Home State Bank v. Johnson

• Decision Date: 11 December 1986
• Docket Number: No. 59099,59099
• Citation: 240 Kan. 417,729 P.2d 1225
• Parties: The HOME STATE BANK, Lewis, Kansas, Appellee, v. Curtis R. JOHNSON and Donna Jo Johnson a/k/a Donna Johnson, Husband and Wife, Appellants.
• Court: Kansas Supreme Court

Page 1225

729 P.2d 1225

240 Kan. 417

The HOME STATE BANK, Lewis, Kansas, Appellee, v. Curtis R. JOHNSON and Donna Jo Johnson a/k/a Donna Johnson Husband and Wife, Appellants.

No. 59099.

Supreme Court of Kansas.

Dec. 11, 1986.

Syllabus by the Court

1. When a district court enters an order of foreclosure in rem against mortgaged land, it must determine and state the amount of the judgment which is being entered against the land.

2. The best and most persuasive evidence of the intention of the parties who enter into a written agreement is that which is expressed by the terms of that agreement.

3. The construction of a written instrument is a question of law, and the instrument may be construed and its legal effect determined by an appellate court.

4. A mortgage given to secure the sum of $100,000 and future advances, which specifically states that the aggregate principal amount of the loans and advances secured by the mortgage shall at no time exceed that sum, and upon which a registration fee based on that amount was paid, and upon which no later agreements increasing the amount secured by the mortgage were executed by the parties, is held to secure only the principal sum of $100,000, plus interest thereon, taxes, insurance, and costs.

5. One of the most important purposes of the redemption statutes is to provide the mortgagor with the rents and profits from the property during the redemption period in order to enable him to redeem.

6. Landowner's royalties, arising from the production of oil and gas under oil and gas leases on the mortgaged premises, and under which the landowner is entitled to one-eighth of the production, are "rents and profits," and ordinarily the landowner is entitled to receive such royalties, undiminished by payment of taxes therefrom, during the period of redemption.

7. Under the particular facts of this case, the mortgagor-landowner's oil and gas royalties, accruing both before and during the period of redemption following sale on foreclosure of the second mortgage, are to be applied toward the first mortgage debt.

W. Thomas Gilman, of Redmond, Redmond, O'Brien & Nazar, Wichita, argued the cause and was on the brief, for appellants.

Rae E. Batt, of Kinsley, argued the cause and was on the brief, for appellee.

MILLER, Justice:

This is an appeal by defendants Curtis R. Johnson and Donna Jo Johnson, the owners and mortgagors of 320 acres of land in Edwards County, from a judgment of the district court of that county foreclosing a second mortgage held by the plaintiff, Home State Bank, and from the sale of the land pursuant to that judgment. This foreclosure proceeding is complicated by several factors: the first mortgage was not foreclosed; additional funds were advanced by the bank to the owners, under a separate agreement and notes, over four years after the mortgage was executed and recorded; oil and gas was being produced under leases on the land and the landowners' royalties were assigned to the mortgagees; and the owners filed a Chapter 7 bankruptcy petition during the pendency of this action.

The controlling issues may be stated as follows: (1) Did the trial court err in failing to fix the amount of the in rem judgment against the real estate and in not limiting that amount to $100,000? (2) Did the court err in determining who is entitled to the oil and gas royalties during the period (a) up until date of sale, and (b) during the period of redemption? and (3) Did the trial court err in ordering that taxes be paid out of the accumulated oil and gas royalties?

We will attempt to state the facts, which appear to be undisputed, in chronological order. On May 1, 1978, the Johnsons executed a first mortgage to The Travelers Insurance Company (Travelers). That mortgage was duly filed for record and recorded in the office of the Register of Deeds of Edwards County. That mortgage is not before us, was not foreclosed, and is not in dispute.

On May 5, 1978, the Johnsons executed to Travelers a document entitled Assignment of Bonuses, Rentals and Royalties under Oil and Gas Lease. That instrument recites the mortgage from the Johnsons to Travelers on the two described quarter sections of land in Edwards County; that each quarter section is subject to an oil and gas lease, one lease being held by Zenith Drilling Corporation, Inc., and the other being held by Texas Energies, Inc. It then recites that for certain consideration, the Johnsons hereby assign to Travelers:

"[A]ll the bonuses, rents and royalties under said oil and gas leases, provided, however, that so long as all of the provisions of said note and mortgage are faithfully performed, owner may receive from lessee for owner's own use, such bonuses, rents and royalties. But it is [the Johnsons'] intention that [Travelers] may receive such bonuses, rents and royalties upon a default in the performance of the provisions of said note and mortgage...."

The assignment was duly signed, acknowledged, and recorded.

On June 2, 1978, the Johnsons executed to the Home State Bank a real estate mortgage covering two described quarter sections of land in Edwards County. The mortgage was given to secure a loan of $100,000, evidenced by a note from the Johnsons to the Bank on the same date. The mortgage contains the following provision:

"This mortgage is given to secure payment of the sum of One hundred thousand and no/100 Dollars ($100,000.00) and interest thereon, according to the terms of promissory note/s this day executed and subsequently to be executed by the mortgagors to the mortgagee, and all other sums which may hereafter be owing to the mortgagee by the mortgagors or any of them, however evidenced; it being understood and agreed that the mortgagee may from time to time make loans and advances to the mortgagors or any of them and that all such loans and advances and the interest thereon will be secured by this mortgage; provided that the aggregate principal amount of the loans and advances hereunder shall at no time exceed the amount hereinbefore stated." (Emphasis supplied.)

The mortgage states that it is subject to a first mortgage to The Travelers Insurance Company in the amount of $165,000, dated May 1, 1978. The Home State Bank's mortgage was duly recorded and the registration fee of $250 was paid, based on the indebtedness of $100,000, as required by K.S.A. 79-3102. (Kansas courts are prohibited by statute, K.S.A. 79-3107, from entering any judgment enforcing a real estate mortgage unless the registration fee fixed by K.S.A. 79-3102 has been paid.)

Johnson's mortgage to the Home State Bank also contained a provision for the assignment of oil and gas royalties, and pursuant thereto on May 31, 1979, the Johnsons executed an amended division order, directing the Permian Corporation to pay to the Bank the Johnsons' royalty interest in production on the oil and gas lease held by Zenith. Similarly, on June 5, 1980, Curtis R. Johnson executed a Transfer Order, directing Zenith Drilling Corporation to pay Johnson's one-eighth landowner's royalty from the Zenith lease to the Home State Bank.

On February 25, 1983, the Johnsons entered into a detailed loan agreement with the Home State Bank, which recited that the Johnsons were desirous of obtaining a line of credit in the aggregate principal amount of $370,000 to renew existing notes, both interest and principal, and to provide funds for 1982 operating expenses. The Johnsons executed two notes. A new note, in the amount of $60,000, was to be paid off within one year, and the principal and interest on that note was to be reduced by payment of all oil and gas royalty income. A renewal note, in the amount of $310,000, was to be paid by all other income, including that from farm crops, grazing crops, government payments, sale of grain, and from royalty income after the $60,000 note was paid. This agreement is lengthy and need not be set forth in full here, except for the following provision, which is the only reference in the loan agreement to the June 2, 1978, real estate mortgage:

"h. It is further understood by the parties that the consideration for this loan agreement is the further extension of credit by Bank to Borrower, all as provided by Real Estate Mortgage previously filed for record, all security agreements, all financing statements filed of record, assignment of all oil and gas royalty, bonuses and rentals income."

The $310,000 renewal note stated: "Renew farm operating note," and further recited that it was secured by security agreement on various personal property, assignment of oil and gas income "dated 6-1-80 Zenith, 5-31-79 Permian, RE Mtg dated 6-2-78 on NE 1/4 12-25-17 Edws. Co., Ks." At the time this foreclosure action was filed, this note had been reduced to some $260,000 by various credits. The $60,000 note for "1982 farm operating expenses" recited that it was secured by "Assgn. of oil & gas income dated 6-1-80 Zenith and 5-31-79 Permian. Also RE Mtg dated 6-2-78 on NE 1/4 12-25-17 Edws. Co., Ks." At the time this suit was filed, this note had been reduced to some $13,000 by payments received for oil and gas royalties.

On March 23, 1984, this foreclosure action was filed. The Bank sought judgment against the Johnsons for the balance due on the renewal note, plus interest, and for foreclosure of its mortgage and sale of the real estate and the royalty interests and the personal property covered by the security agreements to pay that judgment. The petition states:

"That no suit of law has been had to secure the debt of said note or mortgage or any part thereof, and that defendants have been given credit for all proper offsets, and that there is now due and owing from the defendants to the plaintiff upon said note and mortgage ... in the sum of $268,584.98 with interest to February 28, 1984, and a per diem rate thereafter of $103.08, the said sum of $100,000.00 to be applied upon the real property mortgage. That defendants have failed to pay...