PUBLISHED OPINION
Case No.: 95-1850
Complete Title
of Case:
CAROLE H. SCHMIDT,
Plaintiff-Respondent,
v.
WAUKESHA STATE BANK, a
Wisconsin banking corporation,
Defendant-Appellant,
BYRON R. LARSON,
Third
Party Defendant.
Oral Argument: May 14, 1996
COURT COURT OF APPEALS OF WISCONSIN
Opinion Released: September 12, 1996
Opinion Filed: September
12, 1996
Source of APPEAL Appeal from a judgment
Full Name JUDGE COURT: Circuit
Lower Court. COUNTY: Milwaukee
(If
"Special", JUDGE: MICHAEL D. GUOLEE
so indicate)
JUDGES:Fine and Schudson, JJ., and Michael T. Sullivan, Reserve
Judge.
Concurred: ---
Dissented: ---
Appellant
ATTORNEYSFor the defendant-appellant there were briefs and oral
argument by Cramer, Multhauf & Hammes, with Richard R. Kobriger
of Waukesha.
Respondent
ATTORNEYSFor the plaintiff-respondent there were briefs and oral
argument by Michael, Best & Friedrich, with David A. Krutz of
Milwaukee.
Amicus CuriaeAmicus Curiae brief was filed by John
E. Knight and James E. Bartzen of Boardman, Suhr, Curry &
Field of Madison, for The Wisconsin Bankers Association.
COURT OF
APPEALS DECISION DATED AND
RELEASED September
12, 1996 |
NOTICE |
A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 95-1850
STATE OF WISCONSIN IN
COURT OF APPEALS
CAROLE
H. SCHMIDT,
Plaintiff-Respondent,
v.
WAUKESHA
STATE BANK, a
Wisconsin
banking corporation,
Defendant-Appellant,
BYRON
R. LARSON,
Third Party Defendant.
APPEAL
from a judgment of the circuit court for Milwaukee County: MICHAEL D. GUOLEE, Judge. Reversed and cause remanded.
Before
Fine and Schudson, JJ., and Michael T. Sullivan, Reserve Judge.
SCHUDSON,
J. Waukesha State Bank appeals from the
judgment granting a declaratory judgment to Carole H. Schmidt, following a
bench trial. The trial court concluded
that the business note executed by Schmidt's ex-husband, Byron R. Larson, was
not secured in whole or in part by the dragnet clause of the mortgage on their
real property and, therefore, that Schmidt was not responsible for the debt
under the note. The Bank argues that
under both Capocasa v. First National Bank, 36 Wis.2d 714, 154
N.W.2d 271 (1967), and Wisconsin's Marital Property Act, Schmidt is responsible
for the debt.
We
conclude that the trial court erred in applying Capocasa to the
facts it found. We further conclude
that the trial court erred by reversing the burden of proof under the marital
property act and requiring the Bank to establish that Larson's business note
was secured for the benefit of the marital interests. Accordingly, we reverse and remand for the trial court to make
factual findings in order to determine whether the debt was incurred in the
interest of the marriage and, in doing so, to apply the presumption that it
was, as required by the marital property act.
I. FACTUAL
BACKGROUND
Schmidt
and Larson were married in 1986 and they purchased a duplex in 1990. As husband and wife, they executed a $10,000
consumer universal note secured by a mortgage on the duplex in favor of
Waukesha State Bank. The mortgage
contained a “future advances” or “dragnet” clause, which provided:
5. Mortgage as Security. This
Mortgage secures prompt payment to Lender of ... (b) to the extend [sic]
not prohibited by the Wisconsin consumer Act (i) any additional sums which
are in the future loaned by Lender to any Mortgagor, to any Mortgagor and
another or to another guaranteed or endorsed by any Mortgagor primarily for
personal, family or household purpose and agreed in documents evidencing the
transaction to be secured by this Mortgage and (ii) all other additional
sums which are in the future loaned by Lender to any Mortgagor, to any
Mortgagor and another or to another guaranteed or endorsed by any Mortgagor
....
(Emphasis added.)
Among
other provisions, the mortgage also stated:
8.
Mortgagor's Covenants. Mortgagor
covenants:
....
(f)
Conveyance. Not to sell, assign,
lease, mortgage, convey or otherwise transfer any legal or equitable interest
in all or part of the Property, or permit the same to occur without the prior
written consent of Lender and, without notice to Mortgagor, Lender may deal
with any transferee as to his interest in the same manner as with Mortgagor,
without in any way discharging the liability of Mortgagor under this Mortgage
or the Note;
....
19. Successors and Assigns. The obligations
of all Mortgagors are joint and several.
This Mortgage benefits Lender, its successors and assigns, and binds
Mortgagor(s) and their respective heirs, personal representatives, successors
and assigns.
On
December 26, 1991, Larson, without Schmidt's knowledge, executed a $7,500
business note with Waukesha State Bank.
Larson and the Bank renewed the note four times in 1992, also without
Schmidt's knowledge. On November 13,
1992, Larson executed a quitclaim deed conveying to Schmidt his right, title
and interest in the duplex.
Subsequently, on February 17, 1993, Larson, again without Schmidt's
knowledge, executed a new note, renewing the original $7,500 and obtaining an
additional $4,500. Larson did not
inform the Bank of the quitclaim conveyance.
Sometime after Schmidt and Larson separated in March 1993, Schmidt
learned that Larson had executed the notes on the property. Schmidt and Larson divorced in October 1993.
The
Bank sought to recover the indebtedness created by the notes under the
mortgage's dragnet clause. The trial
court concluded, however, that the quitclaim deed was valid and, therefore,
that “Larson did not have any interest, either through marriage or singularly,
in the Real Property at the time he executed the Business Note of February 17,
1993.” Further, having found that
“[t]here is no proof that the proceeds of the Business Note did inure to the
benefit of Ms. Schmidt or to the benefit of the real property,” the trial court
also concluded that Schmidt was “not responsible for the debt under the
Business Note.” The trial court
explained: “Since the Business Note is
not a marital obligation, the Bank cannot rely on the provisions of
766.55(2)(b).[1] Rather, the Bank falls under the scope of
766.55(2)(d).”[2]
II. ANALYSIS
A. The Mortgage.
The
express terms of the mortgage, standing alone, make both Schmidt and Larson
responsible for the debt incurred by the business note.[3] The dragnet clause unambiguously provides
that “all other additional sums which are in the future loaned by” the Bank to
either Schmidt or Larson are secured by the mortgage. Paragraphs 8(f) and 19 further clarify that Schmidt and Larson
are obligated jointly and severally and may not relinquish their responsibility
by assigning legal interest in the duplex without written permission of the
Bank. We must consider, therefore,
whether the quitclaim deed and/or Capocasa alter what otherwise
would be Schmidt's clear obligation.
B. The Quitclaim
Deed.
First,
it is necessary to segregate the pre- and post-quitclaim indebtedness—the
$7,500 note Larson executed before he quitclaimed on November 13, 1992, and the
renewal of that loan together with the new $4,500 in the note of February 17,
1993.
Regarding
the $7,500 pre-quitclaim indebtedness, we conclude that because the dragnet
clause establishes contractual covenants between both Larson and the Bank and
Schmidt and the Bank, and because the mortgage prohibits Larson from divesting
his legal interest in the property, absent the Bank's written permission,
Schmidt's obligation under the dragnet clause survives the quitclaim. Indeed, Schmidt cites no authority to
support her argument that by quitclaiming his interest, Larson somehow absolved
her interest in the property of the increased indebtedness by which he
encumbered it before the quitclaim.
A
quitclaim deed cannot cleanse property of encumbrances. It only releases the grantor's claim or
interest in the property. See Leimert
v. McCann, 79 Wis.2d 289, 301, 255 N.W.2d 526, 532 (1977); see also
6A Richard R. Powell & Patrick J.
Rohan, Powell on Real Property ¶ 897[1], at 81A-29-30 (1996). To allow the quitclaim deed to eliminate the
security interest established under the dragnet clause would allow Schmidt to
receive more than Larson was able to give.
Because Larson owned the property subject to the dragnet clause, he
could not quitclaim what he owned “bleached” of his “dragnetted,” contractual
obligations. As the Bank and the amicus
curiae brief of the Wisconsin Bankers Association correctly argue, to allow
quitclaim deeds to so affect separate third-party obligations would be to allow
married persons or co-mortgagors to release the liability of parties to
mortgages by giving quitclaim deeds and not informing the banks of the
conveyances. This would then allow a
married person or co-mortgagor who released legal interest in a property to
obtain additional bank loans that would be unsecured. This, of course, is exactly the kind of subterfuge precluded by
standard real estate mortgage provisions such as paragraph 8(f) in the mortgage
executed by Schmidt and Larson.
Regarding
the post-quitclaim indebtedness of $4,500, however, we must consider additional
questions. Although the quitclaim
violated paragraph 8(f) of the mortgage, was it still valid to eliminate
Larson's interest in the property so that he could not further encumber the
property? If so, was the $4,500
post-quitclaim note Larson's individual debt or did it still fall within the
reach of the dragnet clause?
Sections
706.01(1) and (7), and 706.02(1)(f), Stats.,
specifically allow spouses, among other things, to alienate any interest in a
homestead.[4] That statutory allowance, however, does not
provide that spouses may alienate any interest in order to undermine or
eliminate valid contractual obligations with an uninformed, non-consenting
third party, particularly where a mortgage requires the third party's consent
before any such alienation may occur.
Schmidt
argues that the Bank had constructive notice that Larson had no interest in the
property given that the quitclaim deed had been recorded and that a bank's only
remedy if a quitclaim deed is allowed to defeat a dragnet clause is not to loan
additional money. The Bank responds
that because subsequent liens of indebtedness relate back to the mortgage via
the dragnet clause, see Bank of Barron v. Gieseke, 169
Wis.2d 437, 455, 485 N.W.2d 426, 432 (Ct. App. 1992), it is not required to
perform a title search prior to advancing additional money to a mortgagor under
a dragnet clause.
First
Interstate Bank v. Heritage Bank & Trust, 166 Wis.2d 948, 480 N.W.2d 555 (Ct. App. 1992),
supports Waukesha State Bank's position.
In First Interstate Bank, we specifically rejected the
argument that a mortgagee with a future advances clause and without actual
knowledge of intervening mortgagees should be charged with constructive notice
via record title and should be required to do a title search or credit check
before each advance in order to have priority.
See id., 166 Wis.2d at 954-955, 480 N.W.2d at
558. Further, we again refer to
paragraph 8(f). It requires not only
that the Bank be informed, but also that the Bank give “written consent” before
a legal interest can be alienated.
Thus,
we conclude that although Larson's quitclaim may be valid to assign to Schmidt
interests he otherwise might have in the duplex, it is not valid to alienate
his legal interests in any way that would eliminate his or Schmidt's
contractual obligations to the Bank under the mortgage.
C. Capocasa.
Although
our analysis of the mortgage and quitclaim would seem to conclusively resolve
this appeal, our analysis must continue in light of Capocasa.
In
Capocasa, the supreme court concluded that a joint tenant/wife's
interest in mortgaged property was not subject to a dragnet clause contained in
a note executed by her estranged husband where the wife had no knowledge of the
note and did not consent to subjecting the mortgaged property to this
additional debt.[5] The supreme court acknowledged that the
literal language of the dragnet clause would make the mortgage security for the
husband's note, but explained “that the literal enforcement of the clause would
result, under the circumstances, in the perpetration of an inequitable result
not intended by the parties.” Capocasa,
36 Wis.2d at 720, 154 N.W.2d at 274.[6]
The
supreme court delineated the indebtedness a dragnet clause will secure:
[W]hen a “dragnet” clause is made a part of a mortgage
executed by joint tenants, each mortgagor pledges his undivided interest in the
mortgaged property to secure (1) the joint indebtedness or other indebtedness
specifically named in the instrument, and any existing or future joint
indebtedness of the mortgagors to the mortgagee; (2) any existing or future
individual indebtedness to the mortgagee; and (3) any future debt of his
co-mortgagor which is known to him and to which he consents to be a lien upon
his interest; provided (4), in addition, that whenever the proceeds or the
benefits derived from the other mortgagor's contracting a further obligation
inure to the enhancement of his interest, the “dragnet” clause will be
construed to cover such indebtedness to the extent of that enhancement
notwithstanding the fact that the mortgagor did not know of or consent to the
indebtedness.
Id., 36 Wis.2d at 726-727, 154 N.W.2d at 278 (emphasis in original). Despite the wife's agreement to the dragnet
clause in the mortgage, the supreme court applied the third and fourth Capocasa
criteria and held that her interest in the mortgaged property was not subject
to the bank's lien because she did not know or consent to the husband's loan
and because the obligation did not benefit or enhance her interest in the
property. Therefore, the court ruled,
the bank's lien attached to only the husband's one-half interest and declared
the wife's interest “free and clear of the bank's claim.” Id., 36 Wis.2d at 727, 154
N.W.2d at 278.
Capocasa is distinguishable from the present case for two main
reasons—the first, factual, favoring Schmidt; the second, legal, favoring the
Bank.
First,
in Capocasa, the dragnet clause was applied to the renewal of a
debt originally incurred, with the wife/co-mortgagor's knowledge and consent,
prior to execution of the mortgage containing the dragnet clause. In contrast, putting the quitclaim issue aside for the moment, here the
Bank seeks to apply the mortgage's dragnet clause to secure a new, subsequent
debt incurred without Schmidt's knowledge or consent. Thus, under Capocasa, Schmidt is in an even more
sympathetic position than the spouse who prevailed in Capocasa. Second, however, Capocasa was
decided before Wisconsin enacted Chapter 766, the marital property act. As we will explain, the presumption of
§ 766.55(1), Stats., favors
the Bank.
Capocasa did nothing to undermine the essential validity of a
mortgage dragnet clause. In fact, Capocasa
reiterated that “[t]here is no doubt that mortgages to secure future advances
serve a socially and economically desirable purpose,” see id.,
36 Wis.2d at 719 & n.1, 154 N.W.2d at 273 & n.1, and further, that
“Wisconsin has long recognized that a mortgage can secure future advances and
the lien of the mortgage will attach at the time of the mortgage even though
the advances are made at a later date.”
Id., 36 Wis.2d at 719, 154 N.W.2d at 274.
To
paraphrase the Capocasa criteria in application to this case,
Larson and Schmidt each pledged his or her undivided interest in the duplex
under the dragnet clause to secure: (1) joint or other
indebtedness named in the mortgage, and any present or future joint
indebtedness to the Bank; (2) their existing or future individual
indebtedness to the Bank (here, Larson's loans); (3) any future debt of
one known to the other and consented to by the other as a lien upon his or her
interest; and (4) in addition, with respect to either of them, any “further
obligation[s]” to which one contracts that “inure to the enhancement” of the
other's interest regardless of knowledge or consent (here, arguably, Larson's
loans, unknown to Schmidt).
None
of the first three Capocasa criteria encompasses Larson's loans: (1) they
were not named in the instrument and, excluding any impact of the dragnet
clause, they were not future joint indebtedness; (2) they were not
Schmidt's future individual indebtedness and, as we will explain, they
were not necessarily Larson's future individual indebtedness; and (3) they
apparently were not future debts of Larson known to Schmidt and, as we will
explain, although the loans certainly were known to Larson, they were not
necessarily future debts of Schmidt. Thus, if Larson's notes were
encompassed by the dragnet clause they would be so only because, under the
fourth factor, they were “further obligation[s]” contracted by Larson, unknown
to Schmidt, that “inure[d] to the enhancement of [Schmidt's] interest.”[7]
Still,
the parties argue over whether the Capocasa criteria remain
viable in light of Wisconsin's subsequently enacted marital property law. After all, in the second factor for example,
the very concept of “individual indebtedness” would certainly be affected by the
marital property law's modern view of whether, and under what circumstances a
spouse may incur an indebtedness that is strictly “individual.” As we will see, however, analysis of this
case under Capocasa renders a dispositive question consistent
with that posed under the marital property law.
D. Marital
Property Law.
Section
766.55(2)(b), Stats., states that
“[a]n obligation incurred by a spouse in the interest of the marriage or
the family may be satisfied only from all marital property and all other
property of the incurring spouse.”
(Emphasis added.) Section
766.55(2)(d), Stats., however,
states that “[a]ny other obligation incurred by a spouse during
marriage, including one attributable to an act or omission during marriage, may
be satisfied only from property of that spouse that is not marital property and
from that spouse's interest in marital property, in that order.” (Emphasis added.)[8] Thus, the issue is whether the Larson loans
were “obligation[s] incurred ... in the interest of the marriage,” under
§ 766.55(2)(b), or “other obligation[s],” under § 766.55(2)(d).
Thus,
to determine whether the dragnet clause in this case encompassed Schmidt's
responsibility for the loans Larson secured, the fact-finder must evaluate
whether, under Capocasa, the loans “inure[d] to the enhancement
of Schmidt's interest.” If so, then the
loans, under marital property law, were “obligation[s] incurred by [Larson] in
the interest of the marriage.”
Accordingly, assuming Capocasa survives the enactment of
the marital property act, under its fourth factor, whether “the proceeds or the
benefits derived from [Larson's] contracting a further obligation inure to the
enhancement of [Schmidt's] interest” is the critical issue in determining
whether, under § 766.55(2)(b), Stats.,
the obligation was “incurred in the interest of the marriage or the family.”
E. The Marital
Property Presumption.
“Whether
a family purpose exists in connection with incurring an obligation is a
question of fact.” 2 Keith A. Christiansen et al., Marital Property
Law in Wisconsin § 6.3a, at 6-9 (2d ed. 1993). Section 766.55(1), Stats., provides that “[a]n obligation incurred by a spouse
during marriage, including one attributable to an act or omission during
marriage, is presumed to be incurred in the interest of the marriage or
the family.” (Emphasis added.) In its factual findings, however, the trial
court stated: “There is no proof that
the proceeds of the Business Note did inure to the benefit of Ms. Schmidt or to
the benefit of the real property.” The trial court thus reversed the
presumption and burden of proof.
Larson's
loans, incurred during the marriage, are “presumed to be incurred in the
interest of the marriage or the family” and, therefore, it was Schmidt's burden
to produce evidence to overcome the statutory presumption. See Rule
901.03, Stats.[9] Thus, once the bank established the basic
fact that the loans to Larson were incurred during the marriage, it became
Schmidt's burden to prove by a preponderance of the evidence that the loans to
Larson under consideration were not incurred in the interest of the marriage or
the family. Accordingly, we conclude
that the trial court erred by failing to apply the statutory presumption that
Larson's notes were in the interest of the marriage and thus could be satisfied
from the real property.[10]
III. CONCLUSION
In
summary, we conclude that the mortgage contained a valid dragnet clause and the
quitclaim did not extinguish any interest secured by the dragnet. Further, we conclude that Capocasa,
when properly applied to this case, is consistent with the Wisconsin Marital
Property Act. Therefore, we remand this
matter to the trial court for its factual determinations with the correct
application of the marital property presumption under § 766.55(1), Stats.
By
the Court.—Judgment reversed and
cause remanded.
[1] Section 766.55(2)(b), Stats., states: “An
obligation incurred by a spouse in the interest of the marriage or the family
may be satisfied only from all marital property and all other property of the
incurring spouse.”
[2] Section 766.55(2)(d), Stats., states: “Any
other obligation incurred by a spouse during marriage, including one
attributable to an act or omission during marriage, may be satisfied only from
property of that spouse that is not marital property and from that spouse's interest
in marital property, in that order.”
[3] Larson did not contest the Bank's third-party
complaint against him for foreclosure of the mortgage and, on September 19,
1994, the trial court entered judgment for the Bank against Larson for
$16,355.46.
[4] Contrary to the parties' arguments we see no
ambiguity in or conflict between §§ 766.31(10) and 706.02(1)(f), Stats.
Section 766.31(10) states that “[s]pouses may reclassify their property
by ... conveyance, as defined in s. 706.01(4), signed by both spouses.” (Emphasis added.) Section 706.02(1)(f), however, requires that real property
conveyances alienating any homestead interest of a married person be “signed,
or joined in by separate conveyance, ... except conveyances between spouses.” (Emphasis added.) It is undisputed that the property is a homestead. Section 706.01(4), Stats., specifically mentioned in § 766.31(10), however,
cross-references § 706.02. Thus,
while § 766.31(10) discusses reclassification in general,
§ 706.02(1)(f) explicitly governs the formal requisites for interspousal
real property conveyances alienating any homestead interests.
[5] In Capocasa, a husband and wife
owned a hearing-aid business in which both were officers and 50% stockholders
but the wife “had no part in the actual management of the company.” Capocasa, 36 Wis.2d at
716-717, 154 N.W.2d at 272. The
business borrowed $2,000 from a bank under an unsecured note. The couple subsequently executed a $10,600
note and mortgage, which contained a dragnet clause, on their residence. Id., 36 Wis.2d at 717, 154
N.W.2d at 272-273. After the husband
left the wife and stopped operating the business, the bank exchanged the $2,000
unsecured note of the defunct corporation for the husband's personal note. Id., 36 Wis.2d at 717, 154
N.W.2d at 273. The wife was never asked
to consent to the note nor did she have any knowledge of the husband's note
until the bank tried to collect on the note from the sale proceeds of the
house. Id. The dragnet clause stated that it was
security for the note “and also such further sums of money which may be or
become owing by the parties ..., or any or either of them, to the
[bank].” Id., 36 Wis.2d
at 720, 154 N.W.2d 274 (emphasis in original).
[6] Chief Justice
Currie, joined by Justice Hallows, vehemently dissented, characterizing the
majority opinion as “legal wizardry” and stating that “[t]he [majority's]
desire to accomplish an equitable result is understandable, but I disapprove of
the court modifying and remaking the contract.” Dissent, 36 Wis.2d at 728, 154 N.W.2d at 278.
[7] Schmidt also argues that Larson's notes were
insulated from the effect of the dragnet clause because the Bank did not check
the box in front of the clause from the notes stating: “Unless checked here, this Note is not
secured by a first lien mortgage or equivalent security interest on a
one-to-four family dwelling used as Maker's principal place of residence.” The Bank correctly responds, however, that
the mortgage containing the dragnet clause was a second mortgage and therefore was
not a “first lien mortgage or equivalent security interest.” Additionally, among the “Additional
Provisions” on the back of the notes is:
“This Note is secured by all existing and future security agreements and
mortgages between Lender and Maker.”
[8] As the Bank made
clear at oral argument before this court, it is not seeking to hold
Schmidt personally liable for the indebtedness. Rather, it is seeking to enforce the
mortgage's dragnet clause against her marital property share of the property.
[9] Rule 901.03, Stats., states:
Presumptions in general. Except as
provided by statute, a presumption recognized at common law or created by
statute, including statutory provisions that certain basic facts are prima
facie evidence of other facts, imposes on the party relying on the presumption
the burden of proving the basis facts, but once the basic facts are found to exist
the presumption imposes on the party against whom it is directed the burden of
proving that the nonexistence of the presumed fact is more probable than its
existence.