In re Carley Capital Group
| Decision Date | 08 February 1990 |
| Docket Number | Bankruptcy No. MM11-89-00587 to MM11-89-00589. |
| Citation | 117 BR 951 |
| Parties | In re CARLEY CAPITAL GROUP, James E. Carley, David Carley, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Paul A. Lucey, Godfrey & Kahn, Milwaukee, Wis., for debtors.
Michael B. Van Sicklen, Foley & Lardner, Madison, Wis., for First Wisconsin Nat. Bank.
Susan V. Kelley, Murphy & Desmond, S.C., Madison, Wis., for Creditors Committee.
The material facts are not in dispute. At all relevant times debtors James and David Carley have been the owners of the Sauk County farm which is the subject of this litigation. In the Fall of 1989 a portion of the farm was sold, under court order, with liens attaching to the $125,000.00 sale proceeds. The remaining portion of the farm is still titled in the Carleys' names. First Wisconsin National Bank of Madison (the "Bank") has moved for recovery of the sale proceeds. The Creditors Committee of Carley Capital Group (the "Committee") has opposed the Bank's motion on the basis that the Bank's mortgage is either invalid, or avoidable pursuant to 11 U.S.C. § 544(a).
On August 8, 1979 the Carleys executed and delivered to the Bank the mortgage ("the mortgage") on the Sauk County farm. The mortgage was recorded in the office of the Sauk County Register of Deeds. The obligation secured was described in the mortgage as "a loan by Mortgagee to Mortgagor as evidenced by Mortgagor's Mortgage Note bearing even date herewith in the principal sum of Two Hundred Thousand and No/100 Dollars ($200,000.00). . . ." The mortgage further provided that upon payment in full of the note and full performance of the obligations under the note and mortgage "the Mortgaged Property shall revert to Mortgagor and Mortgagee shall forthwith execute and deliver to Mortgagor an appropriate instrument of release, satisfaction and discharge."
Actually the Carleys did not execute a $200,000.00 note on August 8, 1979. Rather, the Carleys and their two partners executed two irrevocable letters of credit, dated August 8, 1979, in the amounts of $105,000.00 and $175,000.00, in conjunction with two undated notes, bearing the respective amounts. The notes bore a written indication that they were secured by the mortgage. Both letters of credit were to expire on July 31, 1981. The $175,000.00 letter of credit was amended to expire on November 30, 1981, and the $105,000.00 letter was amended three times, ultimately to expire on September 30, 1983. The letters were not drawn upon at any time before their expiration.
The Carleys entered into other transactions with the Bank at various times before and after September 30, 1983, and orally agreed that the Sauk County farm would serve as security for other obligations to the Bank. Accordingly, the Bank sent the Carleys an October 18, 1983 letter confirming this understanding. Not until February 20, 1984 did the Carleys and Carley Capital Group execute a cross-collateralization agreement under which the mortgage was listed as security for other obligations to the Bank. The cross-collateralization agreement was filed with the Wisconsin Secretary of State but was not recorded with the Sauk County Register of Deeds. A similar 1988 cross-collateralization and cross-default agreement also listed the Sauk County farm as security for obligations to the Bank, but was not signed by David Carley and was not filed with either the Secretary of State or the Sauk County Register of Deeds.
It will be assumed for purposes of this opinion that the mortgage identified the $105,000.00 and $175,000.00 notes with reasonable certainty. Those notes are thus assumed to be the obligation secured by the mortgage.
The mortgage provided that upon full performance of the obligations it secured, the property would revert to the Carleys, and the Bank would deliver to the Carleys an instrument of release, satisfaction, and discharge. Although both letters of credit had expired, unused, by September 30, 1983, the Bank did not deliver such an instrument to the Carleys.
The initial question is whether the mortgage was discharged upon the expiration of the letters of credit and the attendant satisfaction of the related notes. Then we must determine whether by operation of the mortgage contract the property reverted to the Carleys, in the absence of the Bank's written satisfaction of the mortgage. In Moore v. Benjamin, 228 Wis. 591, 594, 280 N.W. 340 (1938), the court stated:
The indebtedness to which the mortgage was incident having been satisfied, the mortgage ceased to exist. Authorities are in general accord with the proposition that payment of an indebtedness on a note secured by a mortgage on real estate extinguishes the mortgage lien without satisfaction thereof of record or in writing.
(citation omitted). See also Marshall & Ilsley Bank v. Ewig, 230 Wis. 353, 357, 283 N.W. 795 (1939); Connor v. Connor, 218 Wis. 336, 343, 259 N.W. 729 (1935). It would thus appear that the mortgage was extinguished, and the property reverted to the Carleys, when the second letter of credit expired on September 30, 1983.
The parties dispute the effect of the interval between the expiration of the $105,000.00 letter of credit on September 30, 1983 and the execution of the cross-collateralization agreement on February 20, 1984. The Committee argues that when the letter of credit expired, the mortgage lien was instantly extinguished, and that in order to revive the lien, the Bank was required to file a new mortgage or an amendment to the mortgage in the office of the Sauk County Register of Deeds. The Bank asserts that the mortgage remained valid because there never existed a time without underlying indebtedness due to the parties' oral agreement, predating the expiration of the letter of credit, for which the mortgage was to serve as security.
The Bank cites in support of its position Krugmeier v. Hackett, 134 Wis. 57, 113 N.W. 1103 (1907). The Krugmeier court stated as an initial matter that ". . . as a strict rule governing legal rights, the payment of a debt secured by a mortgage extinguishes the mortgage completely, and . . . such mortgage cannot be revived and become a valid lien upon real estate without the formalities required by law for the execution of mortgages." Id. at 60, 113 N.W. 1103. The court thereafter determined that the "strict rule" did not apply under the facts before it, and allowed the continued existence of a mortgage which "had become extinguished in law so that it no longer constituted a lien upon the land enforceable by defendant." Id. In Krugmeier, the mortgagor, the mortgagee, and the bank all agreed that after paying the amount of the mortgage debt owed by the mortgagor to the mortgagee, the bank would take over and continue to carry the debt previously owed to the mortgagee and secured by the mortgage, and the mortgage would not be satisfied or extinguished but would continue as security for that debt. Id.
The facts of our case may be distinguished from those of Krugmeier. Krugmeier involved a contemporaneous assignment of a mortgage and mortgage debt as part of a transaction in which the mortgagee was paid the amount of the mortgage note, and the mortgagor's account was charged as if having received a loan in the amount of the mortgage note. Our case does not involve assignment of the mortgage debt, be it the letters of credit originally secured by the mortgage, or one of the obligations secured in the later-executed cross-collateralization agreements. Furthermore, even if the parties intended that the mortgage secure other of the Carleys' obligations to the Bank, approximately five months elapsed between the expiration of the $105,000.00 letter of credit on September 30, 1983, and execution of the first cross-collateralization agreement on February 20, 1984. Under these circumstances, there is no reason to depart from the standard rule that a mortgage completely extinguished by payment of the debt secured thereby "cannot be revived and become a valid lien upon real estate without the formalities required by law for the execution of mortgages." Id.
Wis.Stat. § 706.02 sets out the formal requisites for the conveyance by mortgage of an interest in land.1 Pursuant to Wis. Stat. § 706.02(1)(c), in order to be valid, a conveyance must identify "the interest conveyed, and any material term, condition, reservation, exception or contingency upon which the interest is to arise, continue or be extinguished, limited or encumbered." Capocasa v. First National Bank of Stevens Point, 36 Wis.2d 714, 720, 154 N.W.2d 271 (1967); see also Badger State Agri-Credit & Realty, Inc. v. Lubahn, 122 Wis.2d 718, 722-23, 365 N.W.2d 616 (1985). The Bank asserts that the change in the nature of the interest conveyed herein, i.e., from the note referred to in the mortgage to the obligations referenced in the cross-collateral agreements, does not invalidate the mortgage. The Committee cites two cases contradicting the Bank's position: Healy v. Fidelity Savings Bank, 238 Wis. 12, 298 N.W. 170 (1941), and Estate of Dunlap, 184 Wis. 345, 199 N.W. 387 (1924).
In Healy, the court cited Wis.Stat. § 240.06 (), which provided that "No estate or interest in lands, other than leases for a term not exceeding one year . . . shall be created, granted, assigned, surrendered or declared unless by act or operation of law or by deed or conveyance in writing, subscribed by the party creating . . . the same. . . ." (The current Wis.Stat. § 706.01(4) provides that "A `conveyance' is a written instrument, evidencing a transaction governed by this chapter, which satisfies the requirements of s....
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