Service Funding, Inc. v. Craft , 234 Mont. 431 ( 1988 )

NO. 88-203
IN THE SUPREME COURT OF THE STATE OF MONTANA
1988
SERVICE FUNDING, INC.,
a Montana corporation,
Plaintiff and Appellant,
-vs-
ROGER L. CRAFT, NORMA J. CRAFT, JOE W. BERRY,
and FIRST SECURITY BANK OF ROZEMAN, a corp.,
Defendants and Respondents.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Thomas A. Olson, Judge presidinq.
COUNSEL OF RECORD:
For Appellant:
Dunaway, O'Connor ti Moe; Stewart R. Ri.rkpatrick,
Billings, Montana
For Respondent:
Morrow, Sedivy & Bennett; Edmund P. Sedivy, Jr.
Bozeman, Montana
Submitted on Briefs: Sept. 15, 1988
Decided: November 1, 1988
-.
Clerk
Mr. Justice Fred J. Weher delivered the Opinion of the Court.
Service Funding, Inc., (Service Funding) brought an
action to recover $28,802.38 on a note secured by a second
mortgage from the Crafts on property in which First Security
Bank (First Security) also had a security interest. The
District Court for the Eighteenth Judicial District, Gallatin
County, sitting without a iury, denied Service Funding's
request for relief. We affirm.
The issues are:
1. Did First Security Bank have a fiduciary duty to
Service Funding, and if so, was that duty breached?
2. Did the District Court err in failing to subordinate
advances made to the Crafts by First Security Bank to Service
Funding's mortgage?
3. Did the District Court err in failing to grant
recovery to Service Funding by ordering foreclosure of the
Crafts' second mortgage?
In 1982, the defendant Joe Berry sold a life insurance
policy to Roger Craft. To pay the premium, Mr. Craft ob-
tained a loan from Service Funding, which was guaranteed by
Mr. Berry. Mr. Craft did not repay the loan when due, but
instead offered Service Funding a security interest in cer-
tain real property to secure payment. Service Funding
agreed, and took a second mortgage in several proposed condo-
minium units which were being developed by Mr. Craft for
resale in the Raxter Hotel in Bozeman, Montana. The District
Court found that Mr. Craft told Service Funding of First
Security's prior mortgage on all of the units. Mr. Craft
also disclosed the fact that many of the units were not
finished, and that additional funds would he needed from
First Security to complete the units for sale.
First Security consented to the arrangement, and all
parties understood that First Security was authorized to
applv proceeds from the sale of the units first against its
loan and then against Service Funding's second mortgage. At
that time, First Security's unpaid balance was $92,963.96
plus interest.
The District Court found that Service Funding had not
adequately searched the county records, and therefore did not
learn that the bank was authorized to make additional advanc-
es to the Crafts up to $50,000.00 over the face amount of the
note, or a total of $142,963.96. Subsequently, First Securi-
ty made additional advances to the Crafts for the completion
of the units in the following amounts:
April 6, 1983 . . . . . . $29,924.16
July 19, 1984 . . . . . . . . . . . 1,976.15
November 29, 1984 . . . . . . . 25,000.00
The District Court found that First Security did not exceed
its authority to make advances since Mr. Craft had made
payments against the principal. The proceeds from all sales
of units which occurred during this time were applied to the
ohligation to First Security. No money was applied to Ser-
vice Funding's mortgage, nor was Service Funding notified of
the advances made by First Security to Mr. Craft.
Service Funding filed suit against the defendants,
claiming that it should not be subordinated to First Securi-
ty's advances, that First Security had mishandled the ac-
count, and that First Security had breached its duty as
trustee. The District Court concluded that Service Funding's
mortgage was subordinate to First Security's advances under
its Deed of Trust and that First Security had breached no
fiduciary duty to Service Funding. The court also denied
Service Funding judgment against the Crafts and did not order
foreclosure of its second mortgage, although it held the
underlying indebtedness and security agreement against the
Crafts to be in full- force and effect, subiect to First
Security's prior lien. Service Funding appeals the iudgment.
I
Did First Security Bank have a fiduciary duty to Service
Funding, and if so, was that duty breached?
Service Funding argues that an agency relationship
existed between it and First Security, and that as an agent,
the bank had a fiduciary duty to act in good faith and for
the benefit of its principal. Service Funding asserts the
doctrine of principal-agent before this Court as if it were a
decisive issue at the trial court level. We will not consid-
er the agency issue since it was not raised before the Dis-
trict Court, nor were any findings made regarding an agency
relationship. This Court has said many times that alleged
error as to issues not raised in the trial court will not be
considered on appeal. Chadwick v. Giberson (Mont. 1980), 618
P.2d 1213, 1215, 37 St.Rep. 1723, 1726.
Service Funding did contend in the pretrial order that
First Security "became a trustee for the benefit of the
plaintiff and has breached its obligations as said trustee by
misapplication of the proceeds of sales of the condominiums."
The District Court responded to this issue in its Conclusion
of Law #2 which states in part that the bank breached no
fiduciary duty. On appeal, Service Funding is attempting to
have us review the District Court's conclusion, but would
have us apply the law of agency in addition to that which was
presented to the District Court. This Court is unwilling to
determine the existence of an agency relationship for the
first time on appeal.
In reviewing whether the District Court erred in con-
cluding that First Security breached no fiduciary duty to
Service Funding, we will not overturn that finding unless it
is shown to be clearly erroneous. Rule 52(a), M.R.Civ.P.
Service Funding contends that the bank's fiduciary obligation
to properly apply sale proceeds of each condominium arose
when the supplemental agreement granting the second mortgage
was agreed upon. Service Funding argues that the bank was
obligated to notify it of condominium sales and the future
advances made. Since the bank did not do so, and applied
sale proceeds to advances made rather than to the second
mortgage, Service Funding contends that the fiduciary duty
was breached.
The District Court found no evidence to establish a
fiduciary relationship, whether based on the bank's knowledge
of Service Funding's second mortgage, or otherwise. Rather,
the District Court's findings indicate that it was Service
Funding's obligation to discover the existence and extent of
the future advance clause. The record discloses that Service
Funding should have investigated more thoroughly the details
of First Security's agreement with the Crafts prior to enter-
ing this arrangement. Had Service Funding done so, it would
have been aware of the bank's authority to extend more money
to the Crafts and apply proceeds to its deed of trust before
paying off the second mortgage. The role of First Security
was to help Mr. Craft finance the remodeling of the condomin-
ium units to completion. Unless the bank extended money to
Mr. Craft, the units would have remained unfinished, would
not have sold, and neither First Security nor Service Fundinq
would have begun to realize any of the money owed them by the
Crafts. We hold that the record supports the District
Court's findinq that First Security breached no fiduciary
duty to Service Funding.
I1
Did the District Court err in failing to subordinate
advances made to the Crafts by First Security to Service
Funding's mortgage?
Service Funding contends that First Security failed to
give actual or constructive notice of the extent of its
future advance clause, in violation of 5 71-1-206, MCA, which
states that:
(1) The amount of future advances or total indebt-
edness that may be outstanding at any given time
and subject to mortgage protection must be stated
in the mortgage .. .
Because of First Security's alleged failure to comply with
the above statute, Service Funding argues that future advanc-
es made under the bank's first mortgage must be subordinated
to Service Funding's second mortgage, and that the District
Court erred in concluding otherwise. Again we will not
overturn that conclusion unless an abuse of discretion is
shown.
The future advance clause appears in paragraph 21, page
4, of First Security's Deed of Trust, which states that the
principal amount shall not exceed the original amount of the
note plus $50,000.00. The Deed of Trust was referred to in
both the mortgage from the Crafts to Service Funding and the
supplemental agreement to Service Funding's mortgage and
promissory note. We conclude that this evidence is suffi-
cient to affirm the District Court's conclusion that Service
Funding had knowledge of the existence of First Security's
Deed of Trust prior to receiving its second mortgage. It
then became the duty of Service Funding to request a copy of
the Deed of Trust to determine the actual terms of the in-
strument, including any future advance clause. Angus v.
Mariner (1929), 85 Mont. 365, 369, 278 P. 996, 998.
Service Funding next argues that because only page 1 of
the Deed of Trust was recorded, it was not on notice of the
future advance clause which appeared at page four. This
argument must also fail. Section 70-21-302, MCA, states
that, "Every conveyance of real property . . . recorded as
prescribed by law . . .is constructive notice of the con-
tents thereof to .
. . mortgagees." Section 70-21-305, MCA,
states that, "An abstract of a conveyance . . . recorded as
prescribed by law . . .
shall have the same effect ... as
if the conveyance or encumbrance of real property had been
acknowledged or proved and certified and recorded as pre-
scribed by law." The first page of the Deed of Trust reads
in relevant part:
To secure to Lender (a) the repayment of the
indebtedness evidenced by Borrower's note of even
date herewith (herein "Note"), in the principal sum
of $92,963.96 Dollars, with interest thereon,
providing for monthly installments of principal and
interest, with the balance of indebtedness, if not
sooner paid, due and payable on January 31, 1984;
the payment of all other sums, with interest there-
on, advanced in accordance herewith to protect the
security of this Deed of Trust; and the performance
of the covenants and agreements of Borrower herein
contained; and (b) the repayment of any future
advances, with interest thereon, made to Borrower
- Lender pursuant - paragraph 21 hereof (herein
by to
"Future Advances") .(Emphasis addFd. )
We conclude that the recording of page 1 of the Deed of Trust
as an abstract of conveyance gave Service Funding construc-
tive notice of its contents and terms, including the future
advance clause.
Finally, Service Funding argues that advances totaling
$45,012.16 which were made to the Crafts after the maturity
dates on the two original notes significantly diminished the
~ralue of the second mortgage without Service Funding's
knowledge. Even if Service Funding incurred damage or an
increased risk of loss as a result of the future advances,
this argument must fail given the priority of First Securi-
ty's Deed of Trust. The District Court correctly concluded
that First Security had priority not only as to the previous
sale proceeds, but to the remaining collateral as well.
I11
Did the District Court err in failing to grant recovery
to Service Funding by ordering foreclosure of the Crafts'
second mortgage?
Service Funding contends that the District Court should
have ordered foreclosure of the second mortgage against the
Crafts pursuant to the language of the second mortgage, which
allows foreclosure in the event of default. In view of the
priority granted to First Security, this argument is without
merit since no default has occurred.
We affirm the judgment of the District Court.
We Concur: A