Opinion ID: 1231926
Heading Depth: 1
Heading Rank: 3

Heading: kansas law

Text: In Kansas, promissory notes and mortgages are contracts between the parties, and rules of construction applicable to contracts apply to them. First Nat'l Bank & Trust Co. v. Lygrisse, 231 Kan. 595, Syl. ¶ 3, 647 P.2d 1268 (1982). The primary rule in interpreting promissory notes and mortgages is to determine the intention of the parties, and that intention must prevail; such intention is to be determined from an examination of both the mortgage and note, not from each one separately. Carpenter v. Riley, 234 Kan. 758, 763, 675 P.2d 900 (1984). The Bank argues that the face of the $600,000 note states it is secured by the $200,000 mortgage. The district court noted that in Kansas future advance mortgages are governed by K.S.A. 1990 Supp. 9-1101 and K.S.A. 58-2336. K.S.A. 1990 Supp. 9-1101(4) states: Every real estate loan shall be secured by a mortgage or other instrument constituting a lien, or the full equivalent thereof, upon the real estate securing the loan, according to any lawful or well recognized practice, which is best suited to the transaction. The mortgage may secure future advances. The lien of such mortgage shall attach upon its execution and have priority from time of recording as to all advances made thereunder until such mortgage is released of record. The lien of such mortgage shall not exceed at any one time the maximum amount stated in the mortgage.  (Emphasis added.) K.S.A. 58-2336 states: Liens of mortgages securing loans upon real estate; providing for the security of future advances; priority of lien. Every mortgage or other instrument securing a loan upon real estate and constituting a lien or the full equivalent thereof upon the real estate securing such loan, according to any lawful or well recognized practice, which is best suited to the transaction, may secure future advances and the lien of such mortgage shall attach upon its execution and have priority from time of recording as to all advances made thereunder until such mortgage is released of record: Provided, that the lien of such mortgage shall not exceed at any one time the maximum amount stated in the mortgage.  (Emphasis added.) The Bank argues that under the future advance clause all outstanding bank loans are secured by the mortgage. It claims that the $200,000 limitation stated in the mortgage is to be used to determine priority among creditors. The Bank states that $200,000 of its $600,000 loan had priority over Joe and Ellen Cates' $200,000 loan and that the loan from Joe and Ellen Cates then had priority over the balance of the Bank's loan. The Cates claim that the district court correctly found that the lien of any future advance clause is limited to the amount stated in the mortgage. As authority, both parties cite First Nat'l Bank in Wichita v. Fink, 241 Kan. 321, 736 P.2d 909 (1987), where this court interpreted K.S.A. 58-2336 and K.S.A. 1986 Supp. 9-1101(4). In Fink, the mortgagors borrowed $24,506.39 from First National Bank and executed a real estate mortgage for that sum. The mortgage contained a future advance clause. The Finks later borrowed $30,000 from Souders and executed a second mortgage. Subsequent to Souders' loan, the bank made additional loans to the Finks of $6,472 and $13,144. The Finks executed a promissory note and a mortgage to the bank for each loan. Each of the notes stated: SECURITY AGREEMENT FOR VALUABLE CONSIDERATION, Borrower hereby grants unto Bank a security interest in the property (Collateral) described below together with any and all additions thereto, substitutions thereof, and proceeds therefrom: DESCRIPTION OF COLLATERAL Real estate mortgage dated November 22, 1977, on the following described property: Lot 4, North Half of Lot 5, block 10, Beverly Manor, Sedgwick County, Kansas. 241 Kan. at 323, 736 P.2d 909. After the Finks defaulted on their loan, the bank foreclosed. The bank and Souders disputed the priority of their liens. We found that the bank's lien had priority but was limited by K.S.A. 58-2336 to the principal stated in the 1977 mortgage, $24,506.39 plus interest, and that Souders' second mortgage was prior to any sums owing the bank in excess of the 1977 mortgage. 241 Kan at 327, 736 P.2d 909. The Bank misconstrues our holding in Fink. The district court correctly found that K.S.A. 58-2336 limits the lien to the maximum amount stated in the mortgage. The maximum amount stated in the mortgage was $200,000, not $600,000 as claimed by the Bank. In First Nat'l Bank & Trust Co. v. Lygrisse, 231 Kan. 595, 647 P.2d 1268, we discussed how a subsequent loan may be secured under a dragnet clause in a mortgage. Lygrisse involved a mortgage foreclosure action and a mortgage with a future advance clause. The 1976 mortgage covered a loan of $47,000 and contained a dragnet clause for future advances not to exceed $400,000. Subsequent to the $47,000 loan, the mortgagors consolidated their debts and executed another note for $274,664. In the lower left-hand corner of the consolidated note appeared this statement: NOTE SECURED BY S/A 509 head of cattle, machinery and equip., Financial Stmt., R.E. Mgt., dtd. 1/30/76. This recital was on the face of the note when it was executed and clearly expressed the intention of the parties that the debt represented by the note was secured by the mortgage. The district court in Lygrisse found that the Lygrisses' subsequent notes of $206,414, including interest, were secured by the 1976 mortgage. The Court of Appeals reversed, finding that only the $47,000 loan plus interest was secured by the mortgage. It found that the statement on the face of each note, that the note was secured by the real estate mortgage, was not a sufficient reference to the mortgage for the mortgage to secure the subsequent consolidation of the notes. We observed that subsequent debts may be secured under the dragnet clause of a real estate mortgage in either of two ways: (1) by specifically stating on the face of the new note that it is secured by the prior mortgage; or (2) by showing that the subsequent debt is of the same kind or character as, or part of the same transaction or series of transactions with, that originally secured by the mortgage. We observed that all the notes except one, which the district court found to be an inadvertent error, referred to the January 30, 1976, mortgage. We affirmed the district court and reversed the Court of Appeals. Future advance clauses are also discussed in Home State Bank v. Johnson, 240 Kan. 417, 729 P.2d 1225 (1986). In Johnson, the issue was whether the mortgage secured more than the amount on the face of the mortgage. The mortgage was given to secure the sum of $100,000 plus future advances. The mortgage stated that the loan and advances shall at no time exceed [$100,000]. 240 Kan. at 419, 729 P.2d 1225. The subsequent loan agreement between the parties stated that the consideration is the further extension of credit by Bank to Borrower, all as provided by the Real Estate Mortgage previously filed for record. 240 Kan. at 420, 729 P.2d 1225. The Johnson court stated that the best and most persuasive evidence of the intention of the parties who enter into a written agreement is that which is expressed by the terms of that agreement. 240 Kan. at 426, 729 P.2d 1225. It determined the mortgage was never intended to secure an amount in excess of $100,000. 240 Kan. at 426, 729 P.2d 1225. Both the Bank and the Cates agree that the $600,000 note was to finance a business venture and was not of the same kind or quality as the $200,000 note which financed the construction of the Cates' home. The question is whether the July 12 $600,000 promissory note sufficiently refers to the $200,000 mortgage so that the mortgage provides security for $200,000 of the subsequent $600,000 note. The Bank purchased a printed form for its note. When reading the note purchased and prepared by the Bank, the word I in the form refers to the Cates, the borrowers, and the word You refers to the Bank, the lender. The $600,000 note, in a marked box, states: SECURITY: This note is secured by: SECURITY AGREEMENT (COLLATERAL PLEDGE AGREEMENT) DATED 6/12/87, ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL DATED 6/12/87, KANSAS MORTGAGE AND SECURITY AGREEMENT DATED 12/22/86. The box also contains: (This section is for your internal use. It may not include every agreement or item of collateral securing this note. You will not lose any security by omitting it from this section.) To the right of this box are two lines which are designated signature lines where the borrowers say, I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON THE OTHER SIDE). The other side of the document states, SECURITY: The portion of this form identifying agreements securing this note is for your internal reference only. The fact that you do not list an agreement in that portion of the form does not mean that the agreement does not secure this note. According to the Bank, the $200,000 mortgage is referenced on the face of the subsequent $600,000 note and meets the requirements set forth by this court in Lygrisse. We disagree. The $600,000 note refers to a KANSAS MORTGAGE AND SECURITY AGREEMENT DATED 12/22/86. However, the Cates executed two mortgages on that date, one for $500,000 and the other for $200,000. Both mortgages contain the same future advance clauses. The $600,000 note does not state which of the two mortgages secures the note. The only portion of the note which refers to a mortgage is designated for internal use for the Bank and is not part of the agreement between the parties. The loan agreement does not comply with the requirements set out in Lygrisse that, to secure subsequent debts under the dragnet clause of a real estate mortgage, one must specifically state on the face of the new note that it is secured by the prior mortgage or show that the subsequent debt is of the same kind or character as, or part of the same transaction or series of transactions with, that originally secured by the mortgage. Here, the subsequent loan agreement neither specifically states on its face which of the prior mortgages secures the note nor shows that the subsequent debt is of the same kind or character or a part of the same transaction or series of transactions originally secured by the mortgage. Antecedent debts may be secured by a mortgage containing a dragnet or other advance clause only if the antecedent debts are clearly identified in the mortgage. The rule has no application when subsequent notes merely indicate that the antecedent debts are intended to be secured. There was no genuine issue as to any material fact, and the district court correctly determined as a matter of law that the mortgage did not secure the $600,000 note and granted summary judgment. Affirmed.