Case Name: FLORENCE E. KITTEL, Appellant, v. MAURICE C. STRAUS et al., Respondents
Court: North Dakota Supreme Court
Jurisdiction: North Dakota
Decision Date: 1920-12-27
Citations: 47 N.D. 88
Docket Number: 
Parties: FLORENCE E. KITTEL, Appellant, v. MAURICE C. STRAUS et al., Respondents.
Judges: Christianson, Oh. J., and Birdzbll and Grace, JJ., concur.
Reporter: North Dakota Reports
Volume: 47
Pages: 88–100

Head Matter:
FLORENCE E. KITTEL, Appellant, v. MAURICE C. STRAUS et al., Respondents.
(181 N. W. 628.)
Homestead — wife entitled to cancelation of mortgage where purpose for which it was given fails.
In an action to cancel a mortgage as a cloud on plaintiff’s title to homestead property, where it appeared that -the plaintiff joined with her husband in the mortgage, which she understood to have been given as security for the performance, by her husband and another, of certain contract obligations, and where the obligees in that contract, discovering fraud on the part of plaintiff’s husband sufficient to justify rescission thereof, promptly rescinded and repudiated it, but x'etained the mortgage under a prior agreement with the husband that he would give such a mortgage as security for a pre-existing debt, it is held:
1. Where a wife joins in a mortgage upon a homestead, with the understanding that it is to be used for a specific pux'pose, and where the pux-pose fails and the rights of innocent third parties have not attached or been prejudiced, the wife has an equitable right to have the mortgage canceled as a lien upon the homestead.
Opinion filed December 27, 1920.
Rehearing denied February 7, 1921.
Appeal from tbe District Court of Cass County, A. T. Cole, J.
Reversed, and remanded.
Fngerud, Divet, Holt, and Frame, for appellant.
Lawrence & Murphy, for respondents.
Statement of facts by Bikdzei/l, J. Two actions were by stipulation consolidated and tried as one. One is an action by Florence Kit-tel, mortgagor, against Straus and others, to cancel a mortgage executed by her on December 2, 1915, running to the First National Bank of Casselton, mortgagee, and to remove the same as a cloud upon her title to the property therein described. The other is an action by the First National Bank of Casselton against Richard C. Kittel and Florence Kittel, his wife, to foreclose the same mortgage. Separate findings, conclusions, and judgments were entered in the two cases, and separate appeals were taken to this court. The parties have stipulated that the appeal in the foreclosure action shall abide the result of the appeal in the action to remove cloud. The important facts are substantially as follows:
For sometime prior to the execution of the mortgage in question Richard C. Kittel had been president of the First National Bank of Casselton and AY. F. Kittel, his brother, had been cashier. It appears that during the summer of 1915 it became known to the National Bank Examiner and to the directors of the bank that the bank was carrying among its assets considerable bad paper. This matter had been discussed somewhat, and had become a matter of negotiation between Richard Kittel and the directors, and between the directors and the Comptroller of the Currency. Kittel, from time to time, assured the directors that he would make good all the bad paper, and the directors in turn made representations to the Comptroller of the Currency that they would see that the bank was rendered in unobjectionable condition by the end of the year. By the latter part of November, 1915, the directors had concerned themselves seriously as to the condition of the bank. Conversations were held between them and with Kittel at various times, looking toward the making of a definite arrangement whereby they would relieve the bank of the objectionable paper and „vKittel indemnify them by his own obligation supported by collateral •ip the shape, principally, of stocks and bonds. Those negotiations took on definite form at meetings held November 27th and 28th, and December 2d and 3d.
Among the bad paper that had been under discussion' prior to November 27th was an unsecured promissory note of Richard C. Kit-tel for $5,000, dated October 1, 1913, and payable on demand. The directors,' at Kittel’s request, had made no reference to this note in their prior resolutions concerning the bad paper, but it seems nevertheless to have been condemned by them. During some of their earlier meetings, also, Kittel had turned over to Straus some forty shares of his stock in the First National Bank as collateral to the obligations the directors were assuming with reference to some of the bad loans for which Kittel recognized that he should be held responsible. Some of the directors testify, and we shall assume it to bo a fact, that during these earlier negotiations it was understood that Kittel would secure his $5,000 note by giving a mortgage upon his residence prop erty for $6,000; that tbe difference between his note, with tbe accrued interest, and tbe new obligation of $6,000, should be credited to Ms-account in tbe bank, upon which be would be permitted to draw cash in payment of traveling expenses in bis future operations in tbe real estate business. E. C. Kittel resigned as director and president of tbe bank on November 28th, and Straus succeeded him as president. W. E. Kittel resigned as cashier on November 29th, and bis resignation was immediately accepted by Straus.
It seems that no definite arrangement for tbe future conduct of tbe business of tbe bank resulted from tbe meeting of November 27th and 28th, other than tbe change in management, but on tbe afternoon of December 2d a meeting was held, attended by the Kittels and a number of the directors, and by one Tenner, who was acting as attorney for tbe directors. In tbe interim there bad been an examination of tbe bank by two persons from Minneapolis, and from this examination it appeared that Kittel’s shortage was in tbe neighborhood of $75,000. This meeting continued until about 3 o’clock in tbe morning of December 3d. Late at night on December 2d, W. E. Kittel went from this meeting to tbe residence of Kichard C. Kittel for the purpose of securing tbe signature of Florence E. Kittel to tbe mortgage in question. The mortgage was executed, and upon bis return it was placed among tbe papers that were tbe subject-matter of tbe negotiations. When tbe meeting finally adjourned, a contract bad been entered into between Straus, Johnson, Gray, Dittmer, Ford, and Kunck, who were members of tbe board of directors, as parties of tbe first part, and Kichard and William Kittel as parties of tbe second part.
This agreement provided, in substance, that the parties of tbe first part would take over the bank; also some objectionable bonds previously held in its assets; and reimburse tbe bank for all paper which tbe National Bank Examiner ordered taken out, together with all existing liabilities, discrepancies, and differences in reconcilements; and that they would continue to operate tbe bank. Tbe parties of tbe second part agreed to repurchase tbe objectionable bonds by January 1, 1916, with interest, and by January 15th to purchase certain objectionable notes to which reference bad previously been made on the minutes, and on or before December 1, 1916, to pay all losses, liabilities, and discrepancies which tbe first parties might be called upon to pay under the agreement. As security for the performance of their obligations, the Kittels agreed to turn over 283 shares of stock in the bank, 815 shares of stock in the Northern Trading Company, 18 shares in the Casselton Realty Company, 3 shares in the Frank Lynch Company, 8 shares in the Farmers State Bank of Towner, $60,000 of the bonds of the Northern Trading Company, “and a mortgage executed, by the said B. G. Kittel and his wife, upon their residence property in Gasselton and the vacant lots across from the same for $6,000.” A few days later it was discovered that Kittel’s shortage was a great deal larger than the parties had anticipated, amounting eventually to $240,000. A resolution of insolvency was passed on December 6th, and the bank examiner, O. H. Anhier, was placed in charge. At Anhier’s request Kittel subsequently executed, as of December 2, 1915, a $6,000 note payable December 2, 1916. This was treated as a renewal note of Kittel’s $5,000 note. It was attached to that note and was later entered in the books of the bank as an asset. The mortgage was recorded on December 27th. On January 10, 1916, the directors who had signed the agreement of December 2d served upon the Kittels a notice of cancelation and rescission of the agreement, in which it was stated that the parties rescinding “offer and tender to you all matters and things received or tendered to them by you under this agreement.” Kittel never drew the cash representing the difference between the mortgage and his old note, but nearly all of the balance was used with his consent to take up an overdraft of the Northern Trading Company. In other ways, as in directing changes to be made in tho loss payable clauses of the insurance policies upon the property, for instance, Kittel recognized the rights of the bank under the mortgage.

Opinion:
Birdzell, J.
(after stating the facts as above) : The sole question for our consideration upon this appeal is the validity of the mortgage referred to in the above statement as a lien upon the homestead of Richard and Florence Kittel. There is no question but what the mortgage given is the one referred to in the contract of December 3d, and there is nothing to show that Florence Kittel knew of any other consideration for the mortgage than such as was stated in that contract. Tho only testimony in the record concerning the circumstances of the execution of the mortgage by her is that of W. F. Kittel, who took it to her for execution and took her acknowledgment. He testified by deposition as follows:
"I took the mortgage to her and told her that a new contract was being entered into with the directors of the bank, by which they agreed to continue to operate the business of the bank, in which they agreed to remove any assets of the bank objectionable tn the department. . . . I explained to her the terms of the contract and the fact that it was drawn to take care of any liability of my brother and myself to the bank, and that the mortgage was required by the directors to guarantee the fulfilment of the contract by my brother and myself."
Even if this testimony be considered of doubtful credence in view of the witness's fraud and deception as an officer of the bank, for which he was later convicted in the Federal court for violation of. § 5209, U. S. Comp. Stat., it can scarcely be disregarded entirely in view of the fact that it is so fully corroborated by the reference to the mortgage and the purpose for which the security was given as contained in the contract of December 3d. In this state of the record we cannot find that Florence Kittel executed this mortgage for any purpose other than that stated in the testimony of William F. Kittel and in the contract. The mortgage, in its effect upon the homestead, will therefore have to stand or fall in the light of its execution for this purpose as affected by the subsequent transactions regarding the contract.
It is true that Kittel further testified that Mrs. Kittel would only consent to a delivery of the mortgage upon condition that the directors would not prosecute her husband, and that he communicated this condition to the directors. If the performance of such a condition be regarded as the consideration for the mortgage, it is obvious that it would be illegal as compounding a felony, and the entire mortgage would be void. If, on the other hand, it should be regarded merely as a condition affecting delivery, the condition is not operative after delivery to the grantee (Comp. Laws 1913, § 5491) ; and the question of the consideration for the mortgage is still open to inquiry. Of course it is not the law — and neither party to this proceeding contends that it is — 'that the consideration for a mortgage cannot be inquired into after delivery to the grantee or mortgagee. The majority of the court does not hold the consideration to be illegal, nor does it give effect to any condition upon which the mortgage Avas delivered.
The bank held this mortgage but a few days before it was ascertained that it would be impossible to carry out the contract. In the meantime neither the bank nor the directors had assumed any new obligation in reliance upon the mortgage, nor had either in any way altered their position. At most, according to the bank's contentions, it had taken the mortgage as security for a debt long past due, and it was not until after the bank had closed that the excess was applied to wipe out the overdraft of the third party, with Kittel's consent. The contract under which Florence Kittel understood that the mortgage was being given was soon rescinded, so far as the directors of the bank were able to rescind it, except for their failure to return the mortgage in question, and, possibly, some of the shares of stock which had been originally pledged with Straus. They refused to recognize it further as having any binding effect. Could they thus rescind the contract, and, as against Florence Kittel, leave the mortgage in possession of the bank as security for Kittel's pre-existing debt?
We have no good reason to doubt that, prior to the execution of the contract of December 8d, there was an understanding between Richard Kittel and some of the directors of the bank that he would mortgage his residence property to secure his past-due note. This is the testimony of Straus and some of the other directors. But there is no evidence that Florence Kittel was ever made aware of this promise, and neither is there any evidence from which we would be justified in saying that she executed the mortgage, intrusting it to her husband to uso as general security in any way ho should see fit. On the contrary, the evidence discloses that 'she understood the nature of the arrangement that was being made on December 2d and 8d. But she was not a party to that contract, and was in no way responsible for the fraud of her husband which occasioned its rescission and cancelation. She had the undoubted right to determine the conditions and terms upon which she would convey the homestead. The statute requiring a conveyance of a homestead to be executed and acknowledged by both husband and wife does not spend its force in exacting a mere formal act. Tt implies that either shall have power to give or withhold consent entirely, or to attach any condition that might be effective if the separate property of a grantor alone wore involved. We are of the opinion that the record in the instant, case clearly shows that the mortgage was executed, by-Florence E. Kittel to be used as security for the performance of the specific contract of December 3d, and that when this contract was abandoned she had the same right to secure the release of the mortgage that she would have had if she had pledged her own property for a similar purpose. See Gammon v. Wright, 31 Ill. App. 353, 358; Johnson v. Callaway, — Tex. Civ. App. —, 87 S. W. 178, s. c. (Dashiell v. Johnson, 99 Tex. 546, 91 S. W. 1085); 13 R. C. L. 630.
While it might at first blush seem but equitable to allow the bank to foreclose the mortgage upon th© homestead, as it was voluntarily executed and secures but a small part of the indebtedness of the officer whose conduct was responsible for so large a loss, it is evident to a majority of the court that it- cannot bo permitted in the instant case without trenching upon the policy of the law with respect to the homestead estate. To permit a mortgage to be enforced as against the homestead estate where it has been obtained for one purpose and is being-applied to another, and where the rights of no innocent third party Lave attached but remain in statu, quo, would be to establish a precedent that would deprive the homestead estate of the protection which the Constitution and the statutes have sought to accord to it.
It follows from what has been said that the mortgage is of no effect as a lien upon the homestead of Richard and Florence Kittel. In so far, however, as it creates a lien upon any property of Richard Kittel exclusive of the homestead estate, it is valid,, as he had agreed to secure the specific obligation and recognized the mortgage as such security subsequent to the contract of December 3d. This lien was not defeated by the subsequent conveyance of the residence property from Richard Kittel to his wife. The judgment appealed from is reversed and the cause remanded, with directions to enter judgment in accordance with the foregoing opinion. The appellant will recover costs.
Christianson, Oh. J., and Birdzbll and Grace, JJ., concur.