Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-01924/USCOURTS-ca10-87-01924-0/pdf.json

Nature of Suit Code: 220
Nature of Suit: Foreclosure
Cause of Action: 

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FILED 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

United States Court of Appeals 

Tenth Circuit 

MAR 1 51989 

ROBERT L. HOECKER 

Clerk THE MAIZE STATE BANK, ) 

) 

Plaintiff-Appellant, ) 

) 

v. ) 

) 

NICHOLAS A. ORTH, JR.; ERMA MARIE ORTH; ) 

VIRGINIA R. ORTH; DANIELL. ORTH; ) 

THE UNITED STATES OF AMERICA, ACTING ) 

THROUGH ITS AGENCY FARMERS HOME ) 

ADMINISTRATION; BOARD OF COUNTY ) 

COMMISSIONERS, SEDGWICK COUNTY, KANSAS, ) 

) 

Defendants-Appellees. ) 

ORDER AND JUDGMENT* 

No. 87-1924 

(D.C. No. 86-1374) 

( D. Kan.) 

Before MCKAY and BARRETT, Circuit Judges, and JENKINS, Chief 

Judge.** 

**Honorable Bruce S. Jenkins, Chief Judge, United States District 

Court for the District of Utah, sitting by designation. 

Plaintiff, Maize State Bank, appeals from an order of the 

district court holding that a mortgage which the bank sought to 

foreclose was no longer a valid lien on certain real property. 

*This order and 

be cited, or 

for purposes of 

res judicata, 

judgment has no precedential value and shall not 

used by any court within the Tenth Circuit, except 

establishing the doctrines of the law of the case, 

or collateral estoppel. 10th Cir. R. 36.3. 

Appellate Case: 87-1924 Document: 010110024619 Date Filed: 03/15/1989 Page: 1 
The district court decided this case under its equity jurisdiction 

holding that if a mistake had been made, it was to the prejudice 

of defendants. The court held that 

it was the intent and understanding of the parties that 

the payments to the Maize State bank made on January 16, 

1984 and July 30, 1984 ... were made to pay the loan 

secured by the mortgage that is the subject of the 

action and that the mortgage upon receipt of the 

payments was to be released. 

On appeal, the bank argues that defendants, Nicholas Orth Jr. 

and Erma Orth (the Orths), did not notify it that the 

January, 1984 payment was to be applied to the mortgage. 

Therefore, the bank argues as the creditor, it had the right to 

apply the funds to any outstanding obligations as it saw fit. 

The bank has correctly cited the law supporting its argument. 

However, the threshold issue is whether the bank had notice that 

the January, 1984 payment was to be applied to the mortgage. 

The "application of equitable doctrines rests in the sound 

discretion of the district court; absent a showing of abuse of 

discretion, the district court's exercise thereof will not be 

disturbed on appeal." McKinney v. Gannett Co., 817 F.2d 659, 670 

(10th Cir. 1987). Cf. Curtiss-Wright Corp. v. General Elec. Co., 

446 U.S. 1, 12 (1980). The bank does not argue that the court 

abused its discretion either in its decision to exercise its 

equity powers or in the way it applied equity principles. Because 

the district court did not clearly identify the facts upon which 

it relied in order to determine that equity required a holding for 

defendants, we will review the record to determine whether it 

supports the district court's judgment. 

2 

Appellate Case: 87-1924 Document: 010110024619 Date Filed: 03/15/1989 Page: 2 
The parties' stipulated facts show that in 1982 the Orths 

secured a note in favor of the bank with one mortgage covering two 

separate parcels of real property. 1 

In 1984, the Orths sold the parcels to their sons, Daniel L. 

Orth and Nicholas Orth, III. Defendant, Farmers Home 

Administration (FmHA), financed the purchase of these parcels, 

taking a mortgage from each son as security. 

Following the sale in January, 1984, of Parcel No. 1 to 

defendants, Daniel Orth and his wife Virginia, a check was issued 

by Kenneth Beck, attorney for the FmHA, to Erma Orth for 

$31,354.68. Mrs. Orth then deposited the check in the Orth's 

personal account and wrote a check to the bank for $32,527. The 

Orths intended that this check be applied to the portion of the 

loan secured by the mortgage on Parcel No. 1. Instead, the bank 

paid several unsecured notes and the interest due on other notes. 

In July, 1984, the Orths sold Parcel No. 2 to their son, 

Nicholas Orth, III. A joint check was issued by Mr. Beck to 

Nicholas Orth, Jr. and the bank for $63,443.35. On the back of 

that check was written: "Endorsement of this check constitutes 

payment for release of mortgage recorded on Film 539 at page 

1528." The check was endorsed by Mr. Ray Scadden, the president 

of the bank. The bank released the mortgage on Parcel No. 2 only. 

In July, 1985, the Orths filed a petition in bankruptcy under 

Chapter 7 of the Bankruptcy Code. After their discharge in 

bankruptcy was granted, the court ordered relief from the 

1 Although for an unexplained reason the mortgage was recorded on 

separate pages, the parties admit that only one mortgage was 

involved. 

3 

Appellate Case: 87-1924 Document: 010110024619 Date Filed: 03/15/1989 Page: 3 
automatic stay thus allowing the bank to commence this foreclosure 

action against the collateral remaining in the Orth's possession. 

The bank prayed that its lien be declared a first priority and 

that judgment be entered against the Orths for $146,044.51, the 

amount allegedly still owed on the mortgage on Parcel No. 1 and 

various other notes. 

At the bench trial, Nicholas Orth, Jr. testified that 

beginning in October or November, 1982, he had told Mr. Scadden 

several times that he planned to sell both parcels to his sons and 

pay off the mortgage. He also testified that on the day of the 

January closing he told Mr. Scadden: "Today is finally the day." 

While Mr. Scadden testified that he did not remember being told 

about the January closing or any discussion with Mr. Orth the day 

of the sale, he did not deny that the conversations took place. 

Mr. Scadden testified that he thought the January, 1984 

payment represented proceeds from the sale of wheat and was 

intended as partial payment on the principal and interest on 

several small notes. Mr. Orth testified that he received payments 

for his wheat crop in July of each year. 

Mr. Scadden further testified that he was not aware of any 

special instructions regarding the January payment. He 

acknowledged that at his deposition he had not remembered 

receiving the January, 1984 payment or any other facts concerning 

the release of the mortgage. Mr. Orth testified that after the 

closing, he returned to the bank, his wife made a check out for 

$32,527 as directed by Mr. Scadden, he signed two notes "that 

4 

Appellate Case: 87-1924 Document: 010110024619 Date Filed: 03/15/1989 Page: 4 
w[ere] not finished 112 and, because it was late in the day, left 

with the understanding that the bank would release the mortgage on 

the property. Mr. Scadden ''told me he would place the money where 

it should be placed; that he had instruction where to put it." 

Mr. Scadden testified that he did not intend his endorsement 

of the July check to release the entire mortgage. Counsel for the 

bank admitted that the endorsement on the July check "said we are 

going to release the whole thing." 

Mr. Beck testified that he had been directed by the FmHA to 

remove all liens against the title. He had called the bank and 

talked to a man whom he believed to be a Mr. Allen Guthrie to 

determine when the mortgage would be released as to both parcels. 

He was advised that it would be released "in toto" at the second 

closing. Mr. Beck's testimony was not refuted. Mr. Guthrie was 

not called to testify. 

We agree with the district court that Mr. Scadden, a banker 

in a farming community, should have been aware that Mr. Orth's 

deposits from the sale of wheat "normally transpire[d] in July or 

thereabouts, or after harvest." Mr. Orth's testimony that he had 

talked to Mr. Scadden regarding the sale was not refuted. The 

proximity in time between Mr. Orth's conversation with Mr. Scadden 

informing him that "today is finally the day" and the issuance of 

the check to the bank further supports a finding that the bank had 

notice that the proceeds from the January sale of Parcel No. 1 

were to be applied towards the mortgage. 

2 Mr. Orth testified that he signed the notes because he knew the 

entire mortgage had not been released by the January check. 

5 

Appellate Case: 87-1924 Document: 010110024619 Date Filed: 03/15/1989 Page: 5 
. ., 

Our review of the evidence does not leave us "with the 

definite and firm conviction that a mistake has been committed." 

Anderson v. Bessemer City, 470 U.S. 564, 573 (1985}(quoting United 

States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). 

The evidence is sufficient to hold that the bank had notice that 

the January, 1984 payment was to be applied to the mortgage. We 

cannot hold that the district court abused its discretion in 

exercising its equity jurisdiction. 

Finally, we note that Kansas law provides that proceeds from 

the sale of secured property must be applied to the note the 

property secures. See Turon State Bank v. Bozarth, 684 P.2d 419 

(Kan. 1984). We reject the bank's argument that the Kansas 

Supreme Court would distinguish Turon from the case at bar because 

real property is involved rather than personal property. See Ram 

Co. v. Estate of Kobbeman, 696 P.2d 936 (Kan. 1985). 

The judgment of the United States District Court for the 

District of Kansas is AFFIRMED. 

The mandate shall issue forthwith. 

ENTERED FOR THE COURT 

PER CURIAM 

6 

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