Knauss v. Miles Homes, Inc.

• Decision Date: 31 December 1969
• Docket Number: No. 8533,8533
• Citation: 173 N.W.2d 896
• Parties: Reo L. KNAUSS, Plaintiff and Respondent, v. MILES HOMES, INC., Defendant and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 896

173 N.W.2d 896

Reo L. KNAUSS, Plaintiff and Respondent, v. MILES HOMES, INC., Defendant and Appellant.

Civ. No. 8533.

Supreme Court of North Dakota.

Dec. 31, 1969.

Rehearing Denied Jan. 30, 1970.

Syllabus by the Court

1. Any interest in property which is capable of being transferred may be mortgaged. Sec. 35--02--05, N.D.C.C.

2. The interest of a purchaser under a contract for deed is an interest in property which the purchaser may transfer. It therefore is an interest which may be mortgaged. Any mortgage given by the purchaser under a contract for deed covers whatever interest the purchaser has in the contract.

3. In an action to cancel a contract for deed in which the mortgagee of the purchaser was not made a party, although the giving of the mortgage was known to the seller under the contract, only the interest of the named party or parties will be determined.

4. The rights of a mortgagee of the purchaser under a contract for deed may be 5. For reasons stated in the opinion, the judgment quieting title in the plaintiff is reversed and the case is remanded to the district court with instructions to fix a reasonable period of time for defendant to make good the default under the contract, during which period the defendant will be permitted to pay the sums the court shall determine to be due the plaintiff under the contract, based upon the equities as found by the court.

determined in an action to quiet title. In such action, the court will be guided by equitable principles and the mortgagee will be given such reasonable period of time to make good the default as the facts of the case may warrant.

Rausch & Chapman, Bismarck, for plaintiff and respondent.

William R. Mills, Bismarck, for defendant and appellant.

STRUTZ, Judge.

This is an action brought by Reo L. Knauss against Miles Homes, Inc., to quiet title to real property in Burleigh County described as the South Half (S 1/2) of Section 25, Township 140 North, Range 76 West.

The facts, so far as they are pertinent to the issues of this case, disclose that the plaintiff, Reo L. Knauss, and one Harry J. Burke entered into an agreement in writing under the terms of which Burke went into possession of the property. Some time after the execution of this agreement, a dispute arose between the parties as to the nature of their relationship. Knauss asserted that it was a lease agreement with an option to buy, while Burke contended that the agreement was a contract for deed under the terms of which all payments of rent which were made by him were to be credited on the purchase price. The dispute was finally litigated and the district court held that the instrument which the parties had executed was a contract for deed and that all payments of rent made by Burke were to be applied on the balance due on the purchase price.

Thereafter, Burke, while in possession of and engaged in farming the land, purchased from Miles Homes, Inc., the defendant in the present action, materials for a house which he planned to construct on this property. To pay for such building materials, he executed and delivered to Miles a note and mortgage for the purchase price. The mortgage was promptly recorded. Some time after the recording of such mortgage, a number of judgments were docketed against Knauss, the seller of the land, which judgments became liens on the interest of Knauss in such property.

Burke began the construction of his home, using the materials which he had purchased from Miles. Before the house was completed, however, Burke defaulted in his payments to Knauss under the contract for deed. After considerable delay, Knauss brought an action for the cancellation of the contract for deed. Miles, which held the recorded mortgage on Burke's interest in the property, was not made a party to the action to cancel the contract. Judgment cancelling the contract for deed thereafter was entered in such action on November 24, 1964. No appeal was taken by Burke.

The mortgage given by Burke to Miles remained a cloud on Knauss's title, and the action here before the court was commenced on July 15, 1965, for the purpose of quieting title in Knauss and discharging such mortgage of record. The trial court ordered title quieted in Knauss as to any interest which Miles might have in the property by reason of its mortgage from Burke. From a judgment entered on such order, Miles appeals to this court, demanding trial de novo.

Any interest in property which is capable of being transferred may be mortgaged. Sec. 35--02--05, N.D.C.C. The interest of Burke, as purchaser under 'We have no quarrel with the fact that they obtained a mortgage upon the interest that the Burkes had.'

the contract for deed, is an interest in property which he could transfer, and thus is an interest which he could mortgage. The mortgage given by Burke, as purchaser under the contract for deed for the purchase of the land from Knauss, covered all of the interest which Burke had in the land. This court has held that the interest of a holder of a contract for deed is a mortgageable interest. Simonson v. Wenzel, 24 N.D. 638, 147 N.W. 804, L.R.A.1918C, 780 (1914). In the action to quiet title against Miles, the defendant, by counterclaim, sought to foreclose its mortgage. In the trial of that action, the plaintiff's attorney stated to the trial court:

If the law gives to the holder of a contract for deed the right to mortgage any interest which he has in the contract, it must of necessity give to the party to whom such mortgage is given the interest and the rights which the mortgagor has under the contract. The rights which the holder of a contract has in the property described in a contract for deed cannot be terminated by the seller without notice to such holder.

The mortgage to Miles was immediately put on record. But the evidence does not disclose that Miles gave any notice of its interest in the property to Knauss other than to place its mortgage on record. And, while Burke, as purchaser under a contract for deed, had an interest which could be mortgaged to Miles, the enforcement of the mortgage would depend upon keeping the contract for deed in full force and effect. Sheehan v. McKinstry, 105 Or. 473, 210 P. 167, 34 A.L.R. 1315. In Sheehan, the mortgagee of the purchaser was made a party defendant in the action to cancel the contract. This was not done by Knauss in the action to cancel the Burke contract. The plaintiff, however, strenuously asserts that he was not required to join Miles in the action to cancel the contract for deed held by Burke, citing Section 35--03--07, North Dakota Century Code. That section provides:

'The record of a mortgage duly made operates as notice to all subsequent purchasers and encumbrancers.'

The plaintiff contends that since he is not a subsequent purchaser or encumbrancer, but is the holder of the legal title whose interest is long prior to the Miles mortgage, he cannot be regarded as a subsequent purchaser or encumbrancer and the recording of the Miles mortgage therefore was not constructive notice to him of Miles's interest in the property. He cites the early case of Sarles v. McGee, 1 N.D. 365, 48 N.W. 231 (1891), in support of this contention. In Sarles, this court said:

'A senior incumbrancer is not bound to respect the equitable rights of a junior incumbrancer in the property unless he has notice, either actual or constructive, of such rights. The recording of the junior mortgage is not constructive notice to the prior mortgagee of the existence of such mortgage, or of the mortgagee's equitable right thereunder, * * *.'

Whether the rule laid down in Sarles would be applicable in this case, and whether it would permit the plaintiff, who admittedly would be in a position comparable to that of a senior encumbrancer, to cancel Burke's contract for deed without regard to the junior encumbrancer, Miles, where the plaintiff, in fact, has no actual or constructive notice of the Miles mortgage other than by the recording of the mortgage, which, under the above law, would not constitute notice, need not be decided in this action, however. Here, the defendant has demanded a trial de novo, and this court must try the case anew and determine the facts for itself. Johnson v. Davis, 140 N.W.2d 703 (N.D.1966); Bertsch v. Zahn, 141 N.W.2d 792 (N.D.1966); Verry v. Murphy, 163 N.W.2d 721 (N.D.1968).

Therefore, we have very carefully studied the record on the issue of whether the plaintiff had actual knowledge of the Miles mortgage in this case. Weighing the evidence and determining this issue anew, we can come to no conclusion other than that the plaintiff, prior to his action to cancel the Burke contract for deed, had actual knowledge of not only the construction of the Miles home on the property but of the giving of the mortgage to Miles. Judgment in the action cancelling the Burke contract for deed was entered on November 24, 1964. At the hearing in the case at bar, which was had on December 20, 1965, Knauss testified that he knew that a house was being built on the property as early as 1963 or 1964. The record shows that the first materials for this house were delivered on this property in 1960. But Knauss asserts that he had no actual knowledge that Burke had given Miles a mortgage. On cross-examination, when asked when he first had notice that Miles had a mortgage on the property, he answered: 'Well, two or three years ago.' He thus admitted that he had actual notice of the Miles mortgage as early as 1962 or 1963. On redirect, his counsel attempted to correct the effect of this testimony by asking whether this knowledge was gained by him after the action to cancel the contract for deed, and his reply was: 'I think it was after that, yes.'

A review of the entire evidence in this case shows that the plaintiff was very evasive in his answers to direct inquiries as to when he gained knowledge of the Miles mortgage. After having admitted that it was as early as 196...