the intent of the parties in this case could not have been otherwise.

Course of dealing or industry usage and custom is admissible evidence to construe ambiguous terms of an agreement or to supply missing terms in an otherwise valid agreement, at least under certain circumstances; but evidence of a course of dealing and industry usage and custom does not suffice to create a whole agreement, especially when the agreement must be in writing to satisfy the statute of frauds. Farmers Co-operative Association v. Cole, 239 N.W.2d 808 (N.D.1976).

Under Utah law, an agreement to secure an obligation with real property must be in writing because it creates an interest in real property. Utah Code Ann. § 25-5-1 (1984); Jackson v. Dallin, 47 Utah 312, 314, 152 P. 341, 342 (1915). Therefore, evidence of a course of dealing or of industry usage and custom is not admissible to show that real property used to secure one obligation pursuant to a trust deed is also meant to secure another obligation.

In sum, United unequivocably breached its...