Title: Poulos Inv., Inc. v. Mountainwest Sav. and Loan Ass'n

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Poulos Inv., Inc. v. Mountainwest Sav. and Loan Ass'n1984 WY 47680 P.2d 1073Case Number: 83-215Decided: 05/14/1984POULOS INVESTMENT, INC., APPELLANT (PLAINTIFF),

v.

MOUNTAINWEST SAVINGS AND LOAN ASSOCIATION, APPELLEE (DEFENDANT).

Supreme Court of Wyoming
POULOS INVESTMENT, INC., 
APPELLANT (PLAINTIFF),

v.

MOUNTAINWEST SAVINGS AND 
LOAN ASSOCIATION, APPELLEE (DEFENDANT).

Appeal from the District 
Court, LaramieCounty, Joseph F. Maier, 
J.

Bernard Q. 
Phelan, Cheyenne, for appellant.

Douglas G. 
Madison and John E. Masters of Dray, Madison & Thomson, P.C., Cheyenne, for appellee.

Before ROONEY, C.J., and THOMAS, ROSE, BROWN and 
CARDINE, JJ.

BROWN, 
Justice.

[¶1.]     The county court 
determined that a mortgage securing a loan represented by a promissory note was 
security for the principal amount of the note and also the interest that accrued 
on the principal. The district court sitting as an intermediate court of appeal 
affirmed the county court.

[¶2.]     Appellant identifies 
the issues as:

"1. Were the findings of 
fact by the lower courts supported by the evidence, or were they contrary to the 
clear weight of the evidence and clearly erroneous?

"a) Did the procedure of 
the defendant-appellee of charging interest `payable monthly' to the principal 
amount of the loan thereby `. . . reducing the funds available for future draws 
against the construction loan . . .' make such interest payments part of the 
loan proceeds?

"b) Did cash advances by 
the defendant-appellee exceed $72,000.00, the original amount of the 
loan?

"2. Does a subordinate 
mortgage lien have priority over a superior mortgage lien when, after notice of 
the subordinate lien, optional advances made by the superior mortgage lien 
holder on a construction loan exceed the principal amount of the superior 
lien?"

[¶3.]     We will 
affirm.

[¶4.]     On December 12, 1979, 
Al Rossi Building, Inc. (hereinafter Rossi) gave a promissory note to appellee 
MountainWest Savings and Loan Association (hereinafter MountainWest) in the 
principal amount of $72,000. The note provided for monthly interest payments.1 The promissory note was secured by 
a mortgage on real property. The loan was to finance construction, and according 
to the usual construction loan scheme, MountainWest was to distribute funds to 
Rossi as construction progressed.

[¶5.]     As construction 
proceeded, MountainWest released funds to pay construction costs. On January 17, 
1980, a mortgage from Rossi to Poulos Investment Company (hereinafter Poulos) 
was recorded. It was understood by all parties that this latter mortgage was 
subordinate to the MountainWest mortgage. Both parties to this action had actual 
and constructive notice of both the MountainWest mortgage and the Poulos 
mortgage.

[¶6.]     MountainWest in its 
bookkeeping showed a running account of the amount Rossi owed MountainWest. In 
its ledger sheet MountainWest showed check numbers representing amounts paid for 
excavation, plumbing and many other similar items. These amounts were extended 
and added to previous balances to show the total amount Rossi owed MountainWest. 
No interest was paid. Interest that accrued each month was computed and added to 
the running account to show Rossi's indebtedness at any given time. On or about 
June 12, 1982, the amounts MountainWest paid for construction plus accrued 
interest exceeded $72,000, the principal amount of the December 12, 1979, 
promissory note and mortgage.

[¶7.]     Rossi defaulted on both 
the MountainWest loan and the Poulos loan. MountainWest foreclosed its mortgage. 
At the foreclosure sale the Rossi property sold for $89,860.80. This was the 
amount MountainWest's ledger sheet showed was due on its loan to Rossi. The 
ledger sheet showed $70,909.55 construction costs and $18,951.25 interest 
charges. None of the proceeds from the foreclosure sale were paid to 
Poulos.

[¶8.]     Poulos filed this 
action against MountainWest claiming that its lien was superior to the 
MountainWest lien with respect to amounts paid by MountainWest after $72,000.00 
had been paid out or charged as interest.

[¶9.]     The case was tried 
before the Honorable Franklin Mockler, CountyJudge 
for LaramieCounty, who rendered a 
judgment in favor of MountainWest. This judgment was appealed to the DistrictCourtofLaramieCounty where the Honorable Joseph F. 
Maier, sitting as an intermediate appellate court, affirmed the county 
court.

[¶10.]  Appellant Poulos contends that all 
amounts paid and accruing interest after the principal amount of the $72,000 
loan had been reached were optional advances made in excess of the construction 
loan and were therefore subordinate to its intervening mortgage. Poulos contends 
that on June 12, 1981, the principal of the construction loan had been exhausted 
and further payments by MountainWest, plus accruing interest, were optional 
advances and these amounts were subordinate to its lien.

[¶11.]  The question we have to solve is whether 
the priority of a first mortgage includes interest or does the priority apply to 
just the principal if an intervening second mortgage is 
involved.

[¶12.]  Poulos cites authority for a rule that 
"optional advances made after notice of subsequent liens do not have priority 
over subsequent liens." American Law of Property, Section 16.73 (A.J. Casner, 
Ed. 1952); Elmendorf-Anthony Co. v. 
Dunn, 10 Wn.2d 29, 116 P.2d 253 (1941); Trustees of C.I. Mortgage Group v. Stagg of 
Huntington, Inc., (D.C. Goodman & Sons, Inc.), 247 Pa. Super. 336, 372 A.2d 854 (1977); and other cases.

[¶13.]  We do not disagree with this authority; 
however, that rule of law applies to optional advances made and does not apply 
to interest that accrues on the principal amount of a 
loan.

[¶14.]  Poulos contends that MountainWest's 
accounting method supports its theory that optional advances were made. Poulos 
reasons that when MountainWest added the unpaid monthly interest to Rossi's 
construction loan account, it in fact became principal; and therefore when the 
accumulated debt exceeded $72,000, MountainWest had exhausted its authorized 
principal advances. We disagree. The fact that MountainWest's accounting showed 
that unpaid interest was added to Rossi's debt account does not make the 
interest part of the principal.

[¶15.]  Some of the language used by 
MountainWest's loan officer during his examination at trial is confusing, 
contradictory and ambiguous, and if considered in isolation, tends to support 
Poulos' theory. Some of his testimony on the surface seems to say that optional 
advances were made when the accrued interest was extended on the ledger sheet 
and reflect the total debt due. We cannot decide this case solely on accounting 
methods used by MountainWest or how its loan officer characterized the accrued 
interest. We base our determination here on what the Rossi-MountainWest mortgage 
provided.

[¶16.]  The mortgage from Rossi to MountainWest 
provides in part:

"Whereas, Borrower is 
indebted to Lender in the principal sum of Seventy-Two Thousand and no/100 
Dollars, which indebtedness is evidenced by Borrower's note dated December 12, 
1979 (herein `Note'), providing for monthly installments of principal and 
interest, with the balance of the indebtedness, if not sooner paid, due and 
payable on December 12, 1980.

"To Secure to Lender (a) 
the repayment of the indebtedness 
evidenced by the Note, with interest thereon the payment of all other sums, 
with interest thereon, advanced in 
accordance herewith to protect the security of this Mortgage, and the 
performance of the covenants and agreements of Borrower herein contained, and 
(b) the repayment of any future advances, with interest thereon, made to Borrower 
by Lender pursuant to paragraph 21 hereof (herein `Future Advances'), Borrower 
does hereby mortgage, grant and convey to Lender, with power of sale, the 
following described property located in the County of Laramie, State of Wyoming. 
* * *

* * * * * 
*

"21. Future Advances. 
Upon request of Borrower, Lender, at Lender's option prior to release of this 
Mortgage, may make Future Advances to Borrower. Such Future advances, with 
interest thereon, shall be secured by this Mortgage when evidenced by promissory 
notes stating that said notes are secured hereby." (Emphasis 
added.)

[¶17.]  It is clear that the mortgage itself 
specifically provides that Rossi's real property was pledged to secure both 
principal and interest. The way MountainWest's loan officer characterized the 
ledger entries is not controlling. Authority cited by Poulos pertains to 
situations where optional advances were made by a lender similar to the advances 
provided for in paragraph 21 above of the Rossi-MountainWest mortgage. It may 
very well be that if MountainWest paid sums according to the provisions in 
paragraph 21 of the mortgage (future advances), these sums, together with 
interest thereon, would be secondary in priority to Poulos' second mortgage. 
However, that is not the case here; MountainWest never made optional advances to 
Rossi.

[¶18.]  We hold that under the specific terms of 
the Rossi-MountainWest mortgage the security covered both principal and interest 
and that the construction loan was never exhausted.

[¶19.]  Poulos contends that the determination of 
this case by the county court and the district court was not supported by the 
evidence or was contrary to the clear weight of the evidence. This is not really 
a sufficiency of the evidence case; rather, it is a matter of determining the 
legal consequences of the Rossi-MountainWest mortgage. The evidence we consider 
to decide this case is not disputed. The only dispute involves the priorities 
that flow from the mortgage.

[¶20.]  It is uncontroverted that the 
Rossi-MountainWest mortgage was a first mortgage; that $70,909.55 was paid by 
MountainWest for normal construction costs; that $18,951.25 interest accrued on 
the amounts advanced by MountainWest for construction; that the total amount 
Rossi owed MountainWest was $89,860.80. The only problem the parties have is a 
determination of priorities between the two mortgages. We have discussed that 
matter in the first portion of this opinion.

[¶21.]  Affirmed.

FOOTNOTES

1 Several extension 
agreements were entered into by Rossi and MountainWest, by which the due date 
was extended to a later date.