Culbertson State Bank v. Dahl

No. 80-151 I N THE SUPREME COURT OF THE STATE O M N A A F OTN 1980 CULBERTSON STATE BANK OF CULBERTSON, MONTANA, a Montana S t a t e C o r p o r a t i o n , P l a i n t i f f and Respondent, HAROLD D H a n d GENEVA DAHL, husband AL and w i f e a n d MAURICE SYTHE, Defendants and A p p e l l a n t s . Appeal from: D i s t r i c t Court of t h e Seventh J u d i c i a l D i s t r i c t , I n and f o r t h e County o f R i c h l a n d . H o n o r a b l e L. C . G u l b r a n d s o n , J u d g e p r e s i d i n g . C o u n s e l o f Record: For Appellants: B j e l l a , N e f f , R a t h e r t & Wahl, W i l l i s t o n , N o r t h Dakota W. Gene T h e r o u x , Wolf P o i n t , Montana For Respondent: Garden, McCann, and S c h u s t e r , Wolf P o i n t , Montana S u b m i t t e d o n b r i e f s : J u l y 2 2 , 1980 Decided : OCT 2 2 1980 ~ i l e d : OCT 2 2 1980 -V B- . Clerk Mr. Chief Justice Frank I. H a s w e l l delivered the Opinion of the Court. P laintiff-respondent , C u l b e r t s o n S t a t e Bank ( B a n k ) b r o u g h t this action t o foreclose a real e s t a t e mortgage i n t h e Richland County District Court. The D i s t r i c t Court, sitting without a jury, entered judgment in favor of the Bank and a decree of foreclosure, and Harold and Geneva Dahl appeal. H a r o l d and G e n e v a D a h l , as m a k e r s , e x e c u t e d a $20,000 pro- missory note t o Maurice Sythe, t h e payee, on F e b r u a r y 1 4 , 1974. The D a h l s a l s o e x e c u t e d a real e s t a t e mortgage i n Sythe's favor w h i c h was r e c o r d e d on t h e same d a t e . The t e r m s o f t h e n o t e s p e - c i f y t h a t i t i s t o be p a i d i n e q u a l a n n u a l i n s t a l l m e n t s o f $ 4 , 0 0 0 p l u s 7% i n t e r e s t , p a y m e n t s t o commence on F e b r u a r y 1 4 , 1 9 7 5 . The note also designates the Culbertson State Bank as the place where payment is to be made. The n o t e was p l a c e d i n an e s c r o w a c c o u n t w i t h t h e Bank. The e s c r o w a c c o u n t was o p e n e d b y M a u r i c e S y t h e on May 1 0 , 1 9 7 4 . Maurice Sythe obtained a $10,000 note from the Bank on November 6, 1974. The n o t e s t a t e d t h a t t h e B a n k ' s s e c u r i t y c o n - sisted of an "Assignment o f H a r o l d Dahl Note." Consistent with t h i s provision, t h e " D a h l n o t e " was e n d o r s e d b y S y t h e , payable t o t h e Bank. On March 27, 1975, Bank notified H a r o l d Dahl that the February 14, 1975, payment had not been received on the pro- missory note held in escrow. Mr. Dahl made a payment of $5,572.50 ($4,000 on t h e p r i n c i p a l ) on March 31, 1975, w h i c h was t o be a p p l i e d t o t h e n o t e h e l d i n e s c r o w . He t e s t i f i e d t h a t on March 31, 1975, he told Alan Peterson, Bank's executive vice-president, that he had a1 r e a d y paid the $20,000 owing to Sythe. Peterson testified that Dahl had said something about Sythe owing h i m money b u t t h a t D a h l had n o t said anything con- cerning a belief that nothing was owed to the Bank or Sythe. $5,000 on p r i n c i p a l and $ 3 8 2 . 6 4 i n i n t e r e s t was credited to Sythe's $10,000 note on March 31, 1975. Sythe obtained a $5,000 n o t e f r o m B a n k on A p r i l 23, 1975, a t which time he t o l d Alan Peterson that he d i d n o t owe H a r o l d D a h l a n y money. Bank took a written assignment of the Dahl real e s t a t e mortgage on this date. The assignment was recorded on January 27, 1976. Bank sent a l e t t e r t o H a r o l d Dahl on A p r i l 23, 1975, informing h i m t h a t a w r i t t e n a s s i g n m e n t o f t h e m o r t g a g e was t a k e n . Another l e t t e r was s e n t on J a n u a r y 2 6 , 1976, which informed Dahl t h a t the a s s i g n m e n t h a d b e e n r e c o r d e d and t h a t a p a y m e n t was due F e b r u a r y 14, 1976. Bank did not receive any payments from Maurice Sythe on his two $5,000 notes. Harold Dahl also refused to make any further p a y m e n t s on t h e n o t e w h i c h h a d b e e n a s s i g n e d t o t h e Bank. T h e B a n k f i l e d a c o m p l a i n t on O c t o b e r 3 , 1977, a g a i n s t H a r o l d and G e n e v a D a h l and M a u r i c e S y t h e . Bank was n e v e r a b l e t o make s e r - vice of process upon Maurice Sythe. This action came on for trial against Harold and Geneva Dahl on December 19, 1979. Harold Dahl's defense at trial was that he h a d p a i d t h e note and was discharged from liability. He attempted to show that payments on the $20,000 promissory note had been made directly to Maurice Sythe. He introduced several exhibits in this regard including: a check t o S y t h e f o r $9,520 d a t e d March 4, 1975; an $11,800 promissory note from Sythe t o h i m s e l f dated J a n u a r y 1, 1 9 7 5 ; a n d an u n n e g o t i a t e d c h e c k d a t e d A p r i l 2 3 , 1975, made o u t b y h i m s e l f and a l l e g e d l y s i g n e d b y S y t h e f o r $ 5 , 5 7 2 . 5 0 , c o n t a i n i n g a n o t a t i o n t h a t i t was a r e f u n d o f t h e p a y m e n t made b y Dahl. The appellant expended considerable effort at trial i n a t t e m p t i n g t o p r o v e t h a t d i r e c t p a y m e n t s h a d b e e n made t o M a u r i c e Sythe, and t h e r e s p o n d e n t d e v o t e d a s i m i l a r e f f o r t i n attempting t o r e b u t t h e s e a1 l e g a t i o n s . The D i s t r i c t Court found that: t h e $20,000 n o t e was e x e - c u t e d on F e b r u a r y 1 4 , 1974; a real e s t a t e m o r t g a g e was executed a n d r e c o r d e d on t h e same d a t e ; one o f t h e t e r m s o f t h e p r o m i s s o r y n o t e w h i c h was incorporated i n the mortgage s p e c i f i e d t h e p l a c e of payment as t h e C u l b e r t s o n S t a t e Bank; Maurice Sythe endorsed the p r o m i s s o r y n o t e p a y a b l e t o t h e Bank and d e l i v e r e d it to the Bank on May 10, 1974; the Bank, for the consideration of the assignment of the note and delivery of the assignment of the mortgage, l o a n e d M a u r i c e S y t h e $10,000 on November 6, 1974 and $5,000 on April 23, 1975; the Bank is the lawful "owner and h o l d e r " o f a l l t h e n o t e s and t h e m o r t g a g e ; H a r o l d and G e n e v a D a h l h a v e p a i d o n l y $4,000 on t h e n o t e a s s i g n e d t o t h e Bank; $11,000 with interest from March 31, 1975 i s now due and owing from Harold and Geneva Dahl to the Bank; and the Bank has incurred attorney fees in enforcing the collection of the note. The D i s t r i c t C o u r t c o n c l u d e d t h a t a l l o f t h e t e r m s and c o n d i t i o n s o f the note had been broken by the makers and that the Bank was entitled to have the mortgage enforced and foreclosed and to r e c e i ve a t t o r n e y f e e s . On a p p e a l , t h e a p p e l l a n t contends t h a t t h e D i s t r i c t Court erred in admitting correspondence which the Bank received from Maurice Sythe under t h e "business r e c o r d s " e x c e p t i o n t o t h e hear- say rule. It i s a l s o contended t h a t t h e r e is insufficient evi- dence t o s u p p o r t t h e judgment. With regard t o appellant's contention t h a t there i s insuf- ficient evidence to support the judgment, we find the Uniform Commercial Code c o n t r o l 1 i n g . The D i s t r i c t Court p r o p e r l y found t h a t t h e B a n k was a " h o l d e r " o f t h e p r o m i s s o r y n o t e , s i n c e i t was i n possession of the n o t e w h i c h was endorsed by Maurice Sythe. Section 30-1-201(20), MCA. As a result of Bank's status as a "holder" and i t s p r o d u c t i o n o f t h e i n s t r u m e n t , it i s entitled to recover unless the defendant e s t a b l is h e s a defense. Sect i o n 30-3-307 ( 2 ) , MCA. As previously stated, appellant's sole defense was his assertion that 1 i a b i 1i t y had been d i s c h a r g e d by payments a1 l e - g e d l y made d i r e c t l y t o M a u r i c e S y t h e . However, the affirmative defense o f payment only discharges the maker's l i a b i l i t y on t h e i n s t r u m e n t under s e c t i o n 30-3-603, MCA, i f p a y m e n t i s made t o t h e "holder." The a p p e l l a n t n e v e r a t t e m p t e d t o p r o v e t h a t payment was made t o t h e " h o l d e r . He i n s t e a d a t t e m p t e d t o p r o v e t h a t p a y m e n t s w e r e made t o M a u r i c e S y t h e , the original payee. Thus, e v e n had the court determined that payments had b e e n made t o S y t h e , the appellant would not have been d i s c h a r g e d from liability on the instrument. I n short, the appellant f a i l e d t o establish a v a l i d defnse and the Bank was entitled to recover under section 30-3-307 ( 2 ) , MCA. Since the Bank is the holder of the note and a valid assignee o f t h e mortgage which secures the note, it i s e n t i t l e d t o a decree of foreclosure to the extent of the debt due and o w i n g o n t h e d a t e o f commencement. Appellant also asserts that the D i s t r i c t Court erred in admitting correspondence received from Maurice Sythe which g e n e r a l l y d e n i e d t h a t D a h l h a d made a n y p a y m e n t s d i r e c t l y t o h i m . The t w o l e t t e r s w h i c h were a d m i t t e d u n d e r t h e " b u s i n e s s r e c o r d s " exception t o t h e hearsay r u l e , over objection, were s o l i c i t e d by the Bank in an effort to collect Sythe's note and to obtain i n f o r m a t i o n c o n c e r n i n g D a h l ' s a1 l e g a t i o n s o f p a y m e n t . We n e e d n o t address this i s s u e on t h e m e r i t s , s i n c e t h e e v i d e n c e c o u l d have no e f f e c t on t h e outcome of the litigation. The effect of the letters was to rebut the appellant's defense of payment to a person--not a "holder." As previously stated, this was not a valid defense and even i f we were to find error, it would be error not affecting "a substantial right of the party," Rule 103(a), Mont .R.Evid., i.e. it would not be reversible error. Affirmed. ,I Chief Justice y e - , ----- - - - - - - - - - - - - - - - - ------ Jus 'ces