Bissonnette v. Wylie

Bissonnette v. Wylie  (96-029); 166 Vt. 364; 693 A.2d 1050

[Filed 28-Mar-1997]

[Motion for Reargument Denied 23-Apr-1997]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 No. 96-029


Donald and Claudette                              Supreme Court
Bissonnette
                                                  On Appeal from
     v.                                           Franklin Superior Court

Nicholas J.H. Wylie, Daniel E.                    January Term, 1997
Mendl and Martin V. Lavin


Linda Levitt, J.

Donald E. O'Brien, Burlington, for plaintiffs-appellees

Leslie C. Pratt, Montpelier, for defendants-appellants


PRESENT:  Gibson, Dooley, Morse and Johnson, JJ., and Allen, C.J.
          (Ret.), Specially Assigned


       DOOLEY, J.   This case is here for the second time.  See Bissonnette
  v. Wylie, 162 Vt. 598, 654 A.2d 333 (1994) (Bissonnette I).  On remand from
  this Court, the Franklin Superior Court held that two of the defendants,
  sureties on a promissory note, could not claim discharge of their liability
  under 9A V.S.A. § 3-606,(FN1) which discharges a surety of its obligation if
  the creditor unjustifiably impairs the collateral.  This decision was based
  on the conclusion that plaintiffs, who were creditors on the promissory
  note, had a legal obligation to subordinate their mortgage, and thus did
  not unjustifiably impair the collateral when they subordinated their
  mortgage three times.  Defendants contend that the trial court erred in
  concluding that plaintiffs had a legal obligation to subordinate their
  mortgage and that plaintiffs did not unjustifiably impair the collateral
  when they discharged their mortgage, without defendant's consent, to the
  Bank of Vermont.  We affirm the court's holding as to plaintiffs'
  obligation to subordinate their

 

  mortgage, but reverse as to the reasonableness of the discharge.  We remand
  to determine the extent of impairment of the collateral, if any.

       In Bissonnette I, we held that comakers of a promissory note may be
  discharged under 9A V.S.A. § 3-606 when the comaker is in the position of a
  surety, the creditor obtains actual knowledge of the suretyship, and the
  creditor unjustifiably impairs the collateral.  162 Vt. at 605-07, 654 A.2d 
  at 338-39.  We remanded the case to the trial court to determine whether
  plaintiffs had used reasonable care to prevent impairment to the collateral
  and the extent of any impairment.  Id. at 611, 654 A.2d  at 341.

       On February 5, 1986, plaintiffs Claudette and Donald Bissonnette and
  defendants Nicholas Wylie, Daniel Mendl, and Martin Lavin entered into a
  sales agreement in which defendants agreed to purchase approximately two
  acres of land (parcel one) with a ranch house and two-story brick duplex
  from plaintiffs for $210,000.  The property was adjacent to another parcel
  of land owned by defendants (parcel two).  The agreement provided that
  defendants would pay plaintiffs $110,000 in cash, obtained from the Vermont
  National Bank and secured by a first mortgage, and $100,000 in the form of
  a promissory note to plaintiffs, secured by a second mortgage on the
  property.  The sales agreement had an addendum that required plaintiffs to
  "subordinate the 2nd mortgage at Purchasers [sic] option for any purposes
  of improving, preserving and developing the property."  The sale was
  completed in June 1986.

       During the course of the next three years, plaintiffs subordinated
  their mortgage three times.  In October 1986, defendants wanted to borrow
  $1,540,000 from Vermont National Bank to construct the Highpoint Office
  Building.  Plaintiffs were asked and agreed to subordinate their mortgage. 
  Defendants' attorney drafted a new mortgage deed for plaintiffs, which was
  subject to three mortgage deeds -- the first mortgage of $110,000 and two
  others dated November 3, 1986 -- all in favor of Vermont National Bank,
  totalling $1,650,000 and covering both parcel one and parcel two.  These
  mortgages also contained future advance clauses.  All parties believed that
  plaintiffs were required by the purchase and sales agreement to subordinate
  to these

 

  new mortgages.  There was no discussion as to whether the subordination
  clause would be part of the new mortgage deed.  On October 21, 1987,
  defendants replaced one of the two existing construction loans created on
  November 3, 1986 with a new promissory note.  The result of this
  transaction was an increase in the debt owed to Vermont National Bank by
  $380,000.  The new note specified that the whole amount, including the
  additional $380,000, was secured by the preexisting mortgages.

       In April 1989, defendants received preliminary approval for the second
  phase of development from the Colchester Planning Commission.  Defendants
  were planning to build an additional office building, restaurant, bank, and
  parking spaces to serve the existing office building.

       On May 3, 1989, defendants Mendl and Lavin (hereinafter surety
  defendants) transferred their interest in the properties to defendant
  Wylie, who agreed to assume the mortgage to plaintiffs and to indemnify
  surety defendants if either were obligated to pay any sums as a result of
  the mortgage or promissory note.  Plaintiffs received actual notice of the
  transfer by letter, but were not asked to consent to the transfer or to
  Wylie's assumption of the debt.  Surety defendants never informed
  plaintiffs that they would object to further subordination of their
  mortgage.

       On this same day, plaintiffs subordinated a second time to a mortgage
  to Vermont National Bank, this time in the amount of $2,108,000.  This
  added $458,000 of debt with a priority before plaintiffs' mortgage.2  Of
  this amount, $380,000 was attributable to the debt added on October 21,
  1987 and $78,000 was new money.

       On June 30, 1989, plaintiffs further subordinated their mortgage to a
  $2,700,0003

 

  mortgage to the Bank of Vermont.  A portion of this money was given to
  Vermont National Bank to reduce Wylie's debt.  This enabled Vermont
  National Bank to reduce the coverage of its mortgage to include only two of
  three units in the Highpoint Building and a small area of land surrounding
  the building, which in turn allowed the Bank of Vermont to secure its
  mortgage with the balance of the Bissonnette property.

       In the spring of 1991, both plaintiffs and Vermont National Bank
  learned that Wylie was having financial difficulties.  Wylie had a debt of
  $1,623,159 due to Vermont National Bank, which brought a foreclosure
  action.  Wylie also defaulted on plaintiffs' note and on the Bank of
  Vermont's notes.  The amount due on all the notes far exceeded the value of
  the properties, and plaintiffs filed this suit to recover what was due on
  their note.  Surety defendants claimed that plaintiffs unjustifiably
  impaired the collateral by subordinating their mortgage to those of the
  banks.

       In August 1991, the Bank of Vermont's agent contacted plaintiffs'
  attorney by letter and informed plaintiffs that a conditional sales
  contract for the office building had been signed, but plaintiffs had to
  discharge their lien to allow the sale to go through.  The bank explained
  that if plaintiffs did not discharge their lien, it would be forced to
  foreclose on its mortgage, leaving plaintiffs without any payment because
  of the inadequate equity in the properties.  Plaintiffs accepted the bank's
  offer in order to mitigate their damages, and were paid $10,457.50 from the
  proceeds of the sale of the building.

       Plaintiffs' action was originally decided in favor of surety
  defendants on summary judgment, but we reversed and remanded because
  "defendants did not meet their burden of establishing, as a matter of law,
  unjustifiable impairment, nor the extent of any impairment."  Id. at 611,
  654 A.2d  at 341.  On remand, the case was tried to court.  By findings and
  conclusions issued on October 19, 1995, the superior court concluded that
  plaintiffs had a legal

 

  obligation to subordinate their mortgage, and thus surety defendants could
  not claim "discharge based on impairment of the collateral when it was they
  who legally obligated the Plaintiffs to [subordinate] and impair the
  collateral."  Judgment was entered for plaintiffs in the amount of
  $133,111.95, and surety defendants appealed, raising three issues: (1)
  whether the loan proceeds were actually for the preservation, development,
  or improvement of the property, (2) whether plaintiffs had a legal
  obligation to subordinate their mortgage for the development of parcel two,
  and (3) whether plaintiffs used reasonable care when they discharged their
  mortgage, without surety defendants' consent, to the Bank of Vermont for
  $10,457.50.

       On the first issue, surety defendants argue primarily that plaintiffs
  did not have a legal obligation to subordinate their mortgage to the
  additional $458,000 in debt to Vermont National Bank incurred on May 3,
  1989, because the money from the bank loan was not used for the
  preservation, development, or improvement of the property as specified in
  the sales agreement.4 Based on this premise, surety defendants contend
  that the collateral was impaired by plaintiffs' subordination, and thus
  they should be discharged from their obligations as sureties.

       The evidence on the purpose and use of Wylie's additional debt to
  Vermont National Bank is sparse.  As set out above, the face amount of the
  mortgage to Vermont National Bank was increased by $458,000 at the same
  time that surety defendants transferred their interest in the properties to
  Wylie.  Plaintiffs subordinated their mortgage to the new, higher mortgage
  to Vermont National Bank.  This new mortgage actually added only $78,000 to
  the debt with priority before plaintiffs' mortgage; the additional $380,000
  was already secured by the original mortgage under the future advance
  clause.  See 8 V.S.A. § 1207 (validating future advance clauses).

       Surety defendants' complaints are vague and general.  They complain
  that plaintiffs failed

 

  to investigate the use of the additional funds before agreeing to
  subordinate to the new mortgage. Surety defendants did not know what use
  was made of the additional $78,000 and were suspicious of it because Wylie
  once told one of the plaintiffs that he was out of money and did not know
  what he might build.

       First, as to the $380,000 amount, we conclude that defendants do not
  have a valid complaint.  The actual borrowing occurred when defendants were
  still involved in the project, and this debt became secured at that time
  pursuant to the future advance clause in the original mortgage.  Vermont
  law allows a subsequent mortgagee on the same property to prevent
  enlargement of the superior mortgage by way of future advances, by giving
  notice to the superior mortgage holder.  See id.  Plaintiffs failed to give
  notice, but at a time when they had no duty to surety defendants to do so
  because the surety relationship had not yet been created. See Bissonnette
  I, 162 Vt. at 606, 654 A.2d  at 338 (creditor must respect rights of
  sureties in all subsequent dealings with them).

       As to the additional $78,000, surety defendants' complaints might be
  determinative if plaintiffs had the burden of proof to justify the purposes
  of the mortgages that were given priority.  We held in Bissonnette I,
  however, that the burden of proof on unjustified impairment of the
  collateral was on defendants.  Id. at 609, 654 A.2d  at 340 (defendants must
  show "collateral was unjustifiably impaired").  Thus, it was surety
  defendants' burden to show that the proceeds of the secured loans to the
  bank were not used for a proper purpose.  The evidence on the use of the
  additional $78,000 was as available to surety defendants as to plaintiffs.
  Defendants failed to meet their burden of proof that the additional debt
  secured by the May 1989 mortgage to Vermont National Bank was not for a
  purpose within plaintiffs' obligation to subordinate.

       In reviewing decisions of the trial court, we will not disturb the
  court's findings of fact unless, taking the evidence in the light most
  favorable to the prevailing party, they are clearly erroneous.  V.R.C.P.
  52(a); Cab-Tek, Inc. v. E.B.M., Inc., 153 Vt. 432, 434, 571 A.2d 671,

 

  672 (1990).

       Defendants' second claim is that plaintiffs had no duty to subordinate
  to a mortgage on parcel two, and unjustifiably impaired the collateral when
  they did so.  The trial court resolved this issue on a theory of equitable
  estoppel, holding that because defendants induced plaintiffs to take a
  substitute mortgage on both parcels, subject to the prior mortgages to
  Vermont National Bank, they were estopped from arguing that plaintiffs did
  not have the legal obligation to subordinate to mortgages covering parcel
  two.  We agree with the trial court's conclusion, but use a different
  rationale to reach it.

       The subordination agreement states that "[s]ellers agree to
  subordinate the 2nd mortgage at Purchasers option for any purposes of
  improving, preserving and developing the property."  Surety defendants read
  the reference to "the property" as meaning only parcel one and restricting
  the obligation to subordinate to parcel one.  Plaintiffs, on the other
  hand, point out that the language does not speak to the property to be
  covered by plaintiffs' subordinate mortgage, or any superior mortgages; it
  merely restricts the purpose of the borrowing to "any purposes of
  improving, preserving and developing" parcel one.  Particularly when read
  in light of defendants' ownership of parcel two and evident intent to
  develop them together, we conclude that the clause is so broadly written
  that its meaning is ambiguous.  See Isbrandtsen v. North Branch Corp., 150
  Vt. 575, 579, 556 A.2d 81, 84 (1988) (when inquiring into existence of
  ambiguity, court may consider circumstances surrounding making of
  agreement).  Reasonable persons could differ as to its interpretation.  See
  id. at 577, 556 A.2d  at 83.

       The evidence supports only one possible construction of the ambiguous
  agreement.  The dominant evidence is the understandings of the parties as
  reflected in their November 1986 action in expanding the mortgage security
  to both parcels and subordinating it to a mortgage to Vermont National Bank
  to develop the properties together.  The use of this evidence is explained
  by Corbin:

 

     In the process of interpretation of the terms of a contract, the
     court can frequently get great assistance from the interpreting
     statements made by the parties themselves or from their conduct
     in rendering or in receiving performance under it. . . .  The
     process of practical interpretation and application . . . is merely a
     further expression by the parties of the meaning that they give and
     have given to the terms of their contract previously made.  There
     is no good reason why the courts should not give great weight to
     these further expressions by the parties, in view of the fact that
     they still have the same freedom of contract that they had
     originally.  In cases so numerous as to be impossible of full
     citation here, the courts have held that evidence of practical
     interpretation and construction by the parties is admissible to aid
     in choosing the meaning to which legal effect will be given.

     . . . .

     The parties may employ language the application of which they
     know to be uncertain and to which they are too indifferent at the
     time of executing the contract to take the trouble to make certain.
     This . . . causes much greater dependence to be put upon their
     subsequent practical interpretation and construction.

  3 A. Corbin, Corbin on Contracts § 558, at 249, 251-53 (1960); cf. Paradise
  Restaurant, Inc. v. Somerset Enters., Inc., ___ Vt. ___, ___, 671 A.2d 1258, 1261-62 (1995) (distinguishing Corbin on basis that contract at issue
  was not ambiguous).  We adopted this rule in Murphy v. Britton, 109 Vt.
  522, 525, 1 A.2d 724, 725 (1938), a case in which this Court also
  determined the interpretation of an allegedly ambiguous contract based on
  the construction placed on it by the parties.

       The parties' October 1996 actions in combining the parcels for the
  security of both plaintiffs and the bank, joined in by surety defendants,
  belie the interpretation of the subordination agreement surety defendants
  now put forward.  Defendants believed they had the right under the sales
  agreement to join the parcels for financing purposes as long as plaintiffs'
  security was maintained.  Indeed, they apparently believed that they
  improved plaintiffs' security position by extending the new mortgage to
  parcel two, the parcel on which the building was to be built.  We conclude
  that the only possible interpretation of the subordination clause is to
  require plaintiffs to subordinate to mortgages that would cover the total
  development on the

 

  parcels.  There is no error on this issue.

       Surety defendants' third claim is that the trial court failed to find
  that plaintiffs were negligent in discharging the mortgage for a reduced
  price in 1991.  Although the surety defendants raised this argument below,
  and the trial court made findings about the release of the mortgage, the
  trial court failed to deal with this claim.

       The discharge of the mortgage was done without surety defendants'
  knowledge or consent.  Ordinarily, before the holders of a note may release
  their security interest in the collateral, they must obtain the express
  consent of the surety.  See Magnolia Homes Mfg. Corp. v. Montgomery, 451 F.2d 934, 937 (8th Cir. 1971) (under UCC § 3-606, holder could not dispose
  of collateral at substantially less than its reasonable value without
  consent of surety, regardless of terms of note); Prigal v. Kearn, 557 So. 2d 647, 648 (Fla. Dist. Ct. App. 1990) (surety on promissory note
  discharged from liability when holder releases collateral security); Hughes
  v. Tyler, 485 So. 2d 1026, 1030 (Miss. 1986) (surety on promissory note
  discharged because secured party subordinated its mortgage and partially
  released secured property without consent of surety); Godfrey State Bank v.
  Mundy, 412 N.E.2d 1131, 1134, 1138-39 (Ill. App. Ct. 1980) (accommodation
  party discharged under UCC § 3-606 where fire destroyed collateral and bank
  released insurance proceeds to mortgage holder without consent from
  accommodation party); Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315, 320 (Okla. Ct. App. 1976) (sale of collateral without consent of
  accommodation maker was unjustifiable impairment of collateral under UCC §
  3-606); see generally Annotation, Discharge of Accommodation Maker or
  Surety by Release of Mortgage or Other Security Given for Note, 2 A.L.R.2d
  260 (1948 & Supp. 1996); Annotation, What Constitutes Unjustifiable
  Impairment of Collateral, Discharging Parties to Negotiable Instrument,
  Under UCC § 3-606(1)(b), 95 A.L.R.3d 962 (1979 & Supps. 1985, 1996).

       In Bissonnette I, we held that plaintiffs must use "reasonable care"
  to protect the sureties' interests.  162 Vt. at 610, 654 A.2d  at 341.  We
  now hold that failure to obtain the sureties'

 

  consent before disposing of the collateral was a breach of the standard of
  reasonable care, as a matter of law.  This holding alone, however, is not
  determinative of the action.  As we held in Bissonnette I, defendants also
  have the burden to show the extent of any impairment in order to offset
  that amount against their liability.  Id. at 609, 654 A.2d  at 340.  The
  proper measure of such offset is the extent to which the collateral was
  discharged for consideration below its actual value.  Although evidence was
  offered on this point, the trial court failed to make findings on the
  extent of impairment, if any.  We remand for such determination.

       Affirmed in part and reversed in part; remanded to determine the
  extent of  impairment, if any, the release of plaintiffs' security interest
  had on the collateral.


                              FOR THE COURT:



                              _______________________________________
                              Associate Justice



--------------------------------------------------------------------------------
                                  Footnotes


FN1.  9A V.S.A. § 3-606 has been replaced with 9A V.S.A. § 3-605. 
  1993, No. 158 (Adj. Sess.), § 12, eff. Jan. 1, 1995.