Vonk v. Dunn

FELDMAN, Vice Chief Justice.

The Vonks brought this action to foreclose a mortgage that the Dunns had given to secure the purchase of land. The trial court granted summary judgment for the Vonks and the court of appeals affirmed. Vonk v. Dunn, 159 Ariz. 134, 765 P.2d 536 (Ct.App.1988). We granted the Dunns’ petition for review to determine whether equitable considerations apply to acceleration clauses and, if so, whether a factual issue concerning unconscionability precluded summary judgment foreclosing the mortgage. We have jurisdiction under Ariz. Const, art. 6, § 5(3) and A.R.S. § 12-120.24.

FACTS

The Dunns bought 160 acres in Cochise County from the Vonks in 1982 for $28,000. The Dunns paid $4,000 down and signed a promissory note for the $24,000 balance, securing the note with a mortgage on the property. The note ran at eight percent per annum and was payable in regular monthly installments on the first of each month. The note contained a ten-day grace period, which ran without notice from the first day of the month. The mortgage also required the Dunns to pay property taxes. The sanction for delinquent mortgage or property tax payments was acceleration and foreclosure at the Vonks’ election. Finally, the mortgage required payment of the mortgagee’s attorney’s fees and costs in any collection proceeding.

For about three years, the Dunns made timely mortgage payments. For the first six months of 1986, however, the Dunns were late. The Vonks wrote the Dunns, putting them on notice that they must make their payments on time. The notice also called on the Dunns to pay delinquent property taxes. The Dunns acknowledged the reinstatement notice, paid the property taxes, and made timely payments for the rest of 1986.

However, the Dunns’ bank mistakenly returned the February 1987 payment check marked “Insufficient Funds.” The Vonks notified their attorney, who prepared to foreclose. The attorney learned that the Dunns had not paid their November 1986 property taxes. Without contacting the Dunns, the Vonks began foreclosure on February 27, 1987. The complaint alleged default for failure to make the February mortgage payment and the delinquent property taxes. At this point, the Dunns had paid nearly thirty-five percent of the purchase price.

After the Vonks’ filed their complaint on February 27,1987, the Dunns obtained and sent to the Vonks a letter from their bank stating that it had mistakenly dishonored their check. Subsequently, the Vonks offered to dismiss the action if the Dunns brought the payments current and paid attorney’s fees and costs incurred to that time: $932.65.

The Dunns rejected this offer, arguing that the Vonks could have avoided the entire matter by contacting the Dunns during the note’s ten-day grace period. The Dunns, however, paid the delinquent taxes in March 1987. In addition, during the intervening months the Dunns continued to make regular installment payments on the note, totalling $2,338, which the Vonks accepted. The record does not reveal the Vonks’ reason for accepting these payments, but they nevertheless continued with the foreclosure proceeding. The parties did not raise the issue of waiver. Two months later, the trial court granted summary judgment to the Vonks. At the sheriff’s sale, the Vonks purchased the property for the amount of their judgment.

On appeal, the Dunns argued the foreclosure was oppressive and unconscionable, relying on Arizona Coffee Shops, Inc. v. Phoenix Downtown Parking Association, 95 Ariz. 98, 387 P.2d 801 (1963). The court of appeals, however, did not reach this issue. It affirmed, reasoning that the Dunns’ default in payment of the taxes justified acceleration of the note and foreclosure of the mortgage. Vonk, 159 Ariz. at 136, 765 P.2d at 538. The Dunns petitioned this court for review.

DISCUSSION

On review from summary judgment, we view the record in a light most favorable to the party opposing summary judgment (the Dunns) and will affirm only if no genuine issue of material fact exists. Browne v. Nowlin, 117 Ariz. 73, 74, 570 P.2d 1246, 1247 (1977). Given those principles and the arguments advanced, we review this record to determine whether it could support a finding that the Vonks’ foreclosure was unconscionable.

A. The Dunns’ Delinquency in Tax Payments

The note and mortgage allowed the Vonks to accelerate and foreclose for tax delinquency. However, a mortgage foreclosure is an equitable proceeding. Harbel Oil Co. v. Steele, 83 Ariz. 181, 318 P.2d 359 (1957). Those who seek equitable relief “must do equity.” Arizona Coffee Shops, 95 Ariz. at 100, 387 P.2d at 802. If a mortgagee has acted in an “oppressive or unconscionable” manner, the court may relieve the mortgagor of his default. Id. at 101, 387 P.2d at 803; see also Baltimore Life Insurance Co. v. Harn, 15 Ariz.App. 78, 81, 486 P.2d 190, 193 (1971), rev. denied, 108 Ariz. 192, 494 P.2d 1322 (1972). Indeed, as the Dunns argue, equitable considerations* specifically apply to acceleration clauses. Arizona Coffee Shops, 95 Ariz. at 101, 387 P.2d at 802.

Because foreclosure is an equitable proceeding, the plaintiff must do more than merely establish that the defendant has violated the strict terms of the mortgage or note. The plaintiff must additionally show that some “purpose of the [acceleration] clause is ... being circumvented or that the mortgagee’s security is jeopardized.” Harn, 15 Ariz.App. at 81, 486 P.2d at 193; see also Browne, 117 Ariz. at 75, 570 P.2d at 1248 (“acceleration clauses are viewed as protective devices for the security of the lender”). Given these principles, we turn to the facts to determine whether summary judgment was appropriate.

The Dunns owed no more than $66 in property taxes and the arrearage was not of long duration. The county treasurer had not yet issued the “notice of delinquent taxes” required by A.R.S. § 42-385, nor did he commence proceedings for sale by issuing a “notice of proposed sale” as A.R.S. § 42-387 requires. Thus, the property was not in danger of being lost for tax delinquency. We believe that with equitable considerations in mind, a factfinder could find that the Vonks’ invocation of the acceleration clause was unnecessary to protect their security.

Further, the factfinder could have considered whether the breach of the tax obligation was trivial. Considering that the Dunns had already made forty-nine of the sixty note payments,¹ paying nearly thirty-five percent of the purchase price, the $66 tax delinquency appears insignificant. The factfinder could conclude that given the Dunns’ investment, including the $4,000 down payment and their improvements on the property,² it was oppressive and unconscionable' to accelerate and foreclose for a $66 tax arrearage without giving notice and an opportunity to cure. See Arizona Coffee Shops, 95 Ariz. at 102, 387 P.2d at 803.

In addition, the Dunns paid the delinquent property taxes in March 1987, well before the Vonks filed an amended complaint on April 28, 1987 and the motion for summary judgment on May 28, 1987. This fact distinguishes Browne, in which we held that the payment of two years’ delinquent taxes after the grant of summary judgment was too late to cure the problem. Browne, 117 Ariz. at 76, 570 P.2d at 1249 (“equity, it is said, aids the vigilant”). Here, the Dunns paid early enough in the proceedings to receive the benefits of equity. See generally 55 Am.Jur.2d Mortgages § 393 (1971) (citing the rule in other jurisdictions allowing repayment of taxes after commencement of foreclosure proceedings).

Finally, the factfinder could certainly infer that the delinquent tax payment was only a secondary issue to the Vonks. They decided to foreclose when the bank dishonored the Dunns’ February check. After it became clear that the bank had wrongfully dishonored the Dunns’ check, the Vonks’ original reason for foreclosing dissipated, yet they maintained the action solely because of nonpayment of the $66 in taxes.

Our past cases do not prohibit the application of equitable considerations to the question of whether late taxes should trigger acceleration clauses. In Holman v. Roberts, 35 Ariz. 110, 114, 274 P. 775, 780 (1929), we held that the mortgagee’s extension of the time for payment did not excuse the mortgagor of his obligation to pay taxes on time. Nothing in Holman, however, precludes the factfinder from considering whether it is unconscionable for a mortgagee to accelerate the note for delinquency in tax payments. Surely, if equitable principles determine the propriety of acceleration for late payment of interest, see Arizona Coffee Shops, 95 Ariz. at 99, 387 P.2d at 802, they will apply to late payment of taxes.

We further noted in Arizona Coffee Shops that

[t]here can be no doubt of the right of a chancellor to deny foreclosure based upon an acceleration where there are substantial equities in the case which render the acceleration unconscionable.

95 Ariz. at 101, 387 P.2d at 803 (quoting Lieberbaum v. Surfcomber Hotel Corp., 122 So.2d 28, 28-29 (Fla.Dist.Ct.App.1960)).

We believe a reasonable factfinder could conclude that acceleration and foreclosure for the $66 tax delinquency was both oppressive and unconscionable. Because there was an issue of fact, the court of appeals improperly affirmed the grant of summary judgment on the ground that the taxes were delinquent.

B. Late Payment and the Bank’s Wrongful Dishonor of the Dunns’ Check

The Vonks do not dispute that the bank wrongfully dishonored the Dunns’ check for the February 1987 payment. They argue, however, that under the terms of the note and mortgage, they had no duty to notify the Dunns of the dishonored check. The Vonks contend that it was the Dunns’ responsibility to pay on time and assert that the bank’s wrongful dishonor of the Dunns’ check was not their concern.

The Dunns argue that it was inequitable for the Vonks to initiate foreclosure proceedings without notice. A telephone call or letter could have prevented this litigation. Consequently, foreclosure was oppressive and unconscionable.

A check constitutes only conditional payment of the underlying obligation unless the parties agree otherwise. Steele v. Vanderslice, 90 Ariz. 277, 283, 367 P.2d 636, 639 (1961). Thus, if the mortgagor’s bank dishonors his check, the mortgagee still has a right to receive payment. Id.; see also Prevo v. McGinnis, 142 Ariz. 298, 302, 689 P.2d 557, 561 (1984) (mortgagor cannot deliver a worthless check merely to delay the payment date); and see generally 60 Am.Jur.2d Payment § 57 (1987). Under this analysis, the Vonks argue, actual payment alone satisfies the creditor/mortgagee and a bank’s wrongful dishonor is not the mortgagee’s concern. The remedy for wrongful dishonor, the Vonks contend, is to allow the debtor/mortgagor to maintain an action against the bank for damages resulting from foreclosure. A.R.S. § 47-4402; Valley National Bank v. Witter, 58 Ariz. 491, 499, 121 P.2d 414, 418 (1942).

So rigid an analysis, however, is inconsistent with modern conditions, good legal policy, and existing law. Modern-day commerce involves the transfer and exchange of a huge volume of paper. Mortgage payments are expected to be made through the mail to the mortgagee’s or collecting agent’s place of business. Mortgagors in Arizona no longer saddle their horses and call on their mortgagees to tender gold coin in payment of their monthly obligations. Given the volume of computerized transactions, we must expect that banks will occasionally wrongfully dishonor checks. It would be bad law to hold that every time a bank wrongfully dishonors a check tendered for a mortgage payment, the mortgagee may accelerate and foreclose, the mortgagor lose his property, and the bank left to pay the damages as required by § 47-4402. Such a rule would effectively mean that one bank will pay another bank, and lawyers will get a share both going and coming. In our view, neither existing law nor common sense requires such a result.

Where payment by check through the mails is in accordance with business custom, the sending of a check properly mailed in due time even though not so received will prevent summary cancellation of the contract by the other party.

3A A. CORBIN, CORBIN ON CONTRACTS § 722, at 381 (I960); see also id. §§ 758 and 5Á id. § 1235. This principle conforms to the Arizona Coffee Shops rule that equitable considerations apply to the invocation of an acceleration clause.

The tender of a “good” check in accordance with commercial practice and the wrongful dishonor of that check are matters a court must consider in determining whether equity will allow acceleration of the note and foreclosure of the mortgage.³ See Arizona Coffee Shops, 95 Ariz. at 100, 102, 387 P.2d at 802, 803 (illness of bookkeeper resulting in late tender of check for mortgage payment was circumstance court must consider on the issue of unconscionability). The Vonks incorrectly assert that our court of appeals has held that equity will not relieve a mortgagor from late payments resulting from “mistake.” Actually, our court of appeals held that it will not relieve a mortgagor from a default “caused by his negligence, mistake or by accident” when the mortgagee has not acted in bad faith or fraudulently. Ciavarelli v. Zimmerman, 122 Ariz. 143, 144-45, 593 P.2d 697, 698-99 (Ct.App.1979) (emphasis added).⁴ As Ciavarelli recognized, the court may protect a mortgagor from a default that results from accident, a good faith mistake, or some unusual circumstance beyond his control. Id. at 145, 593 P.2d at 699.

Here, the undisputed fact remains that the bank wrongfully dishonored the Dunns’ check to the Vonks. Thus, the Dunns were technically in default not because of their own mistake or accident but because of the bank’s. This certainly was a circumstance beyond the Dunns’ control. Arizona Coffee Shops; First Federal Savings & Loan Association v. Ram, 135 Ariz. 178, 180, 659 P.2d 1323, 1325 (Ct.App.1982) (asserting same rule, but trial court had sufficient evidence from which to conclude that the default resulted from the mortgagor’s own neglect).

We hold, therefore, that the factfinder could decide it was oppressive and unconscionable to permit the Vonks to accelerate the note and foreclose the mortgage because the bank wrongfully dishonored the Dunns’ check for the monthly payment. Thus, the trial judge improperly granted summary judgment.

We must address one further issue. As the statement of facts indicates, the Vonks offered to dismiss the foreclosure action and reinstate the mortgage if the Dunns reimbursed them for their attorney’s fees. The Dunns refused. The merits of each position bear on the equities relating to permitting foreclosure. Also, either party could argue that the bank, because it wrongfully dishonored the check, should eventually be liable to the Dunns for attorney’s fees. A.R.S. § 47-4402. The trial court could allocate fees under A.R.S. § 12-341.01. After hearing the evidence, the trial court, rather than this court, should settle these arguments and determine the equities regarding the attorney’s fee issue.

CONCLUSION

We conclude that the trial judge erred by granting summary judgment. The following are all matters the factfinder should consider in determining whether acceleration and foreclosure were unconscionable: the mortgagors’ timely tender of a valid check, the bank’s wrongful dishonor of that check, the trivial nature of the mortgagors’ breach of the covenant to pay taxes, the amount the Dunns had already paid on the property, the making and acceptance of payments after the purported acceleration, the danger to the Vonks’ security, and the Vonks’ offer to withdraw the foreclosure action on payment of attorney’s fees.

Accordingly, we vacate the court of appeals’ opinion and reverse the judgment. We remand the case for further proceedings consistent with this opinion.

GORDON, C.J., and MOELLER and CORCORAN, JJ., concur.

1 . The last payment was to be a substantial balloon payment.

2 . During the summary judgment arguments, the Vonks also claimed the Dunns were in default for failing to keep the premises insured against fire loss. The Dunns pointed out that they purchased a vacant lot from the Vonks and despite the boilerplate terms of the mortgage, there had been nothing to insure until the Dunns improved the property. All this is of marginal if any relevance, but it does point out that the Dunns might have increased the value of the Vonks’ security.

3 . We need not answer the more difficult question whether, when a bank has properly dishonored a check, the mortgagee must give the mortgagor notice of default and an opportunity to cure. The answer depends on the course of dealing between the parties. See Kammert Brothers Enterprises, Inc. v. Tanque Verde Plaza Co., 102 Ariz. 301, 428 P.2d 678 (1967).

4 . When discussing this rule and directly quoting from Ciavarelli, the Vonks’ brief in the court of appeals left out the two words of the case that we emphasized. Appellees’ Brief at 9.