Case Title: Wagner v. Wyoming Production Credit Ass'n

Citation: 

Docket Number: 87-48

State: wyoming

Court: Wyoming Supreme Court

Date: 1989-05-03T00:00:00Z

Document:
Wagner v. Wyoming Production Credit Ass'n1989 WY 95773 P.2d 927Case Number: 87-48Decided: 05/03/1989Supreme Court of Wyoming
DARREL R. WAGNER AND 
TERESA P. WAGNER, HUSBAND AND WIFE, AND DARREL A. WAGNER AND ROSE A. WAGNER, 
HUSBAND AND WIFE, APPELLANTS (DEFENDANTS),

 
 
v.

 
 

WYOMING PRODUCTION CREDIT 
ASSOCIATION, A CORPORATION, APPELLEE (PLAINTIFF).

 
 
Appeal from the District 
Court, ParkCounty, John T. Dixon, 
J.

 
 
Lawrence A. Yonkee of 
Redle, Yonkee & Arney, Sheridan, and Joseph E. Darrah of Joseph E. Darrah, 
P.C., Powell, for 
appellants.

 
 
Jerry A. Yaap of Bishop, 
Bishop & Yaap, Casper, and Richard E. Day of Williams, Porter, Day & 
Neville, P.C., Casper, for 
appellee.

 
 
Before CARDINE, C.J., THOMAS, URBIGKIT and MACY, 
JJ., and BROWN, Retired J.

 
 

BROWN, Justice, 
Retired.

 
 

[¶1.]     The creditor, Wyoming 
Production Credit Association (WPCA), brought suit in the district court for a 
deficiency judgment. The evidence disclosed that when WPCA brought suit it had 
sold the personal property that secured the debt but retained the real property. 
WPCA was awarded a deficiency judgment after a jury trial and appellants 
(debtors) appeal.

 
 

[¶2.]     Although appellants 
raise nine issues,1 we need only address the following 
issue: 

 
 
May a creditor recover a 
deficiency judgment for a debt secured by real and personal property when it has 
sold the personal property but retained the real property?

 
 
We answer that question 
in the negative and reverse the judgment of the trial 
court.

 
 

[¶3.]     Appellants Darrel Roger 
Wagner (Roger) and Teresa Wagner (Teresa) became indebted to WPCA through 
several loan transactions when WPCA financed their ranching and farming 
enterprises. The indebtedness was evidenced by four promissory notes which were 
secured by livestock, feed, crops, machinery, construction equipment, a mobile 
home and other items of personal property. The first note was dated June 7, 
1982, and recited an amount due of $667,971 on January 15, 1983. The second 
note, dated August 26, 1982, was for $4,000 and was due on January 15, 1983. The 
third note was executed on October 6, 1982 and recited an amount due of $15,000 
on January 15, 1983. The fourth note, dated January 18, 1983, for $125,337 was 
due March 15, 1983. On January 26, 1983, the first three notes were extended to 
March 15, so that all of the notes became due on March 15, 
1983.

 
 

[¶4.]     Roger and Teresa began 
their farming operations in 1980 by purchasing the Whistle Creek Ranch located 
near Powell, Wyoming, which they owned subject to a 
mortgage in favor of WPCA. In the spring of 1982, Roger and Teresa desired to 
expand their farming operations, and they located a suitable ranch in Carter 
County, Montana, known as the Piney Creek Ranch. Roger requested WPCA to finance 
the purchase of the ranch and to advance the funds necessary to operate it, but 
WPCA refused to loan the Wagners any more money until a substantial sum was paid 
on their outstanding mortgage debt. At this time the Wagners owed WPCA 
approximately $600,000, with little repayment having been made on any of the 
loans.

 
 

[¶5.]     In an effort to satisfy 
WPCA's requirements, Roger developed a plan involving his father, Darrel A. 
Wagner (Darrel). After looking at the property, Darrel agreed to provide the sum 
of $400,000 to operate the ranch if Roger was able to purchase it. Roger 
submitted a proposal to WPCA, which included the purchase of stock and equipment 
to operate the ranch with the $400,000 to be provided by Darrel, and the trading 
of Whistle Creek Ranch as a down payment. After reviewing the proposal, a WPCA 
officer agreed that the plan had possibilities and Roger made an offer to 
purchase the Piney Creek Ranch. The seller of the Piney Creek Ranch met with the 
WPCA officer, who informed the seller that the sale could be made if he agreed 
to provide WPCA written permission to take an assignment of the Wagners' 
interest in the ranch. A contract to purchase the property was executed on May 
11, 1982.

 
 

[¶6.]     Sometime during the 
negotiations and purchase of the ranch, it became apparent that Darrel did not 
have the $400,000 in liquid assets. Roger requested WPCA to loan the $400,000 to 
Darrel, but the request was refused because no new capital would be injected 
into the operation. On June 7, 1982, Darrel and his wife, Rose A. Wagner (Rose), 
executed and delivered a guaranty for the debt of Roger and Teresa up to the 
amount of $400,000. The purpose of the guaranty was disputed at trial. Darrel 
testified that he signed the guaranty with the understanding that, if he did so, 
WPCA would loan $400,000 to Roger and Teresa. The WPCA officer denied such an 
agreement, and testified that the guaranty was a written manifestation of an 
earlier verbal understanding and, apparently, enabled Roger to trade the Whistle 
Creek Ranch in the acquisition of the Piney Creek Ranch. In any case, WPCA did 
not advance any funds to operate the Piney Creek Ranch. However, Roger and 
Teresa commenced farming and ranching operations on the ranch, transferred some 
of the livestock and equipment from the Whistle Creek Ranch and moved a modular 
home onto the ranch.

 
 

[¶7.]     On June 14, 1982, the 
Wagners and WPCA entered a loan clarification agreement. Under the agreement, 
Roger and Teresa agreed to sell some of their construction machinery and 
equipment by June 16, 1982, and to sell a ranch, known as the Cowley property, 
by August of 1982, with the proceeds to be applied to the debt. Darrel and Rose 
agreed to guarantee the loan to the extent of $400,000 and to sell certain of 
their property by January 15, 1983, with the proceeds to be applied toward the 
debt.

 
 

[¶8.]     The same day, Roger and 
Teresa executed an assignment of their interest in Piney Creek Ranch to WPCA. A 
quitclaim deed was executed and placed in escrow. This quitclaim deed conveyed 
all of Wagners' interest in the Piney Creek Ranch to WPCA. The agreement 
provided that the assignment and quitclaim deed would be null and void if the 
assignors, the Wagners, paid all indebtedness owed to the assignee, WPCA; that 
if the Wagners defaulted on the contract for deed, WPCA could remedy the default 
and add any sum expended in curing the default to the amount owed WPCA; and, if 
the Wagners defaulted on their loan or if WPCA was in need of additional money 
to liquidate the Wagners' indebtedness, WPCA could sell and dispose of the 
property and obtain a deficiency judgment.

 
 

[¶9.]     The due date on the 
notes passed without the required payment being made. On June 17, 1983, WPCA 
filed a complaint in the district court requesting an order that all of the 
collateral listed in the security agreements and financing statements be 
delivered to WPCA for sale, that judgment be granted to WPCA against Roger and 
Teresa in the principal amount of $761,607.92 plus interest, and that judgment 
be granted to WPCA against Darrel and Rose in the amount of $400,000 plus 
interest, costs and expenses. On September 12, 1983, the district court ordered 
all of the property described in the security agreements and financing 
statements - which did not include any interest in the Piney Creek Ranch - to be 
delivered to WPCA for sale. A sale was conducted, and the proceeds were applied 
to the debt, resulting in an amount remaining due of $759,607.12. While the 
proceedings were continuing, WPCA was informed, on February 21, 1984, that Roger 
and Teresa were in default on the Piney Creek Ranch contract for deed and that, 
if the default was not cured in thirty days, the default provision of the 
contract would be invoked. WPCA exercised its right under the assignment and, on 
May 24, 1985, paid off the remaining sum due on the contract of $451,491 and 
took possession of the Piney Creek Ranch. WPCA decided to retain the ranch and 
permit a credit for the appraised value against the debt owed. The Wagners did 
not raise any issue with regard to WPCA's failure to sell the ranch before 
attempting to obtain a deficiency judgment in any of their pleadings or at the 
pretrial conference.

 
 

[¶10.]  At trial, an officer of WPCA disclosed 
that WPCA had retained possession of the Piney Creek Ranch and had applied a 
credit of $747,741 against the debt owed, which was the value their appraiser 
placed on the property at the time it paid the balance due on the contract for 
deed. The officer also testified that the ranch had decreased in value by the 
time of trial to an estimated value of $400,000. The seller testified that he 
had listed the property at $1.2 million, and Darrel testified that he valued the 
property for tax purposes at $900,000.

 
 

[¶11.]  At the close of the evidence, counsel for 
appellants made a motion to conform the pleadings to the evidence presented at 
trial. He also moved for a directed verdict on the basis that the evidence 
disclosed that WPCA had not sold all of the collateral that secured the debt 
owed before it had attempted to obtain a deficiency judgment. Both motions were 
denied. By special findings, the jury found Roger and Teresa liable for the sum 
of $592,477.41 plus accruing interest, and Darrel and Rose liable for 
$376,800.

 
 

[¶12.]  Following entry of the judgment, the 
Wagners moved for judgment notwithstanding the verdict, and in the alternative, 
for a new trial. The motion for judgment notwithstanding the verdict argued 
that, as WPCA had retained the Piney Creek Ranch, it had elected to take the 
ranch in lieu of the right to obtain a deficiency. The court found that any 
issue of the failure to sell the Piney Creek Ranch was waived by the failure to 
raise it in the pleadings or at pretrial. Finally, the court found that it did 
not err in denying the Wagners' motion to amend their pleadings at the close of 
the evidence because WPCA had not expressly or impliedly given its consent to 
have that issue tried. To the extent that evidence on the issue was presented by 
WPCA, the court reasoned that it was presented on the issue of the debt owed. 
This appeal followed, arguing error in the judgment and the post-judgment 
decisions.

 
 

[¶13.]  Because we find that the trial court 
erred in not granting a directed verdict when it was shown that WPCA had 
retained possession of the Piney Creek Ranch, we find it unnecessary to address 
any error with regard to the jury instructions. Likewise, it is unnecessary to 
address the Wagners' argument that the guaranty lacked 
consideration.

 
 

[¶14.]  The application of the collateral, the 
Piney Creek Ranch property, to the debt by WPCA was accomplished without 
foreclosure in the traditional sense. That is to say, there was neither 
foreclosure of the Montana property by suit nor publication. 
WPCA's method of applying collateral to the debt in a sense resembles strict 
foreclosure.2 Placing a deed in escrow to the 
collateral, executed by the debtor to the creditor, is a transaction sometimes 
used to avoid the expense and delay of a foreclosure in case of default. Cases 
under these circumstances rarely get to the appellate 
courts.

 
 

[¶15.]  The transaction between the parties here 
is somewhat like a contract for deed. In such buy-and-sell agreements, usually a 
deed is placed in escrow with instructions to deliver the deed to the buyer when 
all the payments provided for in the contract for sale have been made. The 
escrow instructions further provide that the deed be returned to the seller in 
case of default.

 
 

[¶16.]  Statutes and the body of law with respect 
to foreclosures by suit or by power of sale afford little guidance in the case 
here, nor does the body of law with respect to contracts for deed. The peculiar 
facts in this case do not fit into any of the traditional financial transactions 
involving the application of collateral to an obligation. In these 
circumstances, we are governed by the substance of what the parties agreed to. 
Anything said about cases involving foreclosure or other transactions involving 
security is only mentioned as secondary supporting logic.

 
 

[¶17.]  In support of their position, appellants 
bring to our attention Durdahl v. Bank of Casper, 718 P.2d 23 (Wyo. 1986) and Eggeman v. Western National Bank, 596 P.2d 318 (Wyo. 
1979). In Eggeman, the court set out five principal remedies given to a secured 
party upon default by the debtor. One of these remedies was to take possession 
of the collateral without judicial process and either accept it in full 
satisfaction or sell it. W.S. 34-21-964(b). In Durdahl, the creditor repossessed 
security and then proceeded to sue on the note without completing the 
foreclosure process. This court said:

 
 
We cannot find anything 
in Wyoming law 
which allows a creditor to repossess collateral and do nothing with it, then 
commence suit on the underlying obligation. It seems that the creditor can 
only:

 
 
1. Repossess the 
collateral and sell it.

 
 
2. Repossess the 
collateral in satisfaction of the debt (also known as strict foreclosure). * * * 
see Western National Bank of Casper v. Harrison, Wyo., 577 P.2d 635 (1978); 
or

 
 
3. Obtain a judgment, 
then execute on the judgment, i.e., have the sheriff repossess the 
collateral.

 
 
Durdahl, 718 P.2d  at 27 
(citations omitted).

 
 

[¶18.]  These two cases have limited value as 
precedent. They involve personal 
property and were decided with reference to the Uniform Commercial Code, 
W.S. 34-21-100 through 34-21-1002. However, much of what is said about applying 
security to the debt should apply for the same reasons when real property is 
involved.

 
 

[¶19.]  Appellants say in their 
brief:

 
 
The Piney Creek Ranch was 
located in the State of Montana. The Wagner assignment with a deed in 
escrow was a mortgage transaction under Montana law. A "mortgage is a contract by 
which specific property is hypothecated for the performance of an act, without 
the necessity of a change of possession." § 71-1-101, M.C.A. and see 55 
Am.Jur.2d, Mortgages § 71.

 
 
"Any interest in real 
property which is capable of being transferred may be mortgaged . . ." § 
71-1-201, M.C.A.

 
 
The Wagner assignment 
gave Plaintiff the right to sell the property. The applicable Montana Statute 
provides:

 
 
When a mortgage confers a 
power of sale, either upon the mortgagee or any other person, to be executed 
after a breach of the obligation for which the mortgage is a security, either an 
action may be maintained under this power to foreclose or proceedings may be had 
under the provisions of the mortgage. § 71-1-223, M.C.A. Also see § 71-1-111, 
M.C.A.

 
 

Montana law requires notice of 
sales made pursuant to a power of sale. § 71-1-224, M.C.A.

 
 

[¶20.]  Therefore, when the Wagners were in 
default, Plaintiff had the option of (1) foreclosing by suit, § 71-1-222, (2) 
exercising a power of sale under the mortgage, § 71-1-223, (3) obtain judgment 
for full amount of the obligation and execute on other property, see Avco 
Financial Services of Billings One, Inc. v. Christiaens, [201 Mont. 117] Mont. 
652 P.2d 220 (1982), or (4) accepting the property in full satisfaction of 
Wagners' obligation, § 30-9-505 M.C.A. which is a UCC provision. Although the 
code applies to security interests created by assignment, § 30-9-102, M.C.A., § 
30-9-104, M.C.A. excludes from Article 9, transfers of interest in real estate. 
However, the buyer's interest under a contract for deed which is set forth on a 
security instrument creates an equitable mortgage in land and thus a security 
interest in real property which is subject to foreclosure. SeeGarnettState Sav. Bank v. Tush, [232 Kan. 447] Kan., 657 P.2d 508. [(1983)] Nevertheless, we 
can find nothing in Montana law which permits the creditor to take 
possession of security, accept it and then maintain an action for a deficiency. 
If the buyer's interest under a contract for deed is treated as a real property 
interest, then WPCA has brought about a strict foreclosure which discharges the 
debt.

 
 

[¶21.]  While the cases cited and the brief 
summary of Montana law on mortgages supplied by appellants have minimal value in 
this case, these cases and law summary do give some support to appellants' claim 
that nothing could be found in Wyoming or Montana law allowing a creditor to 
take possession of security, failing to complete the foreclosure or failing to 
sell the property, and then obtain a deficiency judgment.

 
 

[¶22.]  Except to advise us that the Uniform 
Commercial Code does not apply to the circumstances of this case, appellants say 
very little about the real issue, that is, whether a deficiency judgment can be 
had without first selling the secured property in order to determine the amount 
of the deficiency. Rather, appellants argue vigorously that we should not 
consider this issue because it was not raised in the pleadings or at pretrial 
conference, nor was it tried in the jury trial.

 
 

[¶23.]  Although we agree with WPCA that the 
decision in this case is not controlled by Uniform Commercial Code - Secured 
Transactions, we remain unpersuaded that it could obtain a deficiency judgment 
while it retained possession of the Piney Creek Ranch. The agreement of the 
parties with respect to the recovery of a deficiency for the debt secured by the 
Wagners' interest in the Piney Creek Ranch is set forth in the assignment of the 
contract for deed, which provides:

 
 
In the event of a default 
in payment of the indebtedness hereby intended to be secured, or in the event 
Assignee is in need of additional money to liquidate Assignors' indebtedness 
hereby intended to be secured, it shall 
be lawful for Assignee to sell and dispose of the above-described premises 
and out of the money arising from the sale, to retain the unpaid balance of 
principal and accrued interest, together with costs and expenses of sale, 
including a reasonable attorney's fee, with any surplus to be paid to Assignors 
and with any deficiency to be paid to 
Assignee by Assignors.

 
 
(Emphasis added.) This 
language plainly states that a deficiency judgment could be obtained in the 
event that a sale of the property rendered an amount that was less than the debt 
owed. No evidence was presented that the parties agreed that an appraised value 
could be substituted for the required sale, and we find nothing in the agreement 
that expresses any intent other than that an actual sale was required before a 
deficiency could be obtained.

 
 

[¶24.]  Even if we treated the assignment as a 
form of an equitable mortgage, see generally E. Rudolph, The Wyoming Law of Real 
Mortgages, Ch. 10 at 147-62 (1969), the result would be the same under either 
Wyoming or Montana law. We recently held in Fitch v. Buffalo Federal Savings and 
Loan Association, 751 P.2d 1309 (Wyo. 1988) that a mortgagee, who forecloses by 
advertisement and sale, could obtain a deficiency judgment if the proceeds of 
the sale were not sufficient to cover the debt. Implied, if not expressed, in 
that decision and the statutes relating to the rights of a mortgagee on 
foreclosure (W.S. 34-4-104 through 34-4-113), is a requirement that there first 
be a sale of the land. Montana's law, as explained in Fitch, is more 
restrictive in permitting a foreclosure and sale to obtain a deficiency 
judgment. We hold that without a sale of the property, WPCA had no legal or 
equitable right to a deficiency judgment.

 
 

[¶25.]  Although WPCA cites no law that 
demonstrates it was entitled to the deficiency judgment, it strenuously urges 
this court not to address the issue. WPCA was successful in convincing the trial 
court that the issue had been waived by the Wagners' failure to raise it as an 
affirmative defense in the pleadings and that it was not tried by the express or 
implied agreement of WPCA. We need not address whether the trial court abused 
its discretion in denying the Wagners leave to amend the pleadings to conform to 
the evidence because we find that WPCA failed to carry its burden to show that 
any deficiency was owed. See generally 6 C. Wright & A. Miller, Federal 
Practice and Procedure, §§ 1491-1495 at 453-82 (1971). Once the evidence 
demonstrated that WPCA had not sold the property for an amount less than the 
debt owed, the district court had no recourse but to grant the Wagners' motion 
for a directed verdict. An appraisal cannot be a substitute for a sale when an 
unambiguous contract specifies a sale. As the debt of Darrel and Rose was as 
guarantors for the debt of Roger and Teresa, the failure to present any evidence 
that Roger and Teresa owed a deficiency required a finding that Darrel and Rose 
were not liable as guarantors. See 39 Am.Jur.2d Guaranty § 78 at 1085 
(1968).

 
 

[¶26.]  This case is reversed and the district 
court is directed to enter a directed verdict and judgment in favor of 
appellants.

 
 
FOOTNOTES

 
 

1 Issues raised by 
appellant:

 
 
1. When the jury requested 
information concerning the special verdict form, which was not consistent with 
other instructions, did the trial court err by failing to give further 
instructions?

 
 
2. When the jury requested 
information concerning instruction number 21 defining promissory estoppel, did 
the trial court err by failing to give further 
instruction?

 
 
3. When the jury asked if it found 
Defendants liable, did it have to award the amounts claimed by WPCA, did the 
trial court commit reversible error by answering "yes"?

 
 
4. Does § 1-11-209, W.S. 1977, 
require that the trial court furnish legal instruction to the jury when 
requested on matters bearing on the issues of the case and which influence the 
jury's decision for one party or the other?

 
 
5. Do juror confusion regarding the 
verdict form, failure to give information pursuant to § 1-11-209, error in an 
instruction concerning amount of WPCA recovery and dissent of one or more jurors 
to the verdict taken together require that the special verdict be set 
aside?

 
 
6. Concerning the terms of the 
Continuing Guaranty and loan clarification agreement in light of the 
circumstances shown by the evidence was the Wagners' promise to pay WPCA 
$400,000 a naked promise to pay the debt of another, which is not enforceable 
for lack of consideration?

 
 
7. Were Appellants entitled to amend 
their pleadings to conform to the evidence that WPCA had taken possession of 
security and accepted it in satisfaction of the debt?

 
 
8. Did WPCA by obtaining title to 
the Piney Creek Ranch pursuant to security arrangements and by retaining the 
ranch without selling it give up its' claim for a deficiency against Roger and 
Teresa Wagner?

 
 
9. Were Darrel and Rose Wagner 
relieved of any obligation on the Continuing Guaranty by WPCA obtaining title 
and retaining the Piney Creek Ranch?

 
 

2 59 C.J.S. Mortgages § 519 at 849 
(1949) (footnotes omitted) defines strict foreclosure, 
stating:

 
 
While it was formerly held that, in 
the absence of a statue to the contrary, a decree of strict foreclosure amounted 
to the payment of the mortgage debt without regard to the value of the premises, 
it is now well settled that, notwithstanding such a decree, the mortgagee [sic] 
may remain liable for a deficiency, although the taking of the property 
constitutes a pro tanto payment, and, if the value of the premises equals or 
exceeds the debt, the decree operates as full satisfaction and the mortgagee 
need not restore the excess. However, before the expiration of the time limited 
for redemption, the decree does not operate as a satisfaction of the debt either 
in whole or in part. Where the decree is rendered in pursuance of a stipulation 
that the land shall be taken in full satisfaction of it, the amount of the 
decree is immaterial.