Peoples Bank v. Burgess

PEOPLES BANK of Imboden v. Geraldine BURGESS

CA 96-794                                          ___ S.W.2d ___

                  Court of Appeals of Arkansas
                           Division I
                 Opinion delivered April 9, 1997


1.   Appeal & error -- appellate court must affirm findings of
     chancery court unless they are clearly erroneous. -- It is the
     duty of the appellate court to affirm the findings of the
     chancery court unless they are clearly erroneous.

2.   Mortgages -- payment of debt discharges mortgage -- without
     debt no lien exists. -- Payment of the debt instantly and of
     itself discharges the mortgage; there can be no lien when
     there is no debt. 

3.   Mortgages -- change in parties renewing mortgage amounts to
     satisfaction of discharged lien -- old mortgage does not
     continue as against intervening liens where instrument of
     discharge contains express recital of payment. -- A change in
     the parties renewing a mortgage amounts to satisfaction of the
     discharged lien and not a continuation of the old mortgage as
     against intervening liens, at least where the instrument of
     discharge contains an express recital of payment. 

4.   Mortgages -- decision that appellant lost its priority status
     not clearly erroneous -- bank released its first lien on
     appellee's property when it extinguished prior loans. -- The
     chancery court's determination that appellant lost its
     priority status through its own negligence and poor banking
     practices was not clearly erroneous where, though proceeds
     from the final loan made by the bank were used in part to
     satisfy the initial loan that was secured by a mortgage lien
     on the same real property, the proceeds were also used to pay
     off other loans that were not so secured; where the interest
     rate on the final loan was 8 percent, a rate different from
     the interest rate on the initial loan; where all of the
     parties to the first loan were not also parties to the final
     loan; and where the bank gave appellee's son a receipt that
     reflected payment in full of the indebtedness on the first
     loan; appellant could have taken steps to protect its priority
     status but failed to do so; the bank released its first lien
     on the subject property when it extinguished the prior loans
     and entered into the new loan transaction.


     Appeal from Randolph Chancery Court; Tom L. Hilburn,
Chancellor; affirmed.
     Ponder & Jarboe, by:  Dick Jarboe, for appellant.
     Castleman Law Firm, by:  Bob Castleman, for appellee.

     John B. Robbins, Chief Judge.
     In January 1990, appellant Peoples Bank of Imboden loaned
Richard Burgess and his wife, Melinda Burgess, the sum of
$160,200.00 toward the purchase of eight acres of land and a
salvage business owned by Richard's parents, Gib and Geraldine
Burgess.  The promissory note to the bank was secured by a mortgage
on the real property and a security interest in several vehicles. 
Richard Burgess and Melinda Burgess were makers of this promissory
note, and Gib Burgess and Geraldine Burgess signed as guarantors.
     In August 1990, Richard Burgess and Melinda Burgess gave Gib
Burgess, now deceased, and Geraldine Burgess, the appellee herein,
a promissory note in the amount of $150,000.00.  This note
apparently represented the remainder of the purchase price owed by
Richard Burgess and Melinda Burgess.  As security for payment of
the note, a mortgage on the same property mortgaged to appellant
bank was executed by Richard Burgess and Melinda Burgess in favor
of Gib Burgess and Geraldine Burgess.
     On March 21, 1991, the appellant bank loaned Richard Burgess
$4,501.00 for the purchase of a 1987 Dodge truck, and received a
promissory note executed solely by Richard Burgess.  On October 1,
1991, the bank loaned $25,024.00 to Richard Burgess and Melinda
Burgess and received as collateral a security interest in certain
automobiles.
     The original $160,200.00 loan to the Burgesses was extended
by written agreement on March 9, 1992.  The extension agreement
reduced the interest rate from 12 percent to 8 1/2 percent and
reduced the quarterly payments on the note from $10,050.00 to
$5,000.00.  The $25,024.00 loan was also extended and its interest
rate reduced from 10 percent to 8 1/2 percent.
     On December 16, 1993, the bank entered into another loan
transaction with Richard Burgess, who signed as sole obligor.  The
amount of this loan equaled the unpaid balances of the three
previous loans ($129,964.64) and $301.00 of filing fees.  The new
promissory note was in the principal amount of $130,265.00 with
interest at 8 percent and provided that payment of the total
indebtedness was due on December 16, 1994.  A mortgage on the same
eight acres of real property was executed by Richard Burgess as
security for the loan.  In conjunction with the closing of the
December 16, 1993, loan, the appellant bank gave Richard Burgess
receipts that reflected payment in full of the indebtedness owed on
the first and third loans.
     Richard Burgess defaulted on the final, $130,265.00 loan,
and on March 13, 1995, the bank commenced a foreclosure action. 
Appellee Geraldine Burgess was not named as a party in the initial
complaint, but on motion she was allowed to intervene.  The bank
then amended its complaint to include allegations of priority
because of its original 1990 loan and mortgage.
     After considering the evidence and the arguments of counsel,
the chancery court determined that a novation had occurred when the
bank combined these three loans and entered into the December 16,
1993, loan transaction with Richard Burgess.  The chancery court
specifically found that the bank did not intend to release its
priority status when it executed the final loan.  Nevertheless, the
chancery court concluded that the first and third loans had been
satisfied, thereby discharging those debts and extinguishing the
original mortgage lien.  The court found that, due to the bank's
negligence, the appellee was entitled to a first lien on the
subject real property with the bank's mortgage lien being
secondary.  The bank was awarded judgment against Richard Burgess
in the amount of $148,408.40, and Geraldine Burgess was awarded
judgment in the amount of $181,633.00.  The court ordered that the
proceeds of a public foreclosure sale of the real property be first
applied toward satisfaction of the judgment in favor of Geraldine
Burgess.
     For reversal, the bank argues that the chancery court erred
in finding that Geraldine Burgess was entitled to a first lien
on the subject property.  It contends that its final loan to
Richard Burgess was merely a consolidation of existing loans and
was made as an accommodation to him.  The bank relies on the fact
that it never intended to release its original mortgage, and
submits that this fact should have prevented its lien from becoming
inferior to that of Geraldine Burgess.  The bank asserts that,
whether the final transaction with Richard Burgess constituted a
novation, extension, or modification, it should still have retained
a first lien.
     In their briefs, both appellant and appellee cite Home Federal
Savings and Loan Assoc. v. Citizens Bank, 43 Ark. App. 99, 861 S.W.2d 321 (1993).  In that case, the appellant held first, second,
and third mortgages on property owned by a third party.  When the
mortgagors needed additional time to repay the three notes secured
by these mortgages, the appellant agreed to consolidate them.  The
new note not only included the amount owing on the three prior
notes, but also included an additional indebtedness and had an
interest rate different from the earlier notes.  The appellant
released the first, second, and third mortgages, and recorded the
mortgage securing the new note.
     Prior to releasing its mortgages, the appellant in the Home
Federal case failed to discover that the appellee bank had obtained
a judgment against the mortgagors, which had been entered of
record and become a lien after the original three mortgages were
recorded but prior to the new, consolidated mortgage.  The chancery
court found that the new note was intended to be a new loan rather
than a continuation or renewal of the three prior notes, and
concluded that the appellant had lost its priority status.  On
appeal, this court affirmed.  In doing so, we noted that the
appellee failed to show any reliance or possible prejudice if the
appellant's mortgages were reinstated.  Nonetheless, we stated
that, in such cases, a mortgagee must be free from culpable
negligence in order to have its mortgage reinstated.  We found
that, under the facts of that case, the chancellor's finding that
the appellant demonstrated culpable negligence was not clearly
against the preponderance of the evidence.
     In the instant case, it is our duty to affirm the findings of
the chancery court unless they are clearly erroneous.  See RAD-
Razorback Ltd. Partnership v. B.G. Coney Co., 289 Ark. 550, 713 S.W.2d 462 (1986).  The chancery court found that Peoples Bank of
Imboden lost its priority status through its own negligence and
poor banking practices.  We find that this decision was not clearly
erroneous and, therefore, affirm the order of the chancery court. 
     Although the bank in the case at bar did not intend to release
its original mortgage lien, its actions produced this effect.   The
supreme court has observed that "payment of the debt instantly and
of itself discharges the mortgage," and that "there can be no lien
when there is no debt."  Burnside v. Futch, 229 Ark. 664, 647, 317 S.W.2d 717, 720 (1958).  Although proceeds from the final loan made
by the bank to Richard Burgess were used in part to satisfy the
initial loan that was secured by a mortgage lien on the same real
property, the proceeds were also used to pay off other loans that
were not so secured.  In addition, the interest rate on the final
loan was 8 percent, a rate different from the interest rate on the
initial loan.  All of the parties to the first loan were not also
parties to the final loan, and it has been held that a change in
the parties renewing a mortgage amounted to satisfaction of the
discharged lien, and not a continuation of the old mortgage as
against intervening liens, at least where the instrument of
discharge contains an express recital of payment.  See 55 Am. Jur.
2d Mortgages  404 (1996).  In the present case, the parties to the
two mortgages were not identical, and the bank gave Richard Burgess
a receipt that reflected payment in full of the indebtedness on the
first loan.
     We think that Peoples Bank of Imboden could have taken steps
to protect its priority status in this case.  We find no error in
the chancellor's conclusion that the bank failed to do so, and that
the bank released its first lien on the subject property when it
extinguished the prior loans and entered into the loan transaction
of December 16, 1993.
     Affirmed.
     Stroud and Crabtree, JJ., agree.