Best Fertilizers of Arizona, Inc. v. Burns ( 1977 )

OPINION

HATHAWAY, Judge.

This is an appeal involving two mortgages. The trial court found that appellee’s mortgage was senior to that of appellant and entered judgment foreclosing appellee’s mortgage. Appellant challenges the foreclosure contending that the senior note has been discharged and the mortgage thereby released.

Appellee’s note and mortgage originated when Marcus Vanderslice gave them as a purchase money note and mortgage to Mr. and Mrs. Dees in exchange for title to real property. Mr. Vanderslice later sold the property to McFaddin Ranches subject to the Dees mortgage. McFaddin Ranches did not assume the mortgage but made payments on it. In 1970, McFaddin Ranches ceased making payments. Marcus Vanderslice then, in order to avoid default, paid the balance of the money owed to the Dees who then endorsed and assigned the note and mortgage to Mr. Vanderslice. Appellant contends that this transaction resulted in discharge of the note and release of the mortgage. Mr. Vanderslice, in consideration of the payment of $35,000, endorsed the note and assigned the mortgage to Burns, the appellee. Burns filed an action seeking judgment on the note and foreclosure of the mortgage. Best Fertilizers, holder of a note and mortgage given to it by McFaddin Ranches and encumbering the same property as appellee’s mortgage, counterclaimed for judgment on the note and foreclosure of its mortgage. The trial court granted Burns’ motion for summary judgment and Best Fertilizers appealed.

We have concluded that the trial court’s judgment in favor of appellee must be reversed. Appellee’s mortgage was released when the Dees transferred it back to Vanderslice, the original mortgagor. The note signed by Vanderslice was a negotiable instrument within A.R.S. § 44-2504(A). It was discharged when Mr. Vanderslice reacquired it. A.R.S. § 44-2568(0(1). Appellee argues that these statutes, part of the Uniform Commercial Code as enacted in Arizona, are inapplicable to his note because the note is secured by a real estate mortgage. Albeit the Code does not apply to security interests in realty, the promissory note is not a security interest in realty. Under A.R.S. § 44-2505(A)(5), a note does not cease to be negotiable even though it is secured by a mortgage. Furthermore, A.R.S. § 44-2512(A) states that “[t]he negotiability of an instrument is not affected by: * * * 2. A statement that collateral has been given to secure obligations

In Capital Investors Co. v. Executors of Estate of Morrison, 484 F.2d 1157, 1160 (4th Cir. 1973), the court held:

“ . . . the transferability of such notes, as well as the rights flowing from such transfers, are to be determined by the legal principles unique to negotiable instruments. This is so, though the notes are secured by a real estate mortgage.”

When Mr. Vanderslice purchased the note and mortgage from the Dees he became the holder of his own note and mortgage bringing the transaction within A.R.S. § 44-2568(C)(1). “The liability of all parties is discharged when any party who has himself no right of action or recourse on the instrument: 1. Reacquires the instrument in his own right.” Mr. Vanderslice had no right of action or recourse on the instrument. He was the only person liable for payment. McFaddin Ranches, his grantee, had been making payments but had not assumed the mortgage. Mr. Vanderslice therefore had no right to demand payment from McFaddin Ranches. This result is in accord with pre-existing common law relating to mortgages. Osborne, Handbook on the Law of Mortgages 554 (2d Ed. 1970).

Once the note is discharged, the mortgage is released. The mortgage ceases to be a lien upon the property because there can be no mortgage unless there is a debt. Our Supreme Court has held that “The very essence of a mortgage is a subsisting obligation to pay. It matters not whether the debt existed before or was created by the transaction in question. But debt there must be.” Merryweather v. Pendleton, 90 Ariz. 219, 367 P.2d 251 (1961); Charter Gas Engine Co. v. Entrekin, 30 Ariz. 341, 246 P. 1038 (1926). Also, a mortgage has been found to be “incident to the note and inseparable therefrom” so that “ ‘A mortgage, as distinct from the debt it secures, is not a thing of value nor a fit subject of transfer . . . ’” Hill v. Favour, 52 Ariz. 561, 567, 84 P.2d 575, 578 (1938). Among the “gems” and “free” offerings of the late Professor Chester Smith of the University of Arizona College of Law was the following analogy. The note is the cow and the mortgage the tail. The cow can survive without a tail, but the tail cannot survive without the cow.

Reversed and remanded for proceedings consistent with our holding that appellee’s note was discharged and the accompanying mortgage released.

HOWARD, C. J., concurs.