Opinion ID: 1925557
Heading Depth: 2
Heading Rank: 2

Heading: Proof of the Underlying Debt

Text: ¶ 36. We next address the issue of whether the circuit court and court of appeals erred in determining that the Bank had failed to prove the debt underlying the Mortgage. The court of appeals ultimately upheld the circuit court's conclusion that the Mortgage was invalid because the Bank had failed to prove the existence of the debt underlying the Mortgage. Mitchell Bank, 257 Wis. 2d 723, ¶¶ 18, 25. The circuit court concluded that because the Bank could not produce the Note and could not prove the existence and contents of that Notethe $50,000 debt referenced in the Mortgagethe Mortgage was invalid for failure of the Bank to prove the underlying debt. Id., ¶ 18. ¶ 37. In order to foreclose on the Mortgage, the Bank was required to prove the existence of the underlying debt that the Mortgage secured. Where there is no debt  no relation of debtor and creditor  there can be no mortgage. Doyon & Rayne Lumber Co., 196 Wis. at 390 (internal quotation and citation omitted). Schanke contends that the evidence overwhelmingly supports the circuit court's conclusion that the Bank failed to prove the existence of the May 7 Note, while the Bank contends that the evidence demonstrates that the missing Note was the latest in a series of renewal notes, securing the September 1986, $50,000 obligation. ¶ 38. This issue is complicated as a result of the presence of the dragnet clause, which purports to secure all outstanding antecedent debt. One of the issues we asked the parties to address in their supplemental materials was whether proof of a valid dragnet clause, by itself, [is] sufficient to validate a mortgage when there is no proof of underlying debt other than the antecedent debt secured by the dragnet clause[.] Both Schanke and the Bank concede that if a mortgage contains a valid dragnet clause and proof is made as to the specific amount of debt secured thereby, the mortgage is valid. Schanke contends that the mortgage must also clearly recite the past consideration and state a specific amount of antecedent debt. Schanke further contends that the mortgage must be executed in good faith. ¶ 39. However, Schanke fails to substantiate these requirements with citation to case law. His contention that the mortgage must clearly state that it secures antecedent debt and specifically state the amount is more appropriately directed at the question of what is required for a dragnet clause to be enforceable in the first instance. Likewise, his good faith requirement is merely an attempt to persuade this court to consider his fraudulent transfer argument, which was not established at the circuit court. ¶ 40. We conclude that a legally enforceable dragnet clause can by itself validate a mortgage when there is proof of the underlying antecedent debt secured by the dragnet clause and the mortgage clearly indicates that the parties intended for the mortgage to secure antecedent debt. This is perfectly logical because the bank has the burden of specifically proving the underlying debt secured by the mortgage. Capocasa v. First Nat'l Bank, 36 Wis. 2d 714, 720, 154 N.W.2d 271 (1967). ¶ 41. The parties to this litigation focus on the missing Note and whether the Bank needed to produce the Note to foreclose. The circuit court, the court of appeals, and the parties all speak of the Mortgage as securing the $50,000 note. Yet, this is an improper use of terminology. A mortgage, secures the debt, not the note, bond, or other evidence of the debt, while the note represents, and is the primary evidence of, the debt. 59 C.J.S. Mortgages § 143 (1998). What matters is the debt itself, not the Note. Thus, the proper inquiry is whether the Bank failed to prove the debt secured by the Mortgage. ¶ 42. The Mortgage in question here secures two categories of debts. First, it secures the $50,000 debt evidenced by the missing Note. Second, the Mortgage, via the dragnet clause, purports to secure all antecedent debt owed by the Waltkes to the Bank. With respect to the first categorythe debt evidenced by the Notethe Bank was not required to produce the Note in physical form, if it could establish the Note's existence, terms, and conditions through other evidence, or otherwise establish the existence of outstanding debt secured by the Mortgage. See, e.g., New England Savs. Bank v. Bedford Realty Corp., 680 A.2d 301, 310 (Conn. 1996) (finding that the loss of a promissory note supporting a mortgage was not fatal to foreclosure action). In Wisconsin, the cause of action on a note evidencing an indebtedness and the cause of action to foreclose the mortgage on real estate that secures the indebtedness are distinct. Bank of Sun Prairie v. Marshall Dev. Co., 2001 WI App 64, ¶ 12, 242 Wis. 2d 355, 626 N.W.2d 319. Thus, in the context of a mortgage foreclosure action: A bill or note is not a debt; it is only primary evidence of a debt; and where this is lost, impaired or destroyed bona fide, it may be supplied by secondary evidence. The loss of a bill or note alters not the rights of the owner, but merely renders secondary evidence necessary and proper. New England Savs. Bank, 680 A.2d at 310 (internal citations & quotations omitted). See Bank of Sun Prairie, 242 Wis. 2d 355, ¶¶ 17-19 (implying that where an outstanding debt has been reduced to a judgment, the judgment can serve as proof of the debt secured by the mortgage). ¶ 43. Therefore, it matters not whether the Note itself is produced, as long as the Bank can prove the underlying debt secured by the Mortgage: `A mortgage is only an incident to a debt, which is the principal thing.' Doyon & Rayne Lumber Co., 196 Wis. at 390 (quoting Cawley v. Kelley, 60 Wis. 315, 319, 19 N.W. 65 (1884)) See also Sec. Nat'l Bank, 41 Wis. 2d at 715-16 (concluding that the fact that a note was not executed was immaterial when the mortgagee proved the existence of the underlying debt described in the mortgage); Badger State Agri-Credit & Realty, Inc. v. Lubahn, 122 Wis. 2d 718, 724, 365 N.W.2d 616 (Ct. App. 1985) (stating that [e]xtrinsic evidence may be used to ascertain and prove the debt). Thus, even if the Bank could not produce the Note and did not establish its terms via secondary evidence, this simply means that they did not prove the existence of the $50,000 debt stated on the face of the Mortgage. However, even if the Bank did not prove the $50,000 debt referenced in the missing Note, the Bank can still foreclose if it proved that the Mortgage secured antecedent debt and proved the existence of such antecedent debt. Thus, the Mortgage is still valid, as long as the dragnet clause is enforceable and the Bank proved the amount of underlying debt secured thereby. [17] ¶ 44. In essence, whether the Bank proved the existence of the May 7 Note is immaterial in this case because we hold that the circuit court and court of appeals erred in finding that the parties intended the Mortgage to secure only the debt evidenced in the Note. We conclude that the plain language of the Mortgage unambiguously indicates an intention on the part of the Waltkes and the Bank that the Mortgage was to secure all of the outstanding Waltke debt. We hold that the Mortgage is valid and enforceable because the parties intended the Mortgage to secure antecedent debt through the dragnet clause, the Bank proved the existence of antecedent debt, and the dragnet clause contained in the Mortgage is valid under Wisconsin law. ¶ 45. Whether a mortgage sufficiently identifies the debt it secures is a factual determination. Badger State, 122 Wis. 2d at 723. However, we find that the circuit court erred as a matter of law in determining that the parties intended the Mortgage to secure only the $50,000 debt evidenced in the missing Note. Mitchell Bank, 257 Wis. 2d 723, ¶¶ 18-19. ¶ 46. In order to ascertain the intent of the parties with respect to what debt the Mortgage secured, the circuit court was not required to look beyond the Mortgage document itself. While intent is a factual matter, . . . the parol evidence rule prohibits a trial court from inquiring into the intent of parties to an unambiguous written agreement. Schmitz v. Grudzinski, 141 Wis. 2d 867, 872 n.4, 416 N.W.2d 639 (Ct. App. 1987) (internal citations omitted). [18] Whether a contract is ambiguous is . . . a question of law which we review de novo.  Id. at 871. A contract is ambiguous when it is reasonably susceptible of more than one meaning. Id. ¶ 47. First, the Mortgage states that it secures the $50,000 debt as evidenced by the missing Note. More importantly, the Mortgage provides, in pertinent part: This Mortgage is also given to secure any extension(s) and/or renewal(s) of the note(s) and the payment of any and all other sums advanced hereunder or secured by this Mortgage as further described and permitted in Paragraph 4 below, for any reason, and to secure performance of the covenants, conditions and agreements contained herein or in any note or other evidence of any of the Obligations (as hereinafter defined) secured by this Mortgage. (Emphasis added.) Paragraph Four, the Dragnet Clause, further provides: Present and Future Advances and Mortgage as Security. The term Obligor as used herein shall include without limitation the Mortgagor, Borrower, maker, co-maker, endorser or guarantor of any of the Obligations as hereafter defined. The term Obligations as used herein shall include, without limitation, all of the debts, notes, guaranties, obligations and liabilities of whatever nature or amount (and any extension, renewals or modification thereof) arising out of credit or other financial accommodation previously granted, contemporaneously granted or granted in the future by Mortgagee to or at the request of any Obligor, and the performance of all covenants, conditions and agreements contained in this Mortgage or in any evidence of or document relating to any of the foregoing and, to the extent not prohibited by law, costs and expenses of collection or enforcement of the Obligations . . . . Since this Mortgage secures all Obligations of any Obligor to Mortgagee, it is acknowledged that it may secure Obligations in a greater dollar amount than the amount stated in this Mortgage . . . . (Emphasis added.) ¶ 48. The language of the dragnet clause makes it abundantly clear that the Mortgage was intended to secure all prior obligations and that such obligations may be greater than the face amount of the Mortgage. This language is unambiguous. [19] Thus, [w]e need not consider the trial court's findings of fact, because the interpretation of a written agreement is a question of law to which we owe no deference to the trial court. Schmitz, 141 Wis. 2d at 871. As [w]e have already concluded that the [mortgage] unambiguously secured previously granted credit[,] . . . the only evidence of [the parties'] intent was the [mortgage], which we have concluded is unambiguous. Id. at 872-73. Therefore, we disregard the circuit court's finding as to the intent of the parties because the Mortgage unambiguously states that it secures all prior debts in addition to the debt listed at the top of the Mortgage. Thus, we conclude that the parties intended the Mortgage to secure antecedent debt. ¶ 49. There is no dispute the Bank proved a substantial amount of underlying antecedent debt. The record is replete with proof that the Waltkes have a substantial amount of antecedent debt due and owing to the Bank. There is no dispute that a portion of the $50,000 advanced to Waltke on September 4, 1986, is still outstanding. The Bank's ledgers, the cashier's check, and the write-off to the FDIC, taken together, conclusively establish that this amount is still due and owing. It is clear from the record that the Bank conclusively established the existence of other outstanding Waltke debt in the form of personal debt, Miracle Shield guaranties, and Gary Butler guaranties. As the court of appeals noted, Mitchell Bank introduced . . . evidence of ascertainable, underlying prior debts existing antecedent to the Mortgage and Note . . . that remain unpaid by the Waltkes and that fall under the dragnet clause. Mitchell Bank, 257 Wis. 2d 723, ¶ 21. Assuming the dragnet clause is valid, it is for the circuit court on remand to make factual findings as to the precise amount of this debt. [20]