Opinion ID: 361017
Heading Depth: 1
Heading Rank: 3

Heading: The Bank's Policy Regarding the Proceeds of Partial Conveyances of Mortgaged Property.

Text: 22 The record shows that from a time before the loan was made to the Millers and the mortgage was given to the Bank until the present, the Bank has had in effect certain policies regarding the disposition of proceeds of partial conveyances of mortgaged property. These policies are not limited to but do expressly apply to the proceeds of condemnation of a portion of the mortgaged land. The Bank contends that under these policies, it was proper to demand one-half of the recovery that the Millers agreed to with the Railroad. The court held that this too was unconscionable and that the Bank could not rely upon its policies both for that reason and because, as the court said, the Bank had not uniformly applied those policies. With these views of the district court, we find ourselves in disagreement. 23 Under the laws of Montana, which is a lien state, a mortgage does not convey any title in the mortgaged lands to the mortgagee. It does create a lien, but the Supreme Court of Montana has held that in a condemnation action, the condemning body need not name the mortgagee as a defendant or bring the mortgagee into the case. State ex rel. State Highway Commission v. District Court of Thirteenth Judicial District, 1972, 160 Mont. 35, 499 P.2d 1228, 1235: 24 Furthermore, in Montana it is established that a mortgage does not create an estate in real property but is mere security for payment of a debt or discharge of an obligation it creates a lien upon the property. Cornish v. Woolverton, 32 Mont. 456, 81 P. 4; Barth v. Ely, 85 Mont. 310, 278 P. 1002. Therefore, Nichols on Eminent Domain, 3rd Ed. Vol. 2, § 5,741, states that in jurisdictions such as Montana: 25     in the absence of express statutory requirement, the mortgagee need not be made a party, or be notified of the proceedings, and he is not entitled to compensation from the condemnor. 26 We hold that it is unnecessary for the Commission to bring a quiet title action or name additional defendants. 27 The court held that the lien holder mortgagee could look only to the proceeds of the condemnation. 28 It is quite understandable that when the land was being sold, not condemned, the Railroad made its check payable to the Millers and the Bank. Only in this way could it avoid the possibility of liability to the Bank arising from paying over the amount of the settlement to the Millers without the consent of the Bank. A mortgage imposes a lien on all of the property mortgaged. Thus the 8k acres involved in the condemnation action and settlement were a part of the security for the Bank's loan. 29 ( A) mortgagee cannot be compelled to accept a part of his debt and release a corresponding part of the land, unless he has expressly agreed to do so . . . . 59 C.J.S. Mortgages § 479, p. 757. We know of no law that would prevent the Bank from demanding a portion of the proceeds of a sale of a part of the mortgaged property as consideration for its willingness to release its lien upon the portion sold, at least provided that what it does is not truly unconscionable. We are unable to agree with the district judge that the Bank's stated policies or its administration of them, as disclosed by the record, are unconscionable. 30 The record shows without contradiction that at the time that the loan was made and the mortgage was given on June 6, 1966, interest rates were reasonably stable. At that time, the Bank's written policies, in effect since January 25, 1961, dealing with partial releases, read as follows: GENERAL POLICY 31 Loans. A partial release of the security for a loan . . . may be granted under any of the following conditions provided the credit factors are favorable. 32 1. Without any payment or other adjustment on the loan when 33 (a) The remaining security is sufficient to support the balance of the loan on the basis prescribed for new loans and the interest rate on the loan is at least equal to the bank's minimum refunding rate applicable to the loan; . . . . 34 Shortly after, on July 1, 1966, subparagraph (a) of the policy was amended in part to read as follows: 35 (a) The remaining security is sufficient to support the balance of the loan on the basis prescribed for new loans and the interest rate on the loan is 5 1/2% Or more; . . . . 36 There was another amendment on December 1, 1966:(a) The remaining security is sufficient to support the balance of the loan on the basis prescribed for new loans and the interest rate on the loan is the rate currently being charged on new loans; . . . . 37 On March 21, 1969, because of the changes in the money market, the policy statement was again changed, to provide for two different policies, one dealing with Current Interest-Rate Loans and the other dealing with Less than current rate loans. The policy for current interest-rate loans was similar to that previously in effect for all loans. The new policy related to less than current rate loans: 38 Less than current rate loans. If the interest rate on the loan is less than the rate currently being charged on new loans, the granting of the partial release will be conditioned upon 39 (1) The payment of at least one-half of the present market value or sale price, including severance damages of the security to be released (whichever is higher) for application on the balance of the loan even though the remaining security is ample to support the remaining loan; . . . ; or 40 (2) The payment of an amount necessary to reduce the remaining loan to the maximum loanable and reamortizing the balance at the rate currently being charged on reamortized loans unless the loan is already written at this rate. 41 There was an exception for cases in which the sale price of the security to be released was nominal and inconsequential, meaning worth less than $2,000.00 or 10% Of the loan balance, a provision not applicable in our case. 42 These provisions were again changed on April 9, 1969, but remained substantially the same where the loan involved was at an interest rate lower than 7%. The figure was raised from 7% To 8% On July 24, 1969, and this was continued in effect on December 16, 1969. This is the provision which was in effect when the settlement was made and the check of the Railroad was sent to the Bank. 43 We are unable to agree with the decision of the district judge that these policies are inequitable or unconscionable or shocking as applied in this case. The court relied upon an admission by the Bank that the sale of the 8k acres would not impair its security and on the fact that the 8k acres were less than 1% Of the total acreage covered by the mortgage. We do not think that the record justifies summary judgment on such grounds. 44 The Bank put in evidence, as part of its response to the Millers' motion for summary judgment, a contract between Robert W. Miller and Patricia M. Miller, the principal plaintiffs, and one Wetsch, dated June 9, 1972, less than two months before the Railroad's action was filed, under which the Millers agreed to sell to Wetsch the property covered by the Bank's mortgage. The total purchase price was $89,500.00. The contract recited that the property was subject to a mortgage of $43,457.02, payable to the Bank in annual installments of $3,999.98, which Wetsch agreed to pay. Thus at that time the mortgage amounted to just under one-half of the total purchase price. The settlement with the Railroad assigned $4,708.00 to the 8k acres and $26,692.00 as damage to the value of the remaining land. If this is an accurate measure of the value of the 8k acres and of the damage to the remaining land, the demand by the Bank for one-half of the total settlement as a means of preventing impairment of its security is by no means unreasonable, much less either shocking or unconscionable. 2 45 Moreover, even if the relative values were not as indicated above, (we mention them only because we think that they indicate that a summary judgment on the ground of unconscionability is not justified) we think that the policy of the Bank is a reasonable one. The Bank obtains money to lend to farmers by issuing short term bonds. It gets no money from the United States Treasury. It exists to provide long term loans to farmers, at interest as low as will permit it to remain solvent, with a reasonable margin of security. In a period of rising interest rates, when it has long-term low-interest loans outstanding, its ability to make new long-term loans at low-interest rates is necessarily impaired. It must pay higher and higher interest on its short-term bonds while continuing to collect low interest on its long-term loans, such as the Miller loan. 46 There is nothing in the law that requires the Bank to accede to a partial release of its lien when a portion of the property is sold by the borrower. We are unable to conclude that it is unreasonable, much less unconscionable, for the Bank to have a policy such as the one that it has, under which, where current interest rates are substantially higher than the interest rate on the outstanding loan, it demands, as consideration for a partial release from the mortgage, either that one-half of the proceeds of the sale be applied against the outstanding loan, or that the loan thereafter carry the same rate of interest that the Bank is then charging on newer loans. 47 In one sense the policy benefits the borrowers, in that the amount of the loan is reduced. The court refused the Bank's offer to prove that if one half the settlement, $15,700.00, were applied to the mortgage debt, the total amount of interest to be paid would have been reduced by $4,377.90, by reason of reduction of principal and shortening of the amortization period. This is a matter of mathematics, of which the court could and should have taken judicial notice. It is no small benefit to the mortgagors. In another sense, the borrowers can complain because, if they wish to keep the entire proceeds of the sale, they will have to pay a higher interest rate on the loan. This effect, however, is balanced by the enhanced ability of the Bank to make loans either to the borrower or to other farmers at a lower rate than that at which it would be able to make such loans if the policy in question were not in effect. For these reasons, we conclude that the Bank's policy, the existence of which is not contradicted, is, on its face, a valid policy. 48 The Bank is not an ordinary commercial enterprise. It is a body created by the Congress to carry out a defined policy. It is not the business of the courts to second guess the Bank's decisions as to how best to do it, so long as the Bank does not violate the terms of the statute that created it. See Greene County National Farm Loan Association v. Federal Land Bank of Louisville, 6 Cir., 1945, 152 F.2d 215, Cert. denied, 328 U.S. 834, 66 S.Ct. 978, 90 L.Ed. 1610. As the court there pointed out, supervision of the Bank has been entrusted to the Farm Credit Administration, which in turn is under the supervision of the Secretary of Agriculture. It has not been entrusted to the federal courts. (152 F.2d at 220.) 49 There is conflict between the parties as to whether or not the Bank administered the policy in a fair and uniform manner. Under these circumstances it was improper to grant a summary judgment that the policy is invalid. More than that, we do not think that, absent a showing of irrational deviations from the policy, the policy can be held invalid because the Bank in particular cases relaxes it. This seems to us to be a perfectly reasonable thing for the Bank to do in the light of the facts of each particular situation that confronts it. 50 IV. The Claim that the Bank Agreed to take One-Half of the Amount of the Settlement Attributed to the Value of the Land Taken. 51 As we have seen, the Railroad's check assigns $4,708.00 to the value of the land taken, and in the Millers' complaint they assert that two officers of the Association in Billings agreed to accept as the Bank's portion of any settlement one-half of the amount paid for the land taken and to waive whatever claim the Bank might have to any part of the amount assigned to damages to the remaining lands. The Bank does not admit that such an agreement was made but, in line with the views that we have expressed in part III above, we think that if such an agreement had been made in this case, it would be a reasonable agreement and one enforceable against the Bank. 52 The record indicates that borrowers customarily apply for loans through the local association. Indeed, they are required to do so and to become members themselves, and the loans are serviced by the associations. Under these circumstances, it appears to us that the Association had actual, or at least ostensible, authority to vary the policy in the case of the Miller loan. If, therefore, on a trial, the Millers can persuade a fact finder that the officers of the Association did agree, as the Millers claim, then the Bank can be held to that bargain, and it would be entitled to receive only $2,354.00 out of the settlement and the Millers would be entitled to the balance. 53