WELLS FARGO FINANCIAL KENTUCKY, INC. VS. THOMER (JOHN ROBERT), ET AL.
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RENDERED: APRIL 23, 2010; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-001837-MR
WELLS FARGO FINANCIAL
KENTUCKY, INC.
v.
APPELLANT
APPEAL FROM CAMPBELL CIRCUIT COURT
HONORABLE FRED A. STINE, V, JUDGE
ACTION NO. 07-CI-01648
JOHN ROBERT THOMER;
DAWN ALEXIS THOMER;
UNITED STATES OF AMERICA;
AND MOORING TAX ASSET GROUP
APPELLEES
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: KELLER AND NICKELL, JUDGES; LAMBERT,1 SENIOR JUDGE.
1
Senior Judge Joseph E. Lambert sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.
LAMBERT, SENIOR JUDGE: This appeal pits competing lien priority claimants
against one another. Appellant, Wells Fargo Financial Kentucky, Inc. (Wells
Fargo), claims that its mortgage is superior by virtue of the future advance clause
of the mortgage, while Appellees, John Robert Thomer and Dawn Alexis Thomer
(Thomers), claim that their judgment lien achieved superior status when a new
promissory note and mortgage were executed in favor of Wells Fargo. Our
resolution of this case will depend upon the language of the relevant instruments,
statutory and decisional law, and the Restatement (Third) of Property.
The facts are relatively simple. In March of 2000 James M. Grimme
and Kathleen A. Grimme borrowed $152,000 from Norwest Financial America,
Inc., Wells Fargo’s predecessor, and, to secure the loan, placed a mortgage lien on
their residence located in Alexandria, Kentucky.2 The following year, in October
of 2001, the Thomers obtained a judgment lien against the Grimmes’ property for
$15,000, which arose from an unrelated private loan for the purchase of a truck.
The next year, in August of 2002, the Grimmes executed a subsequent promissory
note and mortgage in favor of Wells Fargo in the amount of $158,000.3 In due
course, the Grimmes filed a bankruptcy petition and they are not parties to this
proceeding. The contest before this court is between Wells Fargo and the Thomers
2
All sums of money are rounded down to the nearest one thousand. Exact amounts and exact
dates are unnecessary for resolution of the legal issues.
3
There is no dispute that by virtue of merger or acquisition Norwest Financial and Wells Fargo
are the same party.
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and the issue is which of the parties has a superior lien on the Grimmes’ real
property.
The trial court granted summary judgment to the Thomers. It duly
noted the language of the 2000 mortgage instrument which states that the mortgage
“also secures payment of any future note or notes executed and delivered to
mortgagee by mortgagor after the date hereof” but concluded that “the 2002 note
paid the 2000 note in full.” The trial court continued, “[t]he indebtedness
evidenced by the 2002 note is not a renewal as a renewal has the effect of ‘merely
extending the time for payment rather than [being] entirely new obligations; . . . a
renewal note does not extinguish the original debt without some evidence that the
parties so intended.’ American Fidelity Bank [& Trust Co. v. Hinkle, 747 S.W.2d
620, 622 (Ky. App. 1988)].” The trial court reasoned “Here, the 2002 note did not
simply extend the time for payment of the original note. Rather, it not only paid
the original obligation in full, it represented the borrowing of a larger amount of
money by the Grimmes. There was no indication in the 2002 note that referenced
the 2000 mortgage or Note or that it was a renewal of the 2000 Note.” The trial
court also properly noted that intent is the essential element in proving a novation
but recognized that “[w]hen the Grimmes signed the second note in 2002 for
approximately $158,000.00, they paid the 2000 note in full on the assumption that
the future advances clause in the mortgage would secure the $158,000.00 second
note.”
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From the foregoing, it is clear that the trial court viewed the execution
and delivery of the 2002 note and mortgage as payment in full of the 2000 note and
exoneration of the mortgage securing it. The trial court was persuaded that a
novation had occurred in the Wells Fargo and Grimmes transaction,
notwithstanding its paradoxical comment with respect to the Grimmes’ assumption
as to the effect of the future advance clause.
The parties and the trial court place considerable reliance on Nolin
Production Credit Ass’n v. Citizens National Bank of Bowling Green, 709 S.W.2d
466 (Ky. App. 1986), and we have carefully considered their analysis of that
decision. While certain language in the Nolin case is helpful, the facts differ so
significantly that the holding is far from controlling here. Nolin dealt with an
original mortgage on property in Nelson County executed by a husband and wife.
The subsequent mortgage was on real property in three other counties and only the
husband (following a divorce) signed the materially different subsequent note and
mortgage. Moreover, the amount of the subsequent note far exceeded the future
advance clause in the prior mortgage. In view of these facts, the court’s holding
that a novation occurred is rather unremarkable.
In White v. Winchester Land Development Corp., 584 S.W.2d 56, 63
(Ky. App. 1979), this court addressed the doctrine of novation as follows:
Kentucky law is well-settled that a renewal note will not
extinguish an obligation. Cantrill Construction Co. v.
Carter, 418 F.2d 705 (6th Cir. 1969), citing Porter v.
Bedell, 273 Ky. 296, 116 S.W.2d 641 (1938). A renewal
note is thus distinguished from a novation which does
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operate to extinguish an original debt. Whether a second
note is a renewal of the original obligation, or a novation
thereof, depends upon the intentions of the parties. 11
Am.Jur.2d Bills & Notes, ss 307, 914. The question of
intention in such cases often turns, to a large extent, on
the terms of the hypothecation or pledge agreement.
From White and numerous other authorities, we are instructed that an extension of
additional credit under the future advance clause of a prior mortgage does not
invalidate or reprioritize the security interest given provided the possible additional
credit is disclosed in the mortgage instrument.
Kentucky statutes make provision for the formal release of mortgages
and liens by marginal release or deed of release. KRS 382.360. However, as a
matter of law, whether or not a formal release occurs, upon full payment of the
indebtedness, the instrument of record becomes a nullity. Warning’s Ex’r v.
Tabeling, 280 Ky. 232, 133 S.W.2d 65 (1939). A recorded mortgage serves the
purpose of establishing the lender’s interest in the land that secures the debt and
notice to the world of the lien created thereby. KRS 382.520. Thus, we must
focus upon the indebtedness rather than the mortgage for without the debt, there is
no mortgage. “[W]hen the debt is extinguished or barred by statute of limitations
or otherwise, the mortgage is likewise at an end.” Warning’s Ex’r, 133 S.W.2d at
67. However, the mortgage may be relevant evidence as to the parties’ intent.
From the foregoing, therefore, the controlling question is whether the evidence
shows that the underlying indebtedness of $152,000 was paid, thereby
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extinguishing the mortgage securing it, or whether the underlying indebtedness
remained and continued to support the original mortgage.
The amount of the 2000 debt was $152,000. The amount of the 2002
debt was $158,000. The 2002 note shows that from the $158,000, $141,000 was
the “amount paid on your [Grimmes’] account,” and that additional sums were
advanced. At the time of the 2002 transaction with Wells Fargo, the Grimmes
signed an acknowledgement of their right to cancel that contained the following
language: “You are entering into a new transaction to increase the amount of
credit provided to you. We acquired a mortgage, lien or other security interest on
your home under the original transaction and we will retain that mortgage, lien or
other security interest in the new transaction.” Moreover, the HUD-1A Settlement
Statement executed by the Grimmes refers to “Wells Fargo Financial non-cash
disbursement” of $141,000. From these instruments, we have absolutely no doubt
that $141,000 of the 2002 loan was the same debt as the 2000 loan. The loans
were merely consolidated and additional sums were advanced.
As previously stated, a contract novation relieves parties of the
obligations thereunder and results in a new agreement, while an extension of
additional credit under an existing obligation is merely an amendment and
continuation of the original agreement. The burden to establish novation is on the
party claiming its occurrence. North Western Mut. Life Ins. Co. v. Eddleman, 247
Ky. 116, 56 S.W.2d 561 (1932). As to the substantive law of novation, Eddleman
quotes from 46 Corpus Juris 605 as follows:
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“Similarly the original creditor must assent to the
transaction, for, in the absence of such consent, the
debtor could not by his own act discharge his obligation
and divest the creditor of his claim.” On the next page
(606) section 50, the text says: “Whether a novation has
been accomplished or not depends upon the intention of
the parties. This intent is the controlling element in
determining the question, and unless the transaction was
intended to extinguish the old obligation by substituting
the new one therefor, a novation is not effected.”
Eddleman, 56 S.W.2d at 562. A similar view was expressed in American Fidelity
Bank & Trust Co. v. Hinkle, 747 S.W.2d 620, 623 (Ky. App. 1988), as follows:
“When there is asserted a discharge without valuable consideration, there must be
evidence from which a fact finder could find intent by the parties that the obligor
be released.” (Emphasis in original.)
Applying these authorities to the case at bar, the Thomers failed to
show that Wells Fargo and the Grimmes intended a novation and intended to
effectively subordinate Wells Fargo’s first lien position with respect to the
Grimmes’ mortgage. From the documents we have examined, we discern no such
intent and we can think of no rational reason for Wells Fargo to have impaired its
own security without consideration. All of the evidence supports the conclusion
that the original indebtedness was merely consolidated and increased by means of
the 2002 note. It is worthy of comment that the 2000 mortgage was not released of
record. As such, we must conclude that the trial court erred in its conclusion to the
contrary.
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Our view in this regard is fortified by the breadth of KRS 382.520.
Sections (1) and (2) broadly protect mortgagees where renewals and extensions of
loans are made. Section (2) provides that the mortgage originally executed
may secure any additional indebtedness, whether direct,
indirect, existing, future, contingent, or otherwise, to the
extent expressly authorized by the mortgage, if the
mortgage by its terms stipulates the maximum additional
indebtedness which may be secured thereby. Except as
provided in subsection (3) of this section, the mortgage
lien authorized by this subsection shall be superior to any
liens or encumbrances of any kind created after
recordation of such mortgage, even to the extent of sums
advanced by a lender with actual or constructive notice of
a subsequently created lien[.]
This language reveals overwhelming legislative intent to protect the interest of
mortgage lenders. More modestly, Bank of Maysville v. Brock, 375 S.W.2d 814,
816 (Ky. 1964), states the proposition “It is sufficient if the mortgage clearly
shows it is to stand as security for both an original loan and for such additional
indebtedness as may arise from future dealings between the parties.”
We have carefully examined the Restatement (Third) of Property,
Mortgages § 7.3 (1997), as it addresses the relationship and priority of senior
mortgages vis-a-vis junior lien interests. This section duly notes circumstances in
which the junior lienholder is materially prejudiced by subsequent loans, interest
rate changes, or other changes in the senior mortgage. Relevant to the case at bar
is §7.3(b):
If a senior mortgage or the obligation it secures is
modified by the parties, the mortgage as modified retains
priority as against junior interest in the real estate, except
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to the extent that the modification is materially
prejudicial to the holders of such interest and is not
within the scope of a reservation of right to modify as
provided in Subsection (c).
The comment that follows §7.3 discusses various types of transactions; i.e.,
construction mortgage loans, farm loans, replacement loans, and the like.
Unmistakably, the comment articulates the view that lien priorities should be
maintained unless there is demonstrable prejudice and lack of notice of the right to
modify the senior mortgage.
Where the original mortgage clearly states that it secures
future advances and specifies no maximum monetary
amount, the intervening lienor is not materially
prejudiced. Since the intervenor takes its lien on notice
that future advances are possible, it cannot validly claim
injury based on the fact that the replacement mortgage
exceeds the pre-release balance of its predecessor.
Restatement (Third) of Property, Mortgages §7.3, cmt. b (1997).
We acknowledge discomfort in allowing Wells Fargo to recover sums
in excess of the balance of its loan after the date the Thomers’ judgment lien was
filed. The record reveals that upon the 2002 consolidation of the loans, there was a
balance of $141,000 and presumably the balance was somewhat greater when the
judgment lien was recorded. A proper examination of the real estate records by
Wells Fargo would have revealed that the judgment lien was filed some ten months
prior to the 2002 transaction. The Restatement (Third) of Property view discussed
hereinabove recognizes that in certain circumstances a junior lienor may be
prejudiced by the holder of the senior mortgage, and the Thomers appear to have
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been prejudiced by the increase of the indebtedness from $141,000 to $158,000.
However, the Thomers cannot satisfy the second prong of the Restatement view.
They cannot show that the extension of additional credit was not within the scope
of the future advance clause of the original mortgage. See KRS 382.520. In fact,
the original mortgage provides that the maximum indebtedness secured by the
mortgage could increase to the sum of $200,000.
The trial court decided this case by summary judgment. It determined
that the requirements of Kentucky Rules of Civil Procedure (CR) 56.03 were met
and applied Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476 (Ky.
1991). It properly recognized that issues of fact should not be decided and that the
evidence of record should be examined to discover whether there were genuine
issues of fact. We agree with the trial court that this was a summary judgment
case. As shown hereinabove, however, we disagree as to which party should have
prevailed.
For the foregoing reasons, the judgment of the Campbell Circuit Court
is reversed and this cause remanded for further consistent proceedings.
NICKELL, JUDGE, CONCURS.
KELLER, JUDGE, CONCURS IN RESULT ONLY.
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BRIEFS FOR APPELLANT:
David A. Stringer
Cincinnati, Ohio
BRIEF FOR APPELLEES, JOHN
ROBERT THOMER AND DAWN
ALEXIS THOMER:
Robert E. Blau
Cold Spring, Kentucky
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