Title: Garnett State Savings Bank v. Tush

State: kansas

Issuer: Kansas Supreme Court

Document:

232 Kan. 447 (1983)
657 P.2d 508
THE GARNETT STATE SAVINGS BANK, A Kansas Banking Corporation, Appellant,
v.
GEORGE M. TUSH, JR., JACQUELYN TUSH, a/k/a JACKY TUSH, and RONALD TUSH, Appellees.
No. 53,714

Supreme Court of Kansas.
Opinion filed January 14, 1983.
Terry Jay Solander, of Loughridge & Solander, of Garnett, argued the cause and was on the brief for appellant.
Richard L. Hines, of Hines, Wood & Ahlquist, of Erie, argued the cause and was on the brief for appellee George M. Tush, Jr.
Orville J. Cole, of Cole & Doering, of Garnett, argued the cause and was on the brief for appellee Jacquelyn Tush.
The opinion of the court was delivered by
HOLMES, J.:
This is an appeal by the plaintiff Garnett State Savings Bank, Garnett, Kansas, (Bank), in an action filed against George M. Tush, Jr., and his wife, Jacquelyn Tush (Tushes), to recover money due under a series of notes executed by the Tushes and to foreclose their interest under a contract of sale of real estate. Following trial to the court, judgment was entered for the defendants. The Bank has appealed and, pursuant to K.S.A. 20-3018(c), the case was transferred from the Court of Appeals. We reverse.
The Tushes had been customers of the Bank for several years *449 and had established a line of credit with the Bank to finance their farming operation. From time to time the Tushes would call upon the Bank for additional funds and over a period of several years numerous notes, renewal notes and security agreements were executed by them to the Bank. The notes involved in this action were (1) a promissory note and a security agreement dated January 21, 1974, in a principal amount of $6,300.00; (2) a note and security agreement dated December 5, 1977, in a principal amount of $5,500.00; (3) a note and security agreement dated December 29, 1977, in a principal amount of $20,536.80; (4) a note dated June 21, 1978, in a principal amount of $1,750.00; and (5) a combination collateral note dated December 1, 1978, in a principal amount of $2,500.00.
A representative of the Bank testified that following the wheat harvest of 1977, he talked with the Tushes about their indebtedness to the Bank and advised them additional security would be required for any additional extension of credit. He testified the Tushes agreed that if additional credit was required in the future they would use their equity in a quarter section of land they were purchasing as additional collateral for the Bank. At that time the Tushes were occupying as their homestead the Northwest quarter of Section 15, Township 22 South, Range 19 East of the Sixth Principal Meridian, Anderson County, Kansas, which they were purchasing under a real estate sales contract wherein Clyde D. Durst and his wife, Holly C. Durst, were the sellers. The Durst contract was entered into in October of 1975 and the combination of payments by the Tushes and the effects of inflation resulted in the Tushes having a substantial equity in the real estate.
In December, 1977, when the Tushes needed to refinance some of their existing indebtedness, they executed the December 5, 1977, note and security agreement. That agreement provided, in part:
*450 The agreement also provided:
The January, 1974, note had been secured by a security interest in farm machinery and livestock; the December 29, 1977, note by farm machinery, two trucks and livestock; the June, 1978, note was unsecured; and the December, 1978, note again designated the real estate contract as security and also included a dragnet clause covering all existing and future indebtedness.
On July 9, 1979, the Tushes found themselves hopelessly in debt and filed a voluntary petition in bankruptcy in the United States District Court at Kansas City. Copies of a part of the bankruptcy proceedings have been included in the record on appeal as attachments to the trial court pleadings, and the original petition reflects that the Tushes had incurred in excess of $125,000.00 in debts. The schedules reflect total assets of a value of $114,916.77 of which $108,876.77 is claimed as exempt. The schedules to the petition also reflect that the Garnett State Savings Bank is listed as a secured creditor with the real estate contract covering the one-quarter section in Anderson County shown, along with certain tangible personal property, as security for the indebtedness due the Bank. Schedule B-4 to the bankruptcy petition lists the real property as homestead property and claimed as exempt under K.S.A. 1979 Supp. 60-2301. The value of the property is shown as $96,000.00. On January 4, 1980, the real property was set aside to the Tushes as exempt property by the trustee in bankruptcy and on January 10, 1980, an order was entered discharging the bankrupts. On August 14, 1980, the trustee, for some reason not reflected in the record, requested an order authorizing him to abandon the real estate and such an order was entered the next day. Shortly thereafter the bankruptcy proceedings were closed and on September 23, 1980, the Bank filed this action to recover on the promissory notes and to foreclose on its security.
The record does not reflect any pretrial order and the transcript of the trial in district court discloses that the only evidence submitted was the testimony of two officials from the plaintiff Bank, the notes and security agreements and a copy of the Durst *451 real estate contract. The defendants presented no testimony and relied upon their bankruptcy discharge as a defense. The Bank's action was premised on two theories. First, it contends it has a security interest under the Uniform Commercial Code (UCC) in the real estate contract which it claims is personal property and that it is perfected by its possession of the contract as escrow agent for the Dursts and the Tushes. In the alternative, the Bank claims to have either a specific or equitable lien upon the quarter section of real estate and seeks foreclosure against the property. The trial court found that as of the date of trial, April 10, 1981, the amount accrued under the notes in question amounted to $28,258.37 unpaid principal, plus interest of $8,675.11. Other findings of fact were consistent with the foregoing recitation of the facts herein.
The pertinent portions of the trial court's conclusions of law are:
"....
The court then entered judgment in favor of the defendants to *452 the effect that the Bank had no interest in the real estate contract or the land and quieted the Tushes' title to the property against the Bank. The Bank has appealed.
In arriving at its judgment, the court concluded that the Bank had no valid security interest under the UCC and no valid mortgage, equitable mortgage, lien or equitable lien which would be enforceable against the real property after the defendants' discharge in bankruptcy. We agree with the first conclusion of the trial court and disagree with the second. We think it is clear that generally the buyer's equity or interest acquired under a contract for the sale of real estate is an interest in the real property itself. This is particularly true when the contract is long term in nature, deposited in escrow and the buyers are placed in possession of the property with all of the incidents of ownership. See Roberts v. Osburn, 3 Kan. App.2d 90, 589 P.2d 985, rev. denied 225 Kan. 845 (1979), and authorities cited therein. We find the argument of the Bank that it has a perfected security interest in the real estate contract as intangible personal property under K.S.A. 1981 Supp. 84-9-102 to be without merit. K.S.A. 1981 Supp. 84-9-104(j) makes it clear that the UCC does not apply to interests in or liens upon real estate.
Appellant's second argument is that if it does not have a security interest under the UCC, it has a security interest in the real property which is subject to being foreclosed. Defendants argue that the subject of a lien upon the real estate was never raised in the trial court and shouldn't be considered upon appeal. As previously indicated the only testimony before the trial court was that of William H. Craig, senior vice-president and a director of the Bank, and Loran Wilson, a loan officer at the Bank. Mr. Wilson only testified as to the balance due under the notes and not as to the security interest claimed by the Bank. While Mr. Craig's testimony is somewhat confusing, it appears obvious that the Bank was looking to the equity in the real property when the additional credit was extended in December, 1977. Did the Bank obtain an interest in the real property which survived bankruptcy and is subject to foreclosure? We think so.
The trial court was of the opinion that the security agreements would have been, absent the discharge in bankruptcy, sufficient to give rise to an equitable mortgage, and would have secured all five notes here in question. The court, however, based its conclusion *453 that such liens would not survive the bankruptcy on the erroneous conclusion that an equitable lien to be valid must be supported by a pre-existing debt and that when the Tushes received their discharge in bankruptcy, the debts due the Bank were discharged and there then being no underlying debt an equitable mortgage or lien could not be established. This theory seems to have been based upon the belief that an equitable mortgage or lien does not arise until an action is brought to enforce the same. The trial court was in error in both of these conclusions. Defendants also assert that the security agreements were not in the proper form to constitute a valid mortgage or lien upon the property.
It has long been held that as between the parties, there are no special formalities required to create a mortgage upon real property. In Assembly of God v. Sangster, 178 Kan. 678, 680, 290 P.2d 1057 (1955), the court stated:
In Beck v. Brooks, 224 Kan. 300, 580 P.2d 882 (1978), the court held:
Fuqua v. Hanson, 222 Kan. 653, 567 P.2d 862 (1977), stated the rule as follows:
It is also well established that an equitable lien or mortgage *454 takes effect at the time of the original transaction between the parties and not at the time of attempted enforcement. In Fitzgerald v. Fitzgerald, 97 Kan. 408, 155 Pac. 791 (1916), it was said:
The agreement to subject the property in this case to the interests of the Bank occurred long before the filing of the petition in bankruptcy or the petition in this action. A mortgage, if any, occurred at the time of the execution of the security agreements.
In Roberts v. Osburn, 3 Kan. App.2d 90, the Court of Appeals held:
For an excellent discussion of the doctrine of equitable mortgages, in a case quite similar to the one now before the court, see Hill v. Hill, 185 Kan. 389, 345 P.2d 1015 (1959).
When the Tushes gave a security interest in their property to secure a debt to the bank, they were giving a security interest in their equitable title to the real estate. As such, the Bank obtained an interest in real estate, not personalty. Even though the security agreement did not meet the statutory requirements for real estate mortgages in that it was not properly acknowledged (K.S.A. 58-2303) or recorded (K.S.A. 58-2221), the instrument created an equitable mortgage in the real estate which was valid between the parties (K.S.A. 58-2223) to secure the debt which existed at the time of the agreement.
The trial court was of the opinion that the security interest could not survive the Tush bankruptcy proceedings because the personal obligation of the Tushes on the notes was no longer *455 collectible. The trial court's conclusion in this respect was clearly erroneous.
In an early Kansas case, this court held that although a personal judgment could not be obtained against a debtor who had taken bankruptcy, a prior attachment of real property did survive a bankruptcy discharge under the law then in existence. Gillett & Co. v. McCarthy, 23 Kan. 668 (1880).
In the early case of Long v. Bullard, 117 U.S. 617, 29 L. Ed. 1004, 6 S. Ct. 917 (1886), the United States Supreme Court said that a bankruptcy discharge does not release the lien of a mortgage on the debtor's homestead when the mortgage was created before bankruptcy. The court also said that the existence and vitality of the lien depended on state law.
In the case of Butler Bros. v. Twineham, 134 Kan. 547, 550, 7 P.2d 531 (1932), the court pointed out that a discharge in bankruptcy does not extinguish a debt. There it was held that a surety was still responsible for a debt even though the bankrupt principal was personally discharged. We noted that the discharge only affected the remedy for collecting a debt personally from the debtor.
In Commodore v. Armour & Co., 201 Kan. 412, 441 P.2d 815 (1968), the court again recognized that a valid existing lien would be unaffected by bankruptcy. In a quote from a federal case the court adopted the statement that, "[t]he law does not continue an obligation [post-bankruptcy] in order that there may be a lien, but only does so because there is one." p. 418. (Emphasis added.)
The Tush bankruptcy was filed before the effective date of the Bankruptcy Reform Act of 1978, 11 U.S.C. § 101 et seq. (Supp. V, 1981), and therefore is not affected by the new act. United States v. Security Industrial Bank (Slip Opinion 81-184 decided November 30, 1982). 9 Am.Jur.2d, Bankruptcy § 648 (1963), in *456 discussing title to exempt property under the former bankruptcy act, states:
At § 662 it is stated:
In Johnson v. Bondurant, 187 Kan. 637, 359 P.2d 861 (1961), this court held:
Thus it is clear that in Kansas, as in most if not all other states, while a discharge in bankruptcy will prevent the bankrupt from being personally liable on a dischargeable debt, the debt itself is not extinguished and a creditor holding a security interest in exempt property may look to that property for satisfaction of the debt. In the instant case, the Bank made it clear during trial that it was not seeking personal judgments against the Tushes but was looking only to its security for payment. In other words, the action was one in rem against the property and not in personam against the Tushes.
The trial court was in error when it concluded that the Bank did not have a security interest in the real property which was subject to foreclosure. Under the Durst real estate contract the only security or collateral that the Tushes had to pledge to the Bank was their equity in the real estate.
One other item remains. Do the security instruments which gave the Bank a security interest in the equity of the Tushes in the real property cover all of the indebtedness owed the Bank? We think the trial court was correct in its conclusion that if there was an actual or equitable mortgage then the same would cover *457 all the indebtedness. The effect of a clause securing future advances, commonly called a dragnet clause, was discussed at length in Emporia State Bank & Trust Co. v. Mounkes, 214 Kan. 178, 519 P.2d 618 (1974). In Mounkes it was held:
See also First Nat'l Bank & Trust Co. v. Lygrisse, 231 Kan. 595, 647 P.2d 1268 (1982). An examination of the notes in this case clearly shows that all of the indebtedness was related to the Tush farming operation and therefore is of the same class or character and is covered by the security interest in the land.
The record furnished in this case indicates that the Tushes filed cross-claims against each other which were declared moot by the trial court due to the decision reached by the trial court. As the decision against the Bank must be reversed, on remand the court shall take such further action as may be necessary to resolve the claims between Mr. and Mrs. Tush.
The judgment of the trial court is reversed and the case is remanded with directions to enter judgment in rem in favor of the Bank for the total indebtedness and to proceed with foreclosure of the interest of the Tushes in the real property and for such other proceedings as may be necessary to comply with the views set forth herein.