Schiele v. First Nat. Bank of Linton

• Decision Date: 16 April 1987
• Docket Number: No. 11302,11302
• Citation: 404 N.W.2d 479
• Parties: Edward SCHIELE and Alice Schiele, Plaintiffs and Appellants, v. FIRST NATIONAL BANK OF LINTON, a North Dakota corporation, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 479

404 N.W.2d 479

Edward SCHIELE and Alice Schiele, Plaintiffs and Appellants, v. FIRST NATIONAL BANK OF LINTON, a North Dakota corporation Defendant and Appellee.

Civ. No. 11302.

Supreme Court of North Dakota.

April 16, 1987.

Tschider & Smith, Bismarck, for plaintiffs and appellants; argued by David A. Tschider.

Wheeler, Wolf, Peterson, Schmitz, McDonald & Johnson, Bismarck, for defendant and appellee; argued by Albert A. Wolf.

MESCHKE, Justice.

Edward and Alice Schiele appeal from a summary judgment in favor of the First National Bank of Linton. The trial court ruled that First National could enforce an assignment of a farm mortgage for the balance of an indebtedness beyond its bid at the Sheriff's sale on its foreclosure of Schiele's home for the same debt. We reverse and remand for further proceedings.

On August 13, 1979, First National loaned the Schieles $135,000. The Schieles executed a promissory note secured both by a real estate mortgage on their home in Linton (home mortgage) and by an assignment of their interest as mortgagees in a farm mortgage from their son and his wife, Remy and Claudia Schiele, as mortgagors (farm mortgage). At that time, First National viewed the loanable value of the home at $85,000 and of the farm mortgage at $50,000, although the home was then valued at a total of $113,000 and the principal amount of the farm mortgage was $150,000 (30 annual payments of $5,000 plus interest at a rate much lower than the bank loan). When they were received, First National credited Remy and Claudia's payments on the farm mortgage to Edward and Alice's note.

In April 1981 Edward and Alice defaulted, and First National foreclosed on their home. First National's complaint did not ask for a deficiency judgment. The foreclosure judgment determined that $140,187.13 (including interest and costs to June 26, 1985) was currently due on the mortgage. The judgment ordered foreclosure sale of the home and stated that no deficiency judgment was granted.

At the Sheriff's foreclosure sale, First National bid $75,000 for the home. Contending that the foreclosure sale of their home fully satisfied First National's mortgage, Edward and Alice moved for post-judgment relief, requesting return of their farm mortgage. The trial court denied their motion, ruling that the issue involved "is not properly in controversy and therefore does not provide jurisdiction ... to make a decision...."

Edward and Alice then commenced this separate action against First National, seeking reassignment of the farm mortgage. The trial court granted summary judgment to First National, ruling that the foreclosure against the home did not fully satisfy the debt and that North Dakota's anti-deficiency statutes did not preclude First National from enforcing the assignment of the farm mortgage to pay the balance of the debt. The trial court relied on the Sheriff's report of the foreclosure sale to hold that $69,150.59 was still due First National.

At the outset, First National contends that res judicata bars this action because the issues here were necessarily involved in the foreclosure action. In Farmers State Bank v. Slaubaugh, 366 N.W.2d 804, 806-807 (N.D.1985), we summarized our approach to this sort of claim:

"This court has stated that the term 'res judicata' can be defined as 'a thing or matter that has been definitely and finally settled and determined on its merits by the decision of a court of competent jurisdiction.' Robertson Lbr. Co. v. Progressive Contractors, Inc., 160 N.W.2d 61, 76 (N.D.1968), citing Knutson v. Ekren, 72 N.D. 118, 5 N.W.2d 74 (1942). This court in Dolajak v. State Auto. & Cas. Underwriters, 252 N.W.2d 180 (N.D.1977), in Syllabus p 2, stated:

" '2. In order for an issue to be considered res judicata, it is not enough to have been involved in an earlier action, but must have been actually litigated and decided in that action.'

"See Matter of Estate of Nelson, 281 N.W.2d 245 (N.D.1979). In Nodland v. Nokota Co., 314 N.W.2d 89, 92 (N.D.1981), we said: 'The doctrine of res judicata is not applicable as to issues and facts not considered or decided in prior proceedings.' "

In Farmers State Bank v. Slaubaugh, supra, we held that res judicata did not bar a creditor's second execution, notice of levy, and notice of sale where the court's previous order vacating the first execution did not prohibit further executions and where the record clearly indicated that the trial court had not ruled upon the substantive issues on the first motion to vacate.

In this case, this record establishes that, in the prior foreclosure action, the trial court declined to address the return of the farm mortgage because that issue was not "properly in controversy." We conclude that the prior judgment of foreclosure against the home is not res judicata on the status of the farm mortgage because the status of that farm mortgage was not actually litigated and decided in that action.

The important issues on this appeal involve how a secured creditor may enforce the same debt against separate items of collateral. In State Bank of Towner v. Hansen, 302 N.W.2d 760 (N.D.1981), we made it clear that a creditor secured by both real and personal property had the option of foreclosing against all the collateral in a single proceeding pursuant to the rights and remedies of our real property laws, or foreclosing first against the personal property collateral and thereafter in a separate action against the real property collateral. See Northern Trust Co. v. Buckeye Petroleum Co., 389 N.W.2d 616 (N.D.1986). But, we have not addressed the appropriate procedure for a secured creditor to realize on separately identifiable items of real property collateral for the same debt. To begin, then, our inquiry looks to the character of each item of collateral given as security for this debt, the home and the farm mortgage.

Clearly, the home mortgage is real property collateral subject to the provisions of Chapter 32-19, N.D.C.C. But, the character of the assignment of the farm mortgage is not so obvious. It depends upon the proper application of separate provisions of our Commercial Code, Section 41-09-02(3) [U.C.C. Sec. 9-102(3) ], which applies the secured transactions chapter of the Commercial Code to security interests in secured obligations, and Section 41-09-04(10) [U.C.C. Sec. 9-104(j) ], N.D.C.C., which excludes liens on real estate from application of the secured transactions chapter of the Commercial Code.

Section 41-09-02(3) [U.C.C. 9-102(3) ], N.D.C.C., provides:

"3. The application of this chapter to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this chapter does not apply."

Section 41-09-04(10) [U.C.C. Sec. 9-104(j) ], N.D.C.C., provides:

"Transactions excluded from chapter. This chapter does not apply:

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"10. Except to the extent that provision is made for fixtures in section 41-09-34, to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder."

As amended in 1966, Official Comment 4 to U.C.C. Sec. 9-102(3) explains:

"4. An illustration of subsection (3) is as follows:

"The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This Article is not applicable to the creation of the real estate mortgage. Nor is it applicable to a sale of the note by the mortgagee, even though the mortgage continues to secure the note. However, when the mortgagee pledges the note to secure his own obligation to X, this Article applies to the security interest thus created, which is a security interest in an instrument even though the instrument is secured by a real estate mortgage." [Emphasis added.] ¹

In Re Bristol Associates, Inc., 505 F.2d 1056 (3rd Cir.1974), held that assignment of a real estate lease was not a transaction governed by the secured transactions chapter of the Uniform Commercial Code. The court discussed the interrelationship of Pennsylvania's identical enactment of U.C.C. Secs. 9-102(3) and 9-104(j) in view of the 1966 amendment to Official Comment 4 to U.C.C. Sec. 9-102(3):

"The changes in wording produced two effects. First, deletion of the references to mortgages distinguishes between the pledge of a note, a separate and distinct contract, and the underlying real estate mortgage. Where a promissory note and mortgage together become the subject of a security interest, only that portion of the package unrelated to the real property is now covered by section 9-102. Second, the added language makes explicit that the promissory note itself falls within the scope of Article 9 by virtue of its status as an instrument.... The amendments clarify the rationale of applying Article 9 to the promissory note. They refute the possibility that Article 9 reaches out to encompass every transaction colorably included under section 9-102." 505 F.2d at 1061.

Rucker v. State Exchange Bank, 355 So.2d 171 (Fla.Dist.Ct.App.1978), similarly held that assignment of a real estate mortgage as collateral for a bank loan was not a transaction governed by Florida's identical enactment of the relevant provisions of the Uniform Commercial Code because it was specifically excluded by U.C.C. Sec. 9-104(j). See also Bowmar, Real Estate Interests as Security Under the U.C.C.: The Scope of Article Nine, 12 U.C.C.L.J. 99, 116 (1979-80); Coogan, Kripke, & Weiss, The Outer Fringes of Article 9: Subordination Agreements, Security Interests in Money and Deposits, Negative Pledge Causes, and Participation Agreements, 79 Harv.L.Rev. 229, 270-71 (1965). Compare e.g., Bank of California National Association v. Leone, 37 Cal.App.3d 444, 112 Cal.Rptr. 394 (Ct.App.1974) [note secured by deed of trust on real property (mortgage) and which was assigned to Bank as collateral for another loan was not debt secured by mortgage on real property for purposes...