State Bank of Hartland v. Arndt

Decision Date20 February 1986
Docket NumberNo. 84-1683,84-1683
Citation129 Wis.2d 411,385 N.W.2d 219
Parties, 42 UCC Rep.Serv. 1850 STATE BANK OF HARTLAND, a Wisconsin banking corporation, Plaintiff-Respondent, v. Gerald ARNDT, a/k/a Gerald C. Arndt and Evelyn M. Arndt, Defendants-Appellants. *
CourtWisconsin Court of Appeals

Review Denied.

R. Arthur Ludwig and Ludwig & Shlimovitz, S.C., Milwaukee, for defendants-appellants.

Thomas R. Fahl and Brendel, Flanagan, Sendik & Fahl, S.C., Milwaukee, for plaintiff-respondent.

Before GARTZKE, P.J., and DYKMAN and EICH, JJ.

GARTZKE, Presiding Judge.

Gerald and Evelyn Arndt appeal from a judgment in favor of The State Bank of Hartland foreclosing Arndts' interests in their homestead. Arndts contend that the bank is barred from foreclosing its real estate security interest because (1) the bank breached various duties to them by permitting a financing statement covering their business assets to lapse, (2) foreclosure against Evelyn's interest is precluded by her failure to sign a secured note, and (3) the security agreement did not cover future advances. Arndts also contend that the court allowed unreasonable attorney fees. 1 We reject these contentions and affirm.

The principal facts are undisputed. When Arndts bought a bridal salon business in 1975, the bank lent them $11,000 on a note secured by a general security agreement covering their personal property, including business assets. A financing statement was duly filed September 15, 1975. The security agreement and financing statement covered present and future debts. The note was paid in full.

In November 1976 Arndts sought an additional loan to pay business debts. The bank insisted on additional security in the form of a real estate security agreement covering their homestead. Both Gerald and Evelyn signed the real estate security agreement November 19, 1976. Additional sums were advanced to Arndts, resulting in a January 2, 1980 note and separate note dated December 20, 1980. Only Gerald signed the January note. Both signed the December note.

Because no continuation statement was filed before September 15, 1980, the effectiveness of the 1975 financing statement covering Arndts' business assets lapsed. A financing statement is effective for five years from the date of filing and lapses on the expiration of that period unless a continuation statement is filed prior to the lapse. Sec. 409.403(2), Stats. With that lapse, the bank's security interest in Arndts' business assets became unperfected. Id.

Arndts filed bankruptcy in 1982. When the bank filed a claim as a secured creditor based on the real estate security agreement, Arndts filed another claim on behalf of the bank as an unsecured creditor based on the unperfected security interest in their business assets. The bankruptcy court treated the bank as an unsecured creditor. The bank's filing was disallowed, but without prejudice to its rights under the real estate security agreement. The bank realized less on the allowed claim than the full amount of the debt. Had the bank preserved its security interest in Arndts' business assets, it would have been paid in full.

The bank then brought this foreclosure action. The trial court granted the foreclosure judgment on the January 2, 1980 and December 20, 1980 notes and ordered sale of the homestead to pay the debt plus the bank's attorney fees. This appeal followed.


The trial court held that the bank owed Arndts no duty to preserve its security interest in Arndts' business assets. Arndts challenge that holding, presenting several arguments.

Whether a duty exists is a question of law. Anderson v. Green Bay & Western Railroad, 99 Wis.2d 514, 516, 299 N.W.2d 615, 617 (Ct.App.1980). We, of course, need not defer to the trial court's conclusion of law. Midwest Developers v. Goma Corp., 121 Wis.2d 632, 651, 360 N.W.2d 554, 564 (Ct.App.1984).

A duty may be an obligation imposed by law to perform a specific act or an obligation that attaches to other conduct. Walker v. Bignell, 100 Wis.2d 256, 263, 301 N.W.2d 447, 452 (1981). The first is a duty to act. The second is a duty to act in a particular way.

1. No Duty to File Continuation Statement

Nothing in sec. 409.403(2), Stats., on reperfecting a security interest imposes an obligation on a secured creditor to file a continuation statement. Nothing in ch. 409, entitled Uniform Commercial Code--Secured Transactions, or any other statute brought to our attention imposes such an obligation. Nor have Arndts cited a judicial decision which imposes such an obligation on a secured creditor.

2. UCC Collateral Provision Not for Arndts' Benefit

Section 403.606(1), Stats., provides: "The holder [of an instrument] discharges any party to the instrument to the extent that without such party's consent the holder: ... (b) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse."

Arndts argue that by letting its financing statement lapse, the bank impaired collateral for the notes sued on. They seem to contend that their interests in the homestead cannot be foreclosed because the value of the impaired collateral exceeds the value of the debt.

Whatever Arndts' reasoning, sec. 403.606(1), Stats., is inapplicable. This statute is identical to sec. 3-606(1) of the Uniform Commercial Code. Although the several courts that have faced the issue do not agree, the most recent view is that "any party to the instrument" means a party who is in the position of a surety with a right of recourse and does not refer to the primary obligor. Federal Deposit Ins. v. Blue Rock Shopping Center, 766 F.2d 744, 749-51 (3d Cir.1985). The analysis in that case is based upon the drafter's comment to the UCC provision and is consistent with the view of most courts. 2

3. Duty of Good Faith Not Violated

Arndts contend that the bank violated a duty of good faith. They rely on sec. 401 203, Stats., which provides: "Every contract or duty within chs. 401 to 409 imposes an obligation of good faith in its performance or enforcement."

The duty of good faith does not by itself require a secured creditor to file a continuation statement. Good faith cannot stand alone. The obligation of good faith must attach to some other conduct. See Walker, 100 Wis.2d at 263, 301 N.W.2d at 452. Because chs. 401 to 409, Stats., impose no duty upon the bank to file a continuation statement, Arndts have failed to establish statutorily required conduct to which a good faith obligation will attach.

Arndts assert that the security agreement covering their business assets is conduct to which the good faith duty attaches. They argue that the security agreement required the bank to preserve a perfected security interest in their business assets. The trial court made no finding on the point. Whether the agreement required the bank to preserve its security interest is an issue which we may resolve if the document is unambiguous. Schlosser v. Allis-Chalmers Corp., 86 Wis.2d 226, 244, 271 N.W.2d 879, 887 (1978).

The agreement is unambiguous. Nothing in it imposes a duty on the bank to preserve its security in Arndts' business assets. Appellants themselves have not referred us to a specific provision in the agreement.

Before leaving the good faith issue, we note that the trial court made no finding regarding the bank's honesty. Under the Uniform Commercial Code, good faith is defined as "honesty in fact in the conduct or transaction concerned." Sec. 401.201(19), Stats. The court found, however, that the bank did not file a continuation statement because it relied on its real estate security. This finding is inconsistent with dishonesty and impliedly rejects dishonesty as a ground for a conclusion that the bank failed to exercise good faith. We may accept the finding as an implicit finding of good faith. Englewood Apartments Partnership v. Grant & Co., 119 Wis.2d 34, 39 n. 3, 349 N.W.2d 716, 719 (Ct.App.1984).

4. Duty of Diligence, Reasonableness and Care not Violated

Section 401.102(3), Stats., provides that "the obligations of good faith, diligence, reasonableness and care prescribed by chs. 401 to 409 may not be disclaimed by agreement...." Arndts assert that the bank failed to exercise diligence, reasonableness and care by failing to timely file a continuation statement. We reject the contention.

Like good faith, the duties of diligence, reasonableness and care are within the second class of obligations referred to in Walker, 100 Wis.2d at 263, 301 N.W.2d at 452. They attach to other conduct. We find no duty running from a secured creditor to the debtor to preserve a security interest in chs. 401 to 409, Stats., or in the agreement between the parties. Whether the bank exercised diligence, reasonableness and care is not an issue.

5. Exemption Laws Irrelevant

Arndts find significance in the rule that the exemption laws are liberally construed in favor of debtors, Opitz v. Brawley, 10 Wis.2d 93, 95-96, 102 N.W.2d 117, 119 (1960), and that a mortgagee holding security on nonexempt and exempt properties must first proceed against the nonexempt property. Anchor Savings & Loan Asso. v. Week, 62 Wis.2d 169, 175, 213 N.W.2d 737, 739 (1974); Wisconsin Mortgage & S. Co. v. Kriesel, 191 Wis. 602, 609, 211 N.W. 795, 797 (1927); Dunn v. Buckley, 56 Wis. 190, 192-93, 14 N.W. 67, 68-69 (1882). Neither proposition is in point. We are not called upon to construe or apply a law pertaining to exempt property. The bank holds no present security in nonexempt property.


Evelyn Arndt argues that her homestead interest is not security for the January 2, 1980 note which only her husband signed. She relies on the principle that a mortgage creates no lien unless it secures a debt, McCourt v. Peppard, 126 Wis. 326, 331, 105 N.W. 809, 811 ...

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