Daily Development for Thursday, January 30, 2003

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; MODIFICATIONS; FUTURE ADVANCES: A mortgage that provides that it secures a certain note, "and all renewals, extensions and modifications," shall not be construed as a note securing future advances, and consequently, when the loan balance is paid down to zero, the mortgage is deemed cancelled.

Cottingham v. The Citizens Bank, CV-01-14, 2003 Westlaw 133246 (Alabama 1/17/03)

Carolyn and her husband Donnie, together with Donnie's brother and the brother's wife, jointly executed two promissory notes in 1988, apparently to provide funding for a business that the brothers operated. One of the notes secured a debt of $129,000, and the other secured a line of credit of $100,000. Simultaneously, each couple executed a mortgage on their respective homes. Other collateral, owned by the business, was also provided for the notes.

The mortgage executed by Carolyn and Donnie stated that it secured an amount of $60,000 as represented in a "note of even date.". Presumably this $60,000 was part of the debt described in the notes described above.

But in a later part of the opinion the court notes the bank in its brief admitted that the original promissory noted executed by Carolyn did not contain an advances clause. The statement is inconsistent with the notion that the 1988 mortgage secured the line of credit note.

In 1989, the bank alleged, Carolyn and Donnie and his sister in law signed a note for $100,000, listing as security the collateral of the business and the 1988 mortgages. This note stated it was a renewal of the 1988 line of credit. But the copy of the 1989 note supplied by the bank to the court did not contain Carolyn's signature.

In 1990, the bank claimed, everyone signed a similar renewal note, but the copy of the note the bank provided to the court was illegible.

In 1992, Donnie signed another note, as a corporate officer of a business, stating that the note was a renewal of earlier notes and listing the 1988 mortgages and other collateral as security. In 1998, the bank alleged, Carolyn signed a guarantee of the notes. Carolyn disputes that she signed this guaranty, alleging that her signature was forged.

In 1999, Carolyn and Donnie were divorced, and Carolyn continued to live in the house that was the subject of the 1988 mortgage, and which she and Donnie continued to own jointly.

A year later, the note went into default and the bank foreclosed privately on the home. Thereafter, when it sought to take possession of the home, Carolyn brought this suit alleging that the bank had "fraudulently and in bad faith" brought a foreclosure against her home and defamed her credit. The trial court granted summary judgment to the bank, and Carolyn appealed.

On appeal, held: Reversed. There are disputed questions of fact, and, based upon the apparent record, the mortgage was released as a matter of law when, in 1992, it appears that the original notes were paid down to a zero balance.

The court noted that not only was there no future advance clause per se in the mortgage or (subject to the questions raised above) in the notes, but the mortgage contained a provision that "upon payment of all sums secured by this Security Instrument, Lender shall release this Security Instrument without charge to Borrower . . . " This is consistent with the notion that there was only a specific debt originally intended by the parties. Although the mortgage indicated that such debt could be renewed, modified or extended, this did not mean that future advances could be made based upon the original note.

Arguably, later notes contained provisions for future advances, and referred to the mortgage, but there is a question of fact whether Carolyn executed any of these notes. Further, some of them occurred after 1992, when the mortgage debt, it appears from the record, may have been paid down to a zero balance. That would end the mortgage, as a matter of law.

The bank pointed to other language in the note that said specifically that the "security agreement remains in effect, even if the note is paid and I owe no debt to you until discharged in writing." The court stated that if there was no express provision for future advances, keeping the debt "open," then this provision was null and void, as inconsistent with Alabama common law that "payment of the mortgage debt before foreclosure divests the title of the mortgagee." The court cites an Alabama statute apparently to the same effect (subject to the exception for future advances.)

Although, as noted, there was some issue as to whether Carolyn's signature on the 1998 guaranty was valid, the court concluded that .this was a moot point. Even if Caroyln indeed executed the guaranty in 1998, referring to the 1988 mortgage, the reference would have been meaningless, since that mortgage likely was cancelled and discharged when the principal amount went down to zero in 1992.

Comment 1: The editor apologizes for all the detail here. But veterans will recognize that this is the "same old song" with these kinds of disputes. It is common to have confusion in bank records not only about security relationships but also, and particularly, about renewals. At least this is the editor's viewpoint from observation of the reports that reach the appellate cases. The detail gives useful "flavor" to the dispute here.

But it is unfortunate that the court didn't provide greater clarity as to the relationship between the 1988 mortgage and the "simultaneous" note that was described as a "line of credit." If indeed that note was incorporated by reference into the mortgage, then it would appear that we did have a future advance provision, and the court's own analysis would not hold up.

Comment 2: The editor has included the case as a DD essentially for the point that a provision indicating that notes can be extended, modified and renewed does not mean that the notes are future advance notes, and that, as a consequence, when the balance on such "non future advance notes" reaches zero, the mortgage is cancelled. Such result will prevent the securing of future advances even when the mortgagor has agreed in a later note (after the mortgage has been cancelled as described) that the debt represented in that note constitutes an advance secured by the earlier mortgage.

This is a trap for the unwary and an important lesson for the cautious. The Restatement agrees that a specific agreement for future advances is necessary. Restatement (Third) of Property (Mortgages)