Opinion ID: 2183234
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Heading: The Foreclosure Issue.

Text: The facts pertinent to the foreclosure issue bear additional examination. On October 9, 1967, Reiners and Sherard completed a PCA application to renew their present loan and obtain additional advances for the coming year. They also executed a promissory note and a security agreement encompassing all of the chattels of the partnership. PCA, however, indicated a need for more security and approached the two men to make arrangements to accomplish this. Sherard agreed to pay PCA $45,000 cash to reduce the amount of the loan. This he did in early 1968. Reiners, for his part, executed a $45,000 collateral note due on October 1, 1970, a real estate mortgage securing payment of the note and a collateral agreement. The agreement specified that the mortgage and collateral note were given as collateral security for the $381,728.27 loan to the partnership and that the agreement would remain in force until the debt was paid in full. On October 15, 1970, after the debt was in default, Sherard paid PCA the balance of $17,936.29, noting on his check the words to pay Sherard & Reiners Loan. PCA simultaneously purported to assign to Sherard the collateral note and mortgage which Reiners had given it. The issue thus presented is whether the assignment of the mortgage from PCA to Sherard was valid. The applicable statutory law is SDCL 20-4-2 which states: Performance of an obligation, by one of several persons who are jointly liable under it, extinguishes the liability of all. Thus, if Sherard was jointly liable for the debt when he paid PCA the $17,936.29, his payment extinguished both his liability and that of Reiners; furthermore, the payment would necessarily extinguish the mortgage which Reiners had given as there would be no underlying debt to support it. 55 Am. Jur.2d, Mortgages, § 394; Thompson on Real Property, Vol. 9, § 4813, p. 663. We find that the payment did, in fact, operate to extinguish a joint liability of the two men, that the mortgage was thereby extinguished and that consequently there was no valid assignment thereof. Our finding is based on the conclusion that the joint liability of the two men existed until the final Sherard payment of $17,936.29. The trial court apparently found that Sherard and Reiners had made an agreement between themselves that each would pay $45,000 of the debt. Such an agreement is, of course, permissible. B-OK, Inc. v. Storey, 1970, 3 Wash.App. 226, 473 P.2d 426. However, contrary to the apparent assumption of the trial court, the agreement between the two men did not discharge or make irrelevant the joint liability to PCA; this could occur only with the consent of PCA. As stated in B-OK, Inc. v. Storey, supra: while partners can agree to alter their respective liabilities in terms of existing partnership creditors, and create these relationships    liability between the partners and the partnership creditors remains joint, absent agreement with or consent of creditors. 473 P.2d at 429. It is our determination that no such agreement or consent occurred. First, the documents themselves indicate that PCA did not consider the joint liability of the partnership extinguished in the amount of $45,000 when Reiners gave his collateral agreement, collateral note and mortgage. Indeed, the collateral agreement, in seven separate places, speaks of the Reiners documents as securing the debt of the undersigned and Claude Sherard, and also notes that this debt was $381,728.27the entire amount due from the partnership. Furthermore, PCA did not reduce the amount due it from the partnership at the time it accepted the Reiners documents. Thus it seems clear that there was no agreement between PCA and the partnership or either of the partners to release Sherard from his joint liability. Both Sherard and Reiners remained jointly liable for the entire partnership debt until Sherard made his final $17,936.29 payment. This payment therefore operated by the terms of SDCL 20-4-2 to extinguish the still remaining joint obligation of the two men. The purported assignment must fail because the mortgage, which was given for the express purpose of securing the partnership debt, was also extinguished for the reason that there was no remaining underlying debt. In addition, the collateral note given by Reiners did not remain to support the mortgage because it, too, was given for the express purpose of securing the partnership debt. Sherard implies, however, that he did not intend to pay the joint obligation even if it existed. He intended, he states, to take only an assignment of the Reiners note and mortgage. Even so, his claim must fail. Hazel v. Sharum, 1930, 182 Ark. 557, 32 S.W.2d 315, considered a situation analogous to our own. The facts in that case were that a representative of one of several joint obligers paid a joint obligation and simultaneously took an assignment of the note. The court rejected the payor's contention that the assignment was valid, stating that because the payor was himself primarily liable, the assignment of the note    was ineffectual in preserving    a right of action based on the note   . See 10 C.J.S. Bills and Notes § 449, at 986. Thus, in our case, it is clear that the partnership note could not itself have been preserved. Furthermore, we have found no case nor have we found support in logic to justify preservation of a collateral note and mortgage which were given to secure a note which could not itself be preserved. Indeed, such a finding would destroy, for all practical purposes, the rule of law set out in Hazel v. Sharum, supra. Finally, Sherard contends that certain language in 55 Am.Jur.2d, Mortgages, § 394, lends support to his cause. The language states that a mortgage may be kept alive to conform to the intention of the parties. A reading of the cases supporting the citation, however, indicates that a full statement of the rule apparently is that a mortgage may be kept alive to conform to the intent of the mortgagor and mortgagee at the time of the payment of the underlying debt. See Albers v. Westberg, 1939, 299 Ill.App. 41, 19 N.E.2d 436; cf., Thompson on Real Property, Vol. 9, § 4813, at 664-665. It is clear that Reiners, the mortgagor, did not at the time of payment evidence any intent to have the mortgage against him kept alive. In summary, we find that the trial court erred in entering its order of foreclosure of the Reiners mortgage after Sherard had paid the partnership debt and taken the purported assignment. This is not to say, however, that Sherard has no recourse. While he is not entitled to a suit on the partnership note or on Reiners' note or mortgage, he is entitled to contribution under either SDCL 20-1-6 (see Harris v. King, 1931, 113 Cal.App. 357, 298 P. 100; 10 C.J.S. Bills and Notes § 449, at 986) or under SDCL 48-3-2. Affirmed in part and reversed and remanded in part for proceedings not inconsistent with this opinion.