Hoopes v. Hoopes

• Decision Date: 21 September 1993
• Docket Number: No. 19855,19855
• Citation: Hoopes v. Hoopes, 861 P.2d 88, 124 Idaho 518 (Idaho App. 1993)
• Parties: Melvin R. HOOPES and Ardell C. Hoopes, husband and wife, Plaintiffs-Respondents, v. Lowell J. HOOPES, Defendant-Appellant.
• Court: Idaho Court of Appeals

Page 88

861 P.2d 88

124 Idaho 518

Melvin R. HOOPES and Ardell C. Hoopes, husband and wife, Plaintiffs-Respondents, v. Lowell J. HOOPES, Defendant-Appellant.

No. 19855.

Court of Appeals of Idaho.

Sept. 21, 1993.

Hoopes & Thompson, Rexburg, for defendant-appellant.

Mark B. Clark, Pocatello, for plaintiffs-respondents.

PERRY, Judge.

This appeal is based on an action by Melvin and Ardell Hoopes, husband and wife, against Lowell and Loni Hoopes, husband and wife. ¹ Melvin acted as a cosigner and guarantor on a promissory note for his brother Lowell. Melvin pledged four certificates of deposit as security for the loan. Lowell eventually defaulted on the loan, and the certificates of deposit were seized to satisfy the loan. Melvin brought this action to recover the loss. At trial, the district court, sitting without a jury, determined that Melvin had acquired all the rights of the lending bank through subrogation. The district court found Lowell liable for the amount paid by Melvin on the loan, for interest on the money owed and for attorney fees. On appeal, Lowell challenges the district court's conclusion that Melvin was entitled to recover on a subrogation theory, the calculation of interest on the debt and the award of attorney fees. Melvin, in turn, requests attorney fees on appeal. ² We affirm the subrogation ruling but conclude the district court erred in calculating interest due. We therefore remand in part for a redetermination of the interest component of the judgment and the amount of awardable attorney fees.

FACTS AND PROCEDURAL BACKGROUND

In December of 1982, Zion's National Bank of Utah foreclosed on a farm owned by Lowell. In October 1983, Lowell told Melvin that his redemption rights under Idaho law would expire on December 15, 1983, and that he was having difficulty obtaining a loan to redeem the property. In an attempt to aid Lowell in obtaining financing, Melvin agreed to cosign on a loan from the First Bank of Afton, Wyoming. He also agreed to assign four bank deposits evidenced by certificates of deposit (the "CDs") to the bank as collateral. Lowell received approximately $270,000 from the bank, and a six-month note in favor of the bank was signed by Lowell and Melvin. Melvin alleged that Lowell agreed to sell or mortgage the farm to pay the loan within the six months allowed. At the end of the six months, Lowell was unable to pay off the loan and received an extension, paying only the accrued interest at that time. Lowell subsequently obtained several extensions of the note. During the course of these extensions, Melvin made a number of interest payments on the note in order to protect his CDs from forfeiture. A renewal note in the amount of $290,838.13 was signed by Lowell and cosigned by Melvin in May 1986. At that time, Melvin re-pledged the CDs as security and signed a guarantee of the loan. The final extension was granted by the bank in August of 1987, extending the maturity date of the loan to February 22, 1988. However, on October 15, 1987, American National Bank (formerly First Bank of Afton, Wyoming) was closed by the Federal Deposit Insurance Corporation. On March 10, 1989, the CDs were seized by the FDIC and used to satisfy the loan. On that date, the promissory note was marked "paid in full."

Melvin filed suit to collect the amount that was paid to discharge the debt plus interest. At trial, the district court determined that by virtue of his payment via the CDs, Melvin had gained all the rights of the bank through subrogation. The district court ordered Lowell to pay $290,838.13 as the principal of the debt; $257,295.26 in pre- and post-default interest; and $18,544.19 for interest payments that were made by Melvin (interest was waived on this amount), making a total judgment of $566,678.58. The district court also ordered Lowell to pay attorney fees under the terms of the note and because it found the defense of the case "frivolous" under I.C. § 12-121 and I.R.C.P. 54. Based on a contingency agreement (one-third of the total judgment) between Melvin and his attorney, the attorney fees award was $188,892.86. Lowell filed this appeal, claiming that it was error for the lower court to find that Melvin was subrogated to the rights of the bank, that the interest was improperly calculated and that the district court erred in awarding attorney fees.

I.

The first issue raised is whether the district court properly found that Melvin became subrogated to the right of the bank when the CDs were used to pay off the loan.

In support of the district court's determination of the right of subrogation, Melvin first points to Article 3 of the Uniform Commercial Code as adopted in Idaho. Melvin cites former I.C. § 28-3-415 for the proposition that as an "accommodation party," he has a right of recourse against Lowell. ³ Former I.C. § 28-3-415 states:

Contract of accommodation party.--(1) An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it.

. . . . .

(5) An accommodation party is not liable to the party accommodated, and if he pays the instrument has a right of recourse on the instrument against such party.

There is no dispute that the loan was made for Lowell's benefit and that he was the primary obligor on the loan. Melvin, as the cosigner of the note, was the "accommodation party." Hawkland & Lawrence, UCC Series § 3-415:02 (1986). Without Melvin's signature and the pledge of the CDs, Lowell would not have been able to obtain the loan. Lowell was thus the "accommodated party."

In the Comment to Official Text of the former § 28-3-415 is the following:

5. Subsection (5) is intended to change the result of such decisions as Quimby v. Varnum, 190 Mass. 211, 76 N.E. 671 (1906), which held that an accommodation indorser who paid the instrument could not maintain an action on it against the accommodated party since he had no "former rights" to which he was remitted. Under ordinary principles of suretyship the accommodation party who pays is subrogated to the rights of the holder paid, and should have his recourse on the instrument.

Through subsection (5), Melvin has a "right of recourse" against Lowell for the money paid. Melvin asserted at trial that he was subrogated to all of the rights of the bank, as provided in the note, not merely the right to collect the principal. The district court agreed and awarded interest and attorney fees based on the provisions of the promissory note.

In addition to rights under Article 3 of the UCC, Melvin also seeks to support the district court's subrogation determination by invoking the common law right of subrogation. Given the adoption of Article 3 in Idaho and the attendant statutory rights of subrogation applicable to this case, we would normally not need to consider the common law of subrogation. Because Lowell has raised on appeal a number of common law defenses to subrogation, however, we deem a discussion of subrogation under the common law necessary. Common law subrogation is an equitable principle, based on the theory that one (the subrogee) who is compelled to pay for the debts or damages caused by another should have a right to recover from the person incurring the debt or causing the damage. May Trucking v. Int'l Harvester, Co., 97 Idaho 319, 543 P.2d 1159 (1975). By paying off the creditor (the subrogor), the subrogee acquires all the rights possessed by the subrogor.

Subrogation, in its broadest sense, is the substitution of one person for another, so that he may succeed to the rights of the creditor in relation to the debt or claim and its rights, remedies and securities.... It is considered a creature of equity and is so administered as to secure real and essential justice without regard to form, and it will not be allowed where it would work an injustice to others.... The doctrine of subrogation is not administered as a legal right but the principle is applied to subserve the ends of justice and to do equity. It does not rest on contract and no general rule can be laid down which will afford a test in all cases for its application, and whether the doctrine is applicable to any particular case depends upon the peculiar facts and circumstances of such case.

Houghtelin v. Diehl, 47 Idaho 636, 639-40, 277 P. 699, 700 (1929).

One who claims to be equitably subrogated to the rights of a creditor must satisfy certain prerequisites: (1) payment must be made pursuant to an obligation to do so, or in order to protect the subrogee's own interest, i.e., the subrogee must not be making the payment as a mere "volunteer." Williams v. Johnston, 92 Idaho 292, 298, 442 P.2d 178, 184 (1968); (2) the debt paid must be one for which the subrogee was not primarily liable; and (3) the entire debt must be paid. Houghtelin, supra 47 Idaho at 640, 277 P. at 700, (1929); Cozzetto v. Wisman, 120 Idaho 721, 726, 819 P.2d 575, 760, (Ct.App.1991). Finally, (4) the subrogation must not work any injustice to the rights of others. Houghtelin, supra. See generally, Caito v. United California Bank, 20 Cal.3d 694, 144 Cal.Rptr. 751, 576 P.2d 466 (1978).

Lowell asserts that the district court erred in finding subrogation for three reasons. Lowell claims that Melvin cannot be given subrogation rights because he failed to plead subrogation in his complaint; that Melvin did not come to the action with "clean hands," and, therefore, Melvin is barred from seeking an equitable remedy; and, finally, that as a "volunteer," Melvin was unable to be subrogated to the bank's rights.

We first consider the issue of whether Melvin is barred from obtaining the bank's rights through subrogation when he did not plead it in either the original or amended complaint. A review of the amended complaint reveals that Melvin did not specifically allege that he acquired the bank's rights through "subrogation." He did, however, plead general facts that indicated Melvin had provided security for and guaranteed a...