Production Credit Ass'n of Midlands v. Schmer

• Decision Date: 17 November 1989
• Docket Number: No. 87-1002,87-1002
• Citation: 233 Neb. 749,448 N.W.2d 123
• Parties: PRODUCTION CREDIT ASSOCIATION OF the MIDLANDS, Successor in Interest to Norfolk Production Credit Association, Appellee, v. Philip G. SCHMER, Appellee, and Doris M. Schmer, Appellant.
• Court: Nebraska Supreme Court

Page 123

448 N.W.2d 123

233 Neb. 749

PRODUCTION CREDIT ASSOCIATION OF the MIDLANDS, Successor in Interest to Norfolk Production Credit Association, Appellee, v. Philip G. SCHMER, Appellee and Doris M. Schmer, Appellant.

No. 87-1002.

Supreme Court of Nebraska.

Nov. 17, 1989.

Syllabus by the Court

1. Foreclosure: Equity: Appeal and Error. A foreclosure action is grounded in equity. In an appeal of an equity action, the Supreme Court tries factual questions de novo on the record and reaches a conclusion independent of the findings of the trial court, provided, where credible evidence is in conflict on a material issue of fact, the Supreme Court considers and may give weight to the fact that the trial court heard and observed the witnesses and accepted one version of the facts rather than another.

2. Contracts: Guaranty: Liability. Nebraska adheres to the rule of strict construction of guaranty contracts. When the meaning of the contract is ascertained, or its terms are clearly defined, the liability of the guarantor is controlled absolutely by such meaning and limited to the precise terms.

3. Contracts: Guaranty: Debtors and Creditors: Words and Phrases. An absolute guaranty is a contract by which the guarantor has promised that if the debtor does not perform his obligation or obligations, the guarantor will perform some act for the benefit of the creditor.

4. Guaranty: Notice. An absolute guaranty of payment is enforceable at any time without demand and notice of default.

5. Contracts: Guaranty: Limitations of Actions. The statute of limitations begins to run against a contract of guaranty the moment a cause of action first accrues.

6. Guaranty: Liability: Debtors and Creditors. A guarantor's liability arises when the principal debtor defaults.

7. Contracts: Abandonment: Words and Phrases. Abandonment of a contract occurs where one party acts in a manner inconsistent with the existence of the contract and the other party acquiesces in that behavior.

8. Laches: Negligence. The defense of laches is not favored in Nebraska. It will be sustained only if the litigant has been guilty of inexcusable neglect in enforcing a right to the prejudice of his adversary.

9. Debtors and Creditors: Principal and Surety: Security Interests: Waiver. Where the creditor has security from the principal and knows of the surety's obligation, the surety's obligation is reduced pro tanto if the creditor (1) surrenders or releases the security, (2) willfully or negligently harms it, or (3) fails to take reasonable action to preserve its value at a time when the surety does not have an opportunity to take such action.

Marion F. Pruss, Omaha, for appellant.

James T. Gleason of Stalnaker, Becker, Buresh & Gleason, P.C., Omaha, for appellee Production Credit Ass'n.

HASTINGS, C.J., and BOSLAUGH, WHITE, CAPORALE, SHANAHAN, GRANT, and FAHRNBRUCH, JJ.

FAHRNBRUCH, Justice.

The appellant, Doris M. Schmer, complains that in an action to foreclose her ex-husband's farm and to enforce her guaranty, the trial court erred in finding that a mortgage she gave in 1974 was valid and superior to her lien for alimony, child support, and property settlement.

The appellant also complains that the Madison County District Court erred in holding that her 1975 guaranty for the payment of her husband's debts had continuing validity and in holding that the mortgage and guaranty were cumulative liabilities. We affirm.

A foreclosure action is grounded in equity. In an appeal of an equity action, the Supreme Court tries factual questions de novo on the record and reaches a conclusion independent of the findings of the trial court, provided, where credible evidence is in conflict on a material issue of fact, the Supreme Court considers and may give weight to the fact that the trial court heard and observed the witnesses and accepted one version of the facts rather than another. Mid-America Maintenance v. Bill Morris Ford, 232 Neb. 920, 442 N.W.2d 869 (1989).

Doris and Philip G. Schmer, then husband and wife, were indebted on a note in the sum of $83,825, payable September 5, 1975, to the Norfolk Production Credit Association (NPCA), predecessor in interest to Production Credit Association of the Midlands (PCA) (both associations oftentimes collectively referred to as PCA). The loan financed the Schmers' cattle operation. On September 3, 1974, as security for their $83,825 indebtedness, the Schmers executed and delivered to NPCA a "Collateral Agreement" and a payable-on-demand $75,000 collateral note, which was secured by a $75,000 demand mortgage on two parcels of their farmland (hereinafter called parcel 1 and parcel 2).

The agreement collaterally secured

any renewal or extension of the indebtedness evidenced by the notes last described [the $83,825 note] or any other indebtedness now owed by the undersigned to said association or hereafter incurred by said undersigned with said association either jointly or severally or on the faith or credit of their community or separate estates or either of said estates. It is the express agreement of the parties that the consideration for this pledge is the granting of a loan by the association evidenced by the obligations last above mentioned.

Further, this is a continuing agreement and all rights, powers, and remedies hereunder shall apply to all past, present, and future indebtedness of the undersigned to the association notwithstanding the death, dissolution, incapacity, or insolvency of the undersigned, and shall continue in full force until all indebtedness shall have been paid in full.

(Emphasis supplied.)

Instead of executing and delivering renewal notes, Doris Schmer, on October 13, 1975, executed a $125,000 "Continuing Guarantee." She thereby guaranteed to NPCA and its successors

"the payment at maturity of any or all indebtedness evidenced by any notes, security agreements, mortgages, negotiable instruments, or other evidences of indebtedness of Philip G. Schmer, to [NPCA], whether now in existence or hereinafter incurred by Philip G. Schmer, for any purpose and in any amount whatsoever."

By this document, Doris Schmer bound her separate existing and future-acquired property.

On March 11, 1981, a decree was entered dissolving the Schmers' marriage. Doris Schmer was awarded alimony, child support, and a monetary property settlement.

Thereafter, on April 22, 1981, Philip Schmer executed and delivered to NPCA an operating note and open end real estate mortgage in the amount of $260,000. The pledged real estate consisted of three parcels of land (parcels 1 and 2 and a parcel 3), which included the farmland previously pledged to NPCA in the 1974 real estate mortgage. The unpaid balance of the April 22 note was renewed on May 13, 1982, in the amount of $228,000.

In December 1982, Philip Schmer filed for relief under chapter 11 of the U.S. Bankruptcy Code. That action was dismissed on July 23, 1985, on NPCA's motion. On December 9, 1985, NPCA obtained a judgment on the May 13, 1982, renewal note. NPCA executed on Philip Schmer's equipment, sold it, and applied the proceeds to the debt. In an attempt to satisfy the remainder of the debt, PCA, as successor in interest to NPCA, instituted a foreclosure proceeding on the parcels of farmland pledged in the 1974 and 1981 mortgages. PCA also asked the court to enforce the personal guaranty of Doris Schmer.

In its foreclosure decree, the trial court concluded that Philip Schmer was indebted to appellant by reason of the 1981 divorce decree in the sum of $288,604.51, including interest, and was indebted to PCA in the sum of $390,482.65. With respect to the three parcels of property, the trial court concluded that PCA had a first lien on parcels 1 and 2 in the amount of $75,000 by reason of the original 1974 real estate mortgage; Doris Schmer had a second lien on parcels 1 and 2 in the amount of $288,604.51 by reason of the dissolution decree; and PCA had a third lien on parcels 1 and 2 in the amount of $315,482.65, the total sum owed PCA being offset by the $75,000 first lien. With respect to parcel 3, the trial court concluded that Doris Schmer had a first lien in the amount of $288,604.51, and PCA had a second lien in the amount of $315,482.65.

The trial court further concluded that the $125,000 guaranty given by appellant had not been revoked and was in full force and effect.

In her assignments of error, the appellant specifically claims that the trial court erred in holding (1) "the 1974 PCA mortgage to be a valid lien superior to the lien of Doris Schmer," (2) "the guaranty executed by Doris Schmer in 1975 to have continuing validity," and (3) "the guaranty and the mortgage were cumulative liabilities."

In an effort to refute PCA's first lien on parcels 1 and 2, appellant claims that the 1974 collateral note and mortgage were discharged by payment in accordance with the principle applied in Diesel Service Inc. v. Accessory Sales, Inc., 205 Neb. 381, 288 N.W.2d 258 (1980). Diesel held that where payments are made on an open account, and no appropriation has been made by either party concerning the payments, the law will apply them in discharge of the earliest items. Under that principle, and based on the payments made to NPCA, appellant asks this court to hold as a matter of law that the 1974 mortgage had been paid "either on August 9, 1975, when Philip Schmer made a $77,373.98 payment on his account or, at the latest, on July 2, 1979, when the account reflected a zero balance." Brief for appellant at 21. Appellant's reliance on Diesel is misplaced. The $75,000 collateral note, as previously stated, was given solely as collateral. No payments were ever made on this collateral note. Rather, all payments resulted in decreasing the debtors' obligation as reflected in NPCA's and PCA's loan transaction records.

Appellant further contends that the 1974 real estate mortgage is void because it fails to state that it is intended to secure...