NO. 91-044 IN THE SUPREME COURT OF THE STATE OF MONTANA 1991

DENNIS R. WASHINGTON, Plaintiff and Respondent,

JAMES D. SLACK, JR.; LES HARDY, JR., d/b/a HARDY LEASING and BERT E. ARNLUND; AETNA LIFE INSURANCE

### COMPANY, a corp.; NORWEST BANK OF BILLINGS, N.A. f/k/a THE FIRST NORTHWESTERN BANK OF BILLINGS, a National Banking Assoc.; CARBON COUNTY OIL COMPANY d/b/a VONDRA'S EXXON; DILL, DILL & McALLISTER. a oartnershiw of ittornevs: STANDARD 0%MONTANA ~ESOURCE 

# . . CORP., a Montana corp. Defendants and Appellants.

APPEAL FROM: District court of theThirteenth Judicial District, In and for the County of Carbon, The Honorable William J. Speare,Judgepresiding.

COUNSEL OF RECORD: For Appellants: Carol Hardy Conrad; Pedersen & Conrad, Billings, Montana For Respondent: Evonne Smith Wells, Attorney at Law, Missoula, Montana

Filed: Submitted on Briefs: April 18, 1991 Decided: June 13, 1991Justice Karla M. Gray delivered the Opinion of the Court.

The appellants, Les Hardy, Jr. and Bert E. Arnlund, appeal from the Judgment and Decree of Foreclosure of the District Court of the Thirteenth Judicial District, Carbon County, granting summary judgment to the respondent, Dennis R. Washington, as to lien priority. We affirm. The dispositive issue on appeal iswhether the District Court erred in concluding that the error contained in the respondent's mortgage was not material and therefore, as a matter of law, that the appellants, as subsequent judgment lienholders, had constructive notice of the respondent's prior recordedmortgage. On May 9, 1983, the defendant James D. Slack, Jr., entered into an agreement with Atlantic Richfield Company (ARCO) whereby Slack agreed to purchase from ARCO four tracts of real property. 

### Two of the tracts are contiguousproperty inan area commonly known

as Washoe and located in Township 8 South,Range 20 East, P.M.M., Carbon County, Montana. The other two tracts are in the Joliet area and are located in Township 4 South, Range 22 East, P.M.M., Carbon County,Montana. When ARCO deeded the four tracts of land to Slack, it reserved unto itself the oil and gas interest in those tracts. Thedeed fromARCO asgrantor to Slack asgranteewasmade effectiveMay 9, 1983, and was recorded in the office of the Clerk andRecorder of Carbon County, Montana, at 9:45 a.m., May 11,1983. On the effective date of thedeed,May 9,1983,Slack executed

apromissory note toARCO, securedby amortgage on the four tracts of land. Themortgage, which named Slack as themortgagor andARCO 2as the mortgagee, was recorded in Carbon County on May 11, 1983 at 9:50 a.m. The deed and the mortgage both contain the same legal description of land as to Township, Range, Sections and portions of Sections. The mortgage provided in part: That Mortgagor hereby mortgages to Mortgagee all that property described on attached Exhibit A, incorporatedhereinby this reference, located in Carbon County, Montana,as securityforthepayment toMortgagee of Three Hundred Thousand Dollars ($300,000.00) on or before May 1, 1988,with interest thereonat the rate of eleven percent (11%)' as required in that certain Note of even date herewith. Exhibit A, attached to the mortgage, provided that the mortgage covered "[all1 ARCO1sright, title, and interest in the following described tracts: 

# . . . 

# . This language was followed by the correct legal description of the four tracts of land. Exhibit A

was in error. It should have stated "[all1 Slack's right, title, and interest in the following described tracts: 

# . . .

# .II On September 27, 1984, the defendants and appellants, Les Hardy, Jr. and Bert 

### E. Arnlund, obtained a judgment against Slack in the amount of $78,312.10. An abstract of the judgment was recorded in Carbon County on October 4, 1984. The appellants had no actual notice of the existence of the Slack-ARC0mortgage and their judgment lien has never been satisfied. On October 2, 1987,ARCO assigned its interest in the SlackARCO mortgage and promissory note to theplaintiff and respondent, Dennis R. Washington. The assignment of themortgage was recorded

on July 1, 1988. Slack failed topay the full amount of principal and accrued interest on or before May 1, 1988, as required by the promissory note secured by the mortgage. On April 10, 1989, therespondent commenced a foreclosure action on Slack's interest in the tracts of land described in themortgage; he asserted that the mortgage had priority over the appellantstjudgment lien. OnApril 26, 1989,the appellants answered and cross-claimed, asserting that their judgment lien had first priority based upon the error in the attachment to the respondent's mortgage. The parties filed cross-motions for summary judgment on the issue of priority. The District Court determined that the respondent's mortgage and the appellantsejudgment lienwere valid liensagainst the real property and that the mortgage had priority over the judgment 1ien

## . The court concluded that the error in the attachment to the mortgage was not material and, as a matter of law, that the appellants had constructive notice of the mortgage. The DistrictCourt thengranted the respondent's motion for summary judgment,denied the appellants' motion, and ordered foreclosure. Other facts relevantto thisappeal will bediscussed asnecessary. Did the District Court err in concluding that the error contained in the respondent's mortgage was not material and therefore, as a matter of law, that the appellants, as subsequent judgment lienholders,had constructive notice of the respondent's prior recorded mortgage? The appellants maintain that when ARCO deeded the tracts of land to Slack and reserved for itself the oil and gas interest in those tracts, two separate estateswere created. They assert that Slack's mortgage to ARCO, stating that it covered all of ARCOts interest in the tracts, contained a material error insofar as therights of third parties are concerned because the mortgage identifiedARCO's oil and gas estateas theencumberedproperty and did not disclose an encumbrance upon Slack's interest in the surface estate. The appellants further contend that the recording of the defective mortgage did not impart constructive notice to them as Slack's subsequent judgment creditors. Citing Ponceletv. English (l99O), 243 Mont. 481, 795 P.2d 436 and Ely v. Hoida (l924), 70 Mont. 542, 226 P. 525, they argue that a mortgage describing the wrong property is not constructive notice as to other property which the parties to the mortgage intended to, but did not, describe. In Poncelet, the property owner executed to Poncelet a mortgage containing an erroneous legal description. The mortgage described "Lot 'A' of the Amended Plat of Lots 11 and 12 in Block 6,City of Polson, Lake County, Montana, according to the official plat 

# . . . ." The description left out "of Riverside Addition." After recordation of the Poncelet mortgage, the property owner executed another mortgage which was subsequently assigned to Colonial Savings and Loan Association (Colonial). This mortgage contained a correct legal description. Thereafter, Poncelet brought suit for foreclosure and reformation of his defective mortgage, naming Colonial as a defendant. Colonial moved for summary judgment on the basis that its mortgage had priority over Poncelet's earlier,but defective,mortgage. This Court affirmed summary judgment in favor of Colonial, holding that the secondmortgage had priority over the first. The form of recording of conveyance is paramount unless a party has actual notice of a prior claim. (Citations omitted.) While this rule may have an undeniably harsh effect where Poncelet is concerned, we cannot minimize the import of full compliance with proper legal descriptions for thepurpose of constructive notice from recorded instruments. Itwas incumbent upon Poncelet to make certain that the recorded mortgage contained an accurate legal description of the property. In Elv v. Hoida (1924), 70 Mont. 542, 226 P. 525, a case on all fours with the one at bar, this Court stated that in order to qive a mortqaqe wrioritv as aaainst a subsequent mortqaqee, the mortqaqe must describe the land covered bv itwith sufficient accuracy to enable one examininq the record to identifythe land. In the present case, as in &r, the mortgage described land other than the land intended to be mortgaged. The subsequent mortgagee had no duty to inquire furtherwhen the mortgage appeared on its face to describe some property but not specific property 

# . . . . (Emphasis added.) Poncelet, 243 Mont. at 484, 795 P.2d at 438. In gl.~, Ely's prior recorded mortgage described lots 17 and 18 inblock 1,Lenox addition. Thisblock did not containany lots numbered 17 and 18. The later Bateman mortgage included an accurate legal description of the property located outside the Lenox addition. In holding that the second mortgage had priority over the first, this Court stated: When Bateman took her mortgage, if she desired to protect herself against prior recorded conveyances or mortgages of the property embraced therein, it was, of course, her duty to examine the records. If she did so and discovered that the Elymortgage covered lots 17 and 18 in block 1, Lenox addition, even though she actually read this instrument she was under no obligation to pursue her inquiry further. There is nothinq uwon the face of the Elv mortqaqe to indicate that there was anv mistake or imwerfection therein. 

# . . . and one readinq it would have a riqht to assume that itwas correct,and would have no duty imposed uwon him to qo bevond the record for the purpose of ascertaining that the partiesintendedtocover land located entirelyoutside theLenox addition. 

## . 

# .. (Emphasisadded.) 

# m,70Mont, at 547-48, 226 P. at 527 Construing the Poncelet and decisions together, the property coveredby themortgage will be held tobe described with sufficient accuracy, and will impart constructive notice through the operation of the recording statutes, if one examining the mortgage may, fromthe language of themortgage and the information gained from the inquiry clearly suggested by the language of the mortgage, identify the specific land intended to be included. Because each case depends on its own facts, the determination of what constitutes "sufficient accuracy" must be made on a case-bycase basis. The appellants are correct in their assertion that when ARCO deeded the tracts of land to Slack and reserved the oil and gas interest in those tracts, two separate estates were created. See In re Hume's Estate (1954), 128Mont. 223, 272 P.2d 999. However, it is also true in this state that, although the oil and gas interest is a separate estate, its boundaries continue to be dictated by the boundaries of the severed surface estate. Jackson



### v. Burlington Northern Inc. (1983), 205 Mont. 200, 204, 667 P.2d 406, 408. Therefore, we are presented here with a factual situation where more than one property interest exists within the boundaries of the land;as such, the caseatbar isdistinguishable from both Poncelet and

# m. In this case, there is no error in the legal description contained in the mortgage executed by Slack to ARCO. The legal 7description contained in Exhibit A would lead one examining the record directly to the fourtractsof land owned by Slackand which

were the subject of the mortgage. The question then becomes whether the mortgage sufficiently denotes the specific property interest in those tracts of land which was intended to be covered by themortgage. Upon examining the mortgage in its entirety, it is obvious from the face of the mortgage that it contains a mistake in its reference to the specific property interest encumbered. Slack executed the mortgage as mortgagor and was expressly named as mortgagor on pages one and three of the instrument. Themortgage also provided: That Mortgagor hereby mortgages to Mortgagee all that property described on attached Exhibit A 

# . . . as security for the payment to Mortgagee of Three Hundred Thousand Dollars ($300,000.00). 

# . .. In Exhibit A, there is language immediately preceding the legal description that states: "All ARCO1s right, title, and interest in the following described tracts: 

# . . . . This language is inconsistent with the body of the mortgage which clearly denotes Slack as the mortgagor and ARCO as the mortgagee, since it is axiomatic that a mortgagor cannot mortgage a mortgagee's interest in property. This mistake in the mortgage is made even more obvious by the specific reference to the oil and gas interest reservedbyARCO immediately followingthe legaldescriptionof the four tracts of land in Exhibit A. This reference was a clear indication that the reserved interest was excepted from the mortgaged property. 8Under these particular facts, it is obvious from the face of themortgage that theparties to themortgage intendedthemortgage to cover Slack's interest in the surface estate. Unlike the factual circumstances in Poncelet and 

# m, one examining the mortgage containing this obvious error would at least have a duty to inquire into the mortgage and would be chargeable with constructive notice of all the information in the public records which would be gained if the inquirywaspursued to the full extent to which it led. Guerinv. Sunburst Oil & Gas Co. (1923), 68 Mont. 365, 371, 218 P. 949, 951. From the public records, the constructive notice given thereby, and the mortgage and deed instruments, it is illogical to assert that themortgage contained

a material error. We hold that theDistrictCourt did not err in concluding that the error contained in themortgage wasnot material and therefore, as a matter of law, that the appellants, as subsequent judgment lienholders, had constructive notice of the respondent's prior recordedmortgage. Where, ashere, the specific property intended to be mortgaged can be identified from the instrument itself or from inquiry clearly suggested by the language of the instrument, such error does not affect the validity of the instrument. Affirmed. i

### June 13, 1991 CERTIFICAEOFSERVICE Iherebycertifythatthefollowingorderwas sentbyUnited Statesmail,prepaid,tothe followingnamed:

CarolHardyConrad Pedersen&

### Conrad 1645 Ave.D Billings,MT 59102 EvonneSmithWells AttorneyatLaw P.O. Box9410 Missoula,MT 59807 JamesD. Slack,Jr. P.O. Box 1369 RedLodge,MT 59068 EDSMITH CLERKOFTHESUPREMECOURT STATE

### QFMONTmA