Mitchell Bank v. Schanke

• Decision Date: 27 February 2004
• Docket Number: No. 01-1591., No. 01-1590
• Parties: MITCHELL BANK, Plaintiff-Appellant-Petitioner, v. Thomas G. SCHANKE, Alfred G. Waltke, Marilyn M. Waltke, State of Wisconsin Department of Revenue and Internal Revenue Service, Defendants-Respondents, UNITED STATES, Defendant. Thomas G. SCHANKE, Plaintiff-Respondent, v. MITCHELL STREET STATE BANK, n/k/a Mitchell Bank, Defendant-Appellant-Petitioner.
• Court: Wisconsin Supreme Court

268 Wis.2d 571

2004 WI 13

676 N.W.2d 849

MITCHELL BANK, Plaintiff-Appellant-Petitioner, v. Thomas G. SCHANKE¹, Alfred G. Waltke, Marilyn M. Waltke, State of Wisconsin Department of Revenue and Internal Revenue Service, Defendants-Respondents, UNITED STATES, Defendant.

Thomas G. SCHANKE, Plaintiff-Respondent, v. MITCHELL STREET STATE BANK, n/k/a Mitchell Bank, Defendant-Appellant-Petitioner.

Nos. 01-1590, 01-1591.

Supreme Court of Wisconsin.

Oral argument November 5, 2003.

Decided February 27, 2004.

For Mitchell Bank there were briefs by Hugh R. Braun, Jeffrey L. Janik and Godfrey, Braun & Frazier, LLP, Milwaukee, and oral argument by Hugh R. Braun.

For Thomas G. Schanke there were briefs by Joseph J. Welcenbach, Robert J. Welcenbach and Welcenbach & Widmann, S.C, Milwaukee, and oral argument by Joseph J. Welcenbach.

There were amicus curiae briefs filed by John E. Knight, James E. Bartzen, Kristen E. Spira and Boardman, Suhr, Curry & Field, LLP, Madison, on behalf of the Wisconsin Bankers Association, and oral argument by John E. Knight.

¶ 1. JON P. WILCOX, J.

This case involves two consolidated actions: a foreclosure action and a declaratory judgment action. The parties dispute the validity of a mortgage Mitchell State Street Bank, now known as Mitchell Bank (the Bank), has on certain lands in Genesee, Wisconsin, of which Thomas Schanke (Schanke) owns an undivided one-half interest. Schanke purchased his interest following a previous successful action against Dr. Alfred Waltke (Waltke) to collect on an outstanding debt. Waltke's wife owns the other undivided one-half interest in the disputed property.

¶ 2. On March 7, 2000, Schanke, naming the Bank as a defendant, filed a declaratory judgment action in the Waukesha County Circuit Court, seeking a determination that the Bank's mortgage on the Genesee property was invalid. The Bank subsequently began a foreclosure action on August 9, 2000, with respect to the Genesee property, naming Waltke and his wife, among others, as defendants. The cases were consolidated and tried before the court on the foreclosure action.

¶ 3. This case comes to us on appeal from a published court of appeals decision, Mitchell Bank v. Schanke, 2002 WI App 225, ¶ 29, 257 Wis. 2d 723, 652 N.W.2d 636, affirming a judgment of the Waukesha County Circuit Court, Kathryn W. Foster, Judge, dismissing the foreclosure action after finding that the mortgage of the Bank on the Genesee property was invalid for lack of consideration. The court of appeals also held, as a matter of law, that the Bank failed to prove the underlying debt in the mortgage and that the "dragnet clause"² within the mortgage was unenforceable. Id. For the reasons discussed below, we reverse the court of appeals' decision and remand for further proceedings.

I. FACTS

¶ 4. The facts of these consolidated cases are largely undisputed, but they are also extremely complicated and somewhat incomplete. During the course of 1986 and 1987, Waltke executed several loans, guaranties, and mortgages with various creditors, including the Bank and Schanke.³ These loans were both personal and business related. Sometime during 1987 or 1988, Waltke became insolvent and later declared bankruptcy; he defaulted on nearly all of his loans.

A. The Mortgage at Issue

¶ 5. On May 7, 1987, Waltke and his wife Marilyn executed a real estate mortgage on 34 acres of non-homestead property in Genesee, Wisconsin. The May 7 mortgage (the Mortgage) was a preprinted form that was originally prepared to have been executed on May 14, 1987.⁴ The Mortgage was not recorded until June 2, 1987. This Mortgage is the subject of the parties' respective actions.

¶ 6. The face of the Mortgage states that it was given in consideration for a $50,000 promissory note (the Note), also dated May 7, 1987, in favor of the Bank. The Note is missing; however, the record clearly indicates that no money was disbursed to Waltke on May 7, 1987. The Bank asserts that this Note was a renewal of a September 4, 1986, loan, while Schanke argues that the Mortgage was a fraudulent transfer.

¶ 7. The Bank asserts that the Note, along with countless other documents, was destroyed in a flood of the Bank's basement. The circuit court found it was plausible that a flood destroyed the Note, although Schanke contested this explanation. Accordingly, the controversy between the Bank and Schanke arises from the missing Note.

¶ 8. Waltke had many other transactions with the Bank, including two related notes that were executed in the months leading up to May 7, 1987. Waltke signed the first of those notes on September 4, 1986. This $50,000 note in favor of the Bank was due December 3, 1986, and was secured by a printing press. This was a new loan; the record shows Waltke received a $50,000 cashier's check on September 4, 1986. The Bank claims that this note was renewed in December 1986 for another 90 days, to be due in early March.⁵

¶ 9. As for the second note, the record shows that on March 3, 1987, Waltke renewed the $50,000 September 4 note for another 90 days. This new note was due June 1, 1987, and states that it was a renewal of the September 4 note, but does not reflect that it was secured by any collateral.⁶

¶ 10. The Bank claims that the May 7 Mortgage and Note were a renewal and restructuring of the March 3 renewal note; the May 7 Note renewed the loan period, and the May 7 Mortgage secured the $50,000 debt in the March 3 renewal note. It is likely that, on its face, the May 7 Note would reveal whether it was, in fact, a renewal of the March 3 note.

B. Waltke's Indebtedness to Schanke

¶ 11. During all of his dealings with the Bank, Waltke was also in debt to Schanke. Waltke signed a $20,000 note in favor of Schanke on March 10, 1986, which was due September 9, 1986. Waltke never made any payments on this debt, and Schanke filed suit against Waltke on April 9, 1987, to collect on the note. He served process on Waltke on April 13, 1987. Waltke's answer was due May 4, 1987, three days before he executed the Mortgage at issue in this case.

¶ 12. Waltke did not contest the suit with Schanke and on May 19, 1987, the presiding judge awarded Schanke a default judgment. Schanke purchased a half interest in the Waltkes' Genesee property at a sheriff's sale on June 13, 1998. This is the same property that is the subject of the Mortgage with the Bank.⁷

C. Waltke's Unpaid Obligations to the Bank

¶ 13. There is no dispute that Waltke never repaid the $50,000 loan taken out on September 4, 1986. In December of 1988, Waltke declared bankruptcy. About this time, under the instruction of the FDIC, the Bank "wrote off" this $50,000 debt and the rest of Waltke's outstanding obligations as "legal bad debts."⁸ Waltke's end-of-the-year account statement from the Bank for 1988 demonstrates that until December 2, 1988, he owed the Bank $50,000 in principal and a considerable amount in interest. The Bank's general ledger reflects that on December 2, 1988, it charged Waltke's $50,000 debt to its reserve account as a loss to the Bank. Around this time, the Bank also posted a letter to the FDIC describing all of the bad debts it was writing off, including the $50,000 Waltke debt. The Bank's general ledger, the letter to the FDIC, and the Bank's end-of-the-year account statements demonstrate that Waltke owed an additional $42,000 in outstanding obligations as of December 1988.

¶ 14. Twenty-five thousand dollars of that debt stems from Waltke's personal guaranty of a $25,000 loan the Bank made to Gary Butler in the summer of 1986. Over the course of 1986, that note was renewed three times and no payments were ever made against it. The most recent due date for that loan was February 2, 1987, about a month before Waltke's September 4, 1986, $50,000 note was due.

¶ 15. A smaller portion of Waltke's unpaid obligation to the Bank came from his personal guaranty of a May 29, 1986, $15,000 loan to Miracle Shield International, Inc., a Waltke business interest. The record demonstrates that Waltke and other individuals guaranteed this loan and that some payments were made against it during the summer and fall of 1986. Waltke's personal guaranty of this note was limited to $5,000 and therefore the Bank does not claim interest against this sum.⁹

¶ 16. The remaining $12,000 of Waltke's total unpaid obligations to the Bank as of December 1988 came from his personal guaranty of a $50,000 note to another business interest, Universal Graphics Services, Inc. The Universal Graphics loan originated on November 3, 1986, and established a master line of credit for the business, which was secured by Waltke's personal guaranty.

¶ 17. This note was renewed on February 3, 1987, in the sum of $45,271.98. Apparently, some payments had been made against this note. Also, upon renewal, Waltke secured the note with a real estate mortgage on his Grand Avenue property in Waukesha. The face of the mortgage recites that it was granted in consideration for a $145,271.98 note. Mr. Croke, the Bank's vice president and chief financial officer, testified that this entire sum was probably made available to Universal Graphics for incremental disbursements, although only $45,271.98 had been actually drawn out as of February 1987.

¶ 18. The subsequent disposition of the Grand Avenue mortgage is not clear from the record.¹⁰ The record shows that the most recent amount owed on the Universal Graphics debt was $45,271.98, the entire sum of the February 3 renewal note. On December 2, 1988, the Bank wrote off the Universal Graphics debt in the amount of $12,000. The Bank stated in its letter to the FDIC that as of November 29, 1988, the only security the Bank had for all of Waltke's obligations was his personal guaranty and a lien on a printing press.¹¹

¶ 19. The Bank recovered the written-off $12,000 Universal Graphics debt in July of 1989 upon the foreclosure and sale of one of Waltke's printing presses.¹² The press was originally...