Mortgage Associates, Inc. v. Monona Shores, Inc.

• Decision Date: 02 June 1970
• Docket Number: No. 47,47
• Parties: MORTGAGE ASSOCIATES, INC., a Wisconsin corporation, Respondent, v. MONONA SHORES, INC., Sundby Sand and Gravel Company, Inc., Madison Hardwood Floors, Inc., Harold's Painting and Decorating, Inc., Fish Building Supply, Inc., Alex Temkin, d/b/a Temco Steel Supply Company, National Bank of North Chicago, Grimm Masonry, and W. O. Zimmerman, Inc., Appellants.
• Court: Wisconsin Supreme Court

Page 340

177 N.W.2d 340

47 Wis.2d 171

MORTGAGE ASSOCIATES, INC., a Wisconsin corporation, Respondent, v. MONONA SHORES, INC., Sundby Sand and Gravel Company, Inc. Madison Hardwood Floors, Inc., Harold's Painting and Decorating, Inc., Fish Building Supply, Inc., Alex Temkin d/b/a Temco Steel Supply Company, National Bank of North Chicago, Grimm Masonry, and W. O. Zimmerman, Inc., Appellants.

No. 47.

Supreme Court of Wisconsin.

June 2, 1970.

This is an action to foreclose a construction mortgage on an apartment project of 17 buildings, containing 292 units, known as 'Monona Shores' in the city of Madison. The appeal is from the judgment of foreclosure which determined the mortgage of the plaintiff Mortgage Associates, Inc. (Associates) to be prior to the claims of [47 Wis.2d 173] numerous appellant subcontractors. In spite of voluminous appellate material by way of briefs and appendixes, the issues of law are not complicated although the record relating to the financial arrangements giving rise to the issues is somewhat confusing

Jerome L. Rinzel, Cudahy, for Monona Shores.

A. E. Simonson, Madison, for Harold's Painting etc. and Nat. Bank and Grimm Masonry.

Ross, Stevens, Pick & Spohn, Madison, Daniel W. Hildebrand, Madison, of counsel, for Fish Bldg. Supply and Temko.

McBurney & McBurney, Carlyle H. Whipple, Madison, for Zimmerman, Inc.

Peregrine, Schimenz, Marcuvitz & Cameron, S.C., and M. J. Levin, Milwaukee, for respondent.

HALLOWS, Chief Justice.

The defendant-mortgagor Monona Shores, Inc. (Monona) acquired the land from its sole stockholder Russell J. Lesperance who also, through other corporations, engaged in construction of the apartment complex. Lesperance personally had an option on the land for $188,000 and assigned the option to another corporation of his and finally to Monona at what would appear to be a handsome profit. Unexplained in the record is why a short-term mortgage to facilitate the purchase of the land was recorded in favor of the Bank of Commerce dated June 7, 1965, for $730,000. To pay for the land and the cost of constructing the project, Monona needed funds because it had little or no capital. The projected cost of the development as determined and represented by Monona was $3,500,000. An arrangement for long-term financing with the Equitable Life Assurance Society of the United States (Equitable) was made for a mortgage loan of this amount. This commitment ultimately provided that $3,000,000 would be paid in three installments as certain units were completed and the remaining $500,000 would be disbursed when a certain percentage of the apartments were leased. To assure the availability of $500,000 if the rentals did not qualify under the Equitable commitment, AIC Financial Corporation (AIC) agreed to make a subordinate mortgage loan of $500,000 with a proviso like Equitable's that a fee was to be paid periodically to keep the commitment in effect. Based upon these commitments, Republic Realty Mortgage Corporation (Republic), which had secured the Equitable commitment as agent, agreed to make the interim-construction loan, which would be paid and replaced by the Equitable mortgage, or as the briefs say, 'purchased in three phases.' On July 13, 1965, Monona executed and delivered to Republic a note for $3,500,000 secured by the mortgage on the property, which is the subject of this foreclosure action.

Monona, however, did not use Republic but entered into an agreement with Associates for a construction loan of $3,500,000. This transaction was implemented by having Republic assign to Associates the July 13, 1965, note and mortgage and by making a financing agreement with United States Steel Homes Credit Corporation (Steel), a credit corporation, to loan the money to Associates. To secure this loan Associates, as security, pledged the note and mortgage it received from Republic and assigned the instruments to Steel and entered into other agreements with Steel and Monona.

The understanding between Associates and Monona is evidenced by a commitment and building-loan agreement entered into December 8, 1965, which provided the disbursement of the funds to contractors would not exceed 90 percent of the total value of all the work completed by them and approved by Associates; the disbursements would be made through the Chicago Title & Trust Company as disbursing agent upon instruction from Associates; and, among other things, Associates would not be obligated to make disbursements unless evidence was furnished by Monona establishing that the remaining undisbursed amount of the loan would be sufficient to cover the remaining costs, interest, taxes, loan fees (which originally totaled $213,750), and other anticipated costs. To meet the requirements of the Equitable commitment, Monona also on December 8 Construction started in the fall of 1965 and in the late summer of 1966 the plaintiff discovered the mortgage proceeds would probably be insufficient to cover the remaining projected cost. This insufficiency of funds was brought to the attention of Monona in September and after numerous conferences it acknowledged a shortage of funds in October of 1966. As of this time a little over $3,000,000 of the loan had been disbursed. On November 11 Associates failed to pay the AIC loan-fee commitment. Associates was told by Monona that funds necessary to complete the project would be made available by its selling a part interest in the project to a real-estate-investment fund and requested Associates' consent as required by the loan documents. After the negotiations for this sale for $750,000 terminated unsuccessfully in January of 1967, Associates requested Monona to furnish an up-to-date cost breakdown of the remaining costs to complete the project by January 28, 1967. Monona failed to produce this information and the mortgage-loan interest due that month and the real estate taxes for 1966 were not paid when due. By March 1, 1967, all work on the project had ceased and this action was commenced in April of 1967.

1965, executed and delivered to Republic as substituted evidence of indebtedness six mortgage notes back-dated to July 13, 1965, aggregating $3,500,000 of the same tenor as was the original mortgage note. These notes were endorsed by Republic to Associates.

The evidence relating to various conferences and attempts to breathe life into this dying project is conflicting and will be referred to only when necessary in connection with specific issues.

APPEAL OF MONONA SHORES

(a) Jury Trial.

Monona argues it is entitled to a jury trial on the issue of Associates' negligent breach of contract. It is claimed this is asserted in a counterclaim, but whatever is asserted on this issue is found only in the answer. The alleged breach concerns Associates' failure to pay the AIC loan fee of $12,500 on November 11, 1966. As a separate cause of action for damages, the allegation of this breach is insufficient and can only be treated as a defense to the equitable cause of action asserted in the complaint. A counterclaim must be pleaded as such. Sec. 263.14(2), Stats.

The majority rule is that a legal response including a counterclaim in an equity suit does not create a right to a jury trial on that issue in the absence of a statute or rule of procedure. 47 Am.Jur.2d, Jury, p. 655, sec. 36. This seems to be the rule in Wisconsin at least as to issues raised in the complaint or the answer. Callanan v. Judd (1868), 23 Wis. 343. In Wilson v. Johnson (1889), 74 Wis. 337, 43 N.W. 148, a counterclaim was interposed for loss of the use of the defendant's mare in an equity suit to impress a lien on the mare for keeping. The demand for a jury trial was denied. In Neff v. Barber (1917), 165 Wis. 503, 506, 162 N.W. 667, the court said in an action in equity all the issues, whether legal or equitable, are triable by the court but it does not appear a legal counterclaim was involved.

Monona relies on sec. 270.07(1), Stats., and Neas v. Siemens (1960), 10 Wis.2d 47, 102 N.W.2d 259, for a right to a jury trial on a counterclaim raising a legal issue in an equity suit. We are not here concerned with a legal counterclaim but we point out that Neas probably states too broadly a principle in respect to a legal counterclaim in an equity action. There is considerable logic and merit in the view that when a defendant pleads a legal counterclaim in an equitable action which he is not compelled to do he waives any right to a jury trial he would have if he had brought the action separately. The traditional and constitutional power of a court of equity is to try the facts before it and it is questionable whether one can voluntarily seek its aid and demand a jury trial. This reasoning is not applicable if the defendant is compelled by law to assert the counterclaim because he has no choice. The cases construing Rule 13(a) of the Federal Rules of Civil Procedure hold that where a defendant is compulsorily required under the rule to assert as a counterclaim any claim he has against the opposing party if it arises out of the transaction or occurrence that is the subject matter of the action that he is entitled to a jury trial if the counterclaim asserts a legal right in an equitable suit. If, however, the defendant is under no such compulsion and asserts the legal right in a counterclaim in an equity suit, he thereby waives his right to a jury trial on that issue. See cases cited in 17 A.L.R.3d 1321; Annot. (1968), Right in equity suit to jury trial of counterclaim involving legal issue, p. 1342, sec. 6.

We do not think sec. 270.07(1), Stats., ¹ necessarily compels a jury trial on a legal issue in a counterclaim in an equity suit. It has never been construed to require a jury trial on legal defensive matters of fact in an equity suit. Neas, in holding the defendant was entitled to a jury trial under sec. 270.07(1) on his counterclaim, did not consider whether the counterclaim was compulsory or voluntary.

(b) ...