Matherly v. Citizens Bank

• Docket Number: 1210396, SC-2022-0520,SC-2022-0520
• Decision Date: 28 October 2022
• Citation: 375 So. 3d 776
• Parties: Jenny D. MATHERLY v. The CITIZENS BANK The Citizens Bank v. Jenny D. Matherly Penn Waters, LLC v. The Citizens Bank
• Court: Alabama Supreme Court

375 So.3d 776

Jenny D. MATHERLY

v.The CITIZENS BANK

The Citizens Bank

v.Jenny D. Matherly

Penn Waters, LLC

v.The Citizens Bank

1210396, SC-2022-0520 and SC-2022-0520

Supreme Court of Alabama.

October 28, 2022

Derek E. Yarbrough of Motley, Motley & Yarbrough, LLC, Dothan, for appellant/cross-appelleeJenny D. Matherly.

Robert P. Reynolds and William E. McCartney of Reynolds, Reynolds & Little, LLC, Tuscaloosa; and Gilbert C. Steindorff IV of Reynolds, Reynolds & Little, LLC, Birmingham, for appellee/cross-appellant The Citizens Bank.

Stephen T. Etheredge, Dothan, for appellantPenn Waters, LLC.

MENDHEIM, Justice.

These consolidated appeals stem from an action commenced by The Citizens Bank ("Citizens Bank") in the Coffee Circuit Court against Steve P. Matherly("Steve"); Sue E. Matherly a/k/a Sue Ellen Straften, Steve’s former spouse ("Sue"); and Penn Waters, LLC("Penn Waters").The initial complaint sought: (1) to quiet title to certain real property in Steve; (2) an accounting from Penn Waters as to the balance allegedly owed on a mortgage securing a home-equity line of credit on the same real property; (3) damages from Steve for breach of contract and fraud based on his failure to pay on his personal guaranty of a corporate debt; and (4) a judicial foreclosure of the mortgage securing the indebtedness owed Citizens Bank by Steve.In the course of the proceedings, Steve’s current spouse, Jenny D. Matherly("Jenny"), intervened as a defendant, claiming a homestead interest in the real property at issue.Eventually, the circuit court entered two orders granting a summary judgment in favor of Citizens Bank.The first order awarded the real property in question to Citizens Bank and granted it immediate possession thereof, requiring Steve and Jenny to vacate the property, awarded Jenny $5,000 based on a homestead claim, and required Steve to pay the deficiency balance owed by him to Citizens Bank following foreclosure on the subject real property.The second order concluded that the mortgage held by Penn Waters was void because it had been previously satisfied.Both Jenny and Penn Waters appeal from the circuit court’s judgments, and Citizens Bank cross-appeals the circuit court’s judgment awarding $5,000 to Jenny.Steve has not appealed the judgment against him, and Sue is not a party to the appeals.We affirm the judgments of the circuit court.

I.Facts

On October 16, 2006, Steve and Sue executed and delivered to Community Bank & Trust of Southeast Alabama ("Community Bank") a "Home Equity Line of Credit Agreement"("the HELOC agreement"), which was secured by a mortgage on real property at which the Matherlys resided ("the HELOC mortgage"), which was evidenced by a separate agreement ("the HELOC mortgage agreement"), The real property consisted of 9.682 acres located on County Road 537 in Enterprise, Coffee County, and it is undisputed that it was worth well in excess of $5,000 ("the Matherly property").The HELOC mortgage agreement permitted the Matherlys to borrow from a revolving line of credit, not to exceed $100,000 at any given time, over a five-year period.The HELOC mortgage secured only advances pursuant to the terms and conditions of the HELOC mortgage agreement, and the maximum principal indebtedness secured by the mortgage could never exceed $100,000.The HELOC mortgage was paid off on April 7, 2008.Additionally, the HELOC agreement matured and expired on October 20, 2011, without any outstanding debt owed to Community Bank under the terms of the HELOC agreement or the HELOC mortgage agreement.

On October 30, 2008, Community Bank also extended to Steve a $100,000 revolving commercial line of credit ("the commercial loan"), which was secured by a mortgage from Warehouse Properties, LLC("Warehouse"), an entity owned by Steve ("the first Warehouse mortgage").The first Warehouse mortgage to Community Bank encumbered two parcels of real property owned by Warehouse ("the Warehouse parcels").On November 20, 2008, Community Bank renewed and increased the commercial loan to the sum of $249,500.As additional collateral for the renewed commercial loan, Warehouse granted Community Bank a second mortgage on the Warehouse parcels ("the second Warehouse mortgage"), and Steve also purported to pledge the HELOC mortgage as secondary collateral for the renewed commercial loan.The commercial loan was renewed several times, and each subsequent renewal of the commercial loan listed the first Warehouse mortgage, the second Warehouse mortgage, and the HELOC mortgage as collateral.

On March 12, 2012, Steve and Sue were divorced by judgment; the Matherly property was awarded to Steve.On October 5, 2012, Steve and Jenny were married.It is undisputed that, upon their marriage, Steve and Jenny began occupying the Matherly property as their marital residence.

On November 20, 2012, US Aero Services, Inc.("US Aero"), an entity owned in part by Steve, executed and delivered to Citizens Bank a promissory note in the amount of $500,000 ("the US Aero note").In doing so, Steve assigned Citizens Bank a security interest in certain invoices that US Aero had submitted to the United States Department of Defense as well as payments associated with a contract between US Aero and the United States Department of State related to the overhaul of "Huey" style helicopters.The US Aero note was personally guaranteed by Steve.

On August 23, 2013, to further secure the US Aero Note and any other existing or future obligations due from US Aero or Steve to Citizens Bank, Steve executed and delivered to Citizens Bank an agreement pledging a mortgage on the Matherly property ("the Citizens Bank mortgage") and his personal guaranty ("the Citizens Bank mortgage agreement").The Citizens Bank mortgage agreement expressly identified Steve as "an unmarried male" and stated that he had "full power, right, and authority to enter into the Mortgage and to hypothecate the Property."

From March 28, 2014, to December 29, 2015, Citizens Bank and US Aero entered into various change-in-terms agreements extending the maturity date of the US Aero note.In the final change-in-terms agreement between Citizens Bank and US Aero dated December 29, 2015, Steve acknowledged that the outstanding unpaid principal balance of the US Aero note as of that date was $382,676.46, and the maturity date of the US Aero note was extended to October 20, 2016.

On July 9, 2015, Penn Waters purchased without recourse the commercial loan from Community Bank.As part of that transaction, Community Bank assigned to Penn Waters the first Warehouse mortgage, the second Warehouse mortgage, and, purportedly, the HELOC mortgage, although the assignment does not expressly reference the HELOC mortgage.The principal sum due and owing under the commercial loan on July 9, 2015, was $179,384.47.

US Aero and Steve failed to pay the indebtedness due on the US Aero note by October 20, 2016, and thus defaulted.Under the terms of the US Aero note, the interest rate on the outstanding debt then increased to 18% per annum.As a result of the default, Citizens Bank commenced foreclosure proceedings on the Matherly property.At the foreclosure sale on November 1, 2019, the Matherly property was sold to Citizens Bank for $275,000.

The outstanding indebtedness owed to Citizens Bank by US Aero and Steve under the US Aero note and his personal guaranty on the date of the foreclosure sale was $528,697.92.As provided under the terms of the Citizens Bank mortgage agreement, the credit bid from the foreclosure sale was applied first to the foreclosure expenses, second to unpaid property taxes, third to pay off a superior IRS tax lien, fourth to accrued interest, and fifth to the unpaid principal balance of the US Aero note.After applying the applicable portion of the credit bid to the US Aero note, there remained a deficiency balance of $277,934.50, upon which interest continued to accrue since November 1, 2019.

On July 23, 2018, Citizens Bank commenced this action in the Coffee Circuit Court against Steve, Sue, and Penn Waters.As we noted earlier, Citizens Bank sought to quiet title to the Matherly property in Steve, an accounting from Penn Waters as to the balance allegedly owed on the mortgage evidenced by the HELOC mortgage, damages from Steve for breach of contract and fraud based on his failure to pay on his personal guaranty, and a judicial foreclosure of the Citizens Bank mortgage.On October 2, 2019, Citizens Bank dismissed Sue from the action without prejudice and filed its first amended complaint against Steve and Penn Waters.In that complaint, Citizens Bank sought a judgment declaring the extent and validity of the lien on the Matherly property claimed by Penn Waters under the HELOC mortgage and a judgment against Steve for the indebtedness owed to Citizens Bank under the US Aero note.

Jenny first learned of Citizen Bank’s foreclosure on the Matherly property on November 8, 2019, when a letter was received at Steve and Jenny’s home demanding that Steve vacate the home within 10 days.On December 10, 2019, Jenny petitioned to intervene in the action as a party claiming a homestead interest in the Matherly property.

On January 29, 2020, Citizens Bank filed a second amended complaint in which it added Jenny as a defendant.In that complaint, Citizens Bank sought a judgment declaring the extent, validity, and priority of the HELOC mortgage assigned to Penn Waters, a judgment declaring that the Matherly property was not the homestead of Jenny when Steve executed the Citizens Bank mortgage agreement, a judgment declaring the extent, validity, and priority of the Citizens Bank mortgage, which it had already foreclosed, and a judgment against Steve for the remaining indebtedness owed to Citizens Bank under the US Aero note.

On April 7, 2020, Jenny filed an answer and a counterclaim to the second amended complaint in which she asserted that the Citizens Bank mortgage and Citizens Bank’s foreclosure deed...