Washington v. Slack

NO. 91-044
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991
DENNIS R. WASHINGTON,
Plaintiff and Respondent,
JAMES D. SLACK, JR.; LES HARDY, JR.,
d/b/a HARDY LEASING and BERT E. ARNLUND;
AETNA LIFE INSURANCE COMPANY, a corp.;
NORWEST BANK OF BILLINGS, N.A. f/k/a
THE FIRST NORTHWESTERN BANK OF BILLINGS,
a National Banking Assoc.; CARBON COUNTY
OIL COMPANY d/b/a VONDRA'S EXXON; DILL,
DILL & McALLISTER. a oartnershiw of
.
:
ittornevs. STANDARD 0 MONTANA ~ESOURCE
%
CORP., a Montana corp.
Defendants and Appellants.
APPEAL FROM: District court of the Thirteenth Judicial District,
In and for the County of Carbon,
The Honorable William J. Speare, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Carol Hardy Conrad; Pedersen & Conrad, Billings,
Montana
For Respondent:
Evonne Smith Wells, Attorney at Law, Missoula,
Montana
Submitted on Briefs: April 18, 1991
Decided: June 13, 1991
Filed:
Justice Karla M. Gray delivered the Opinion of the Court.
The appellants, Les Hardy, Jr. and Bert E. Arnlund, appeal
from the Judgment and Decree of Foreclosure of the District Court
of the Thirteenth Judicial District, Carbon County, granting
summary judgment to the respondent, Dennis R. Washington, as to
lien priority. We affirm.
The dispositive issue on appeal is whether the District Court
erred in concluding that the error contained in the respondent's
mortgage was not material and therefore, as a matter of law, that
the appellants, as subsequent judgment lienholders, had
constructive notice of the respondent's prior recorded mortgage.
On May 9, 1983, the defendant James D. Slack, Jr., entered
into an agreement with Atlantic Richfield Company (ARCO) whereby
Slack agreed to purchase from ARCO four tracts of real property.
Two of the tracts are contiguous property in an area commonly known
as Washoe and located in Township 8 South, Range 20 East, P.M.M.,
Carbon County, Montana. The other two tracts are in the Joliet
area and are located in Township 4 South, Range 22 East, P.M.M.,
Carbon County, Montana. When ARCO deeded the four tracts of land
to Slack, it reserved unto itself the oil and gas interest in those
tracts. The deed from ARCO as grantor to Slack as grantee was made
effective May 9, 1983, and was recorded in the office of the Clerk
and Recorder of Carbon County, Montana, at 9:45 a.m., May 11, 1983.
On the effective date of the deed, May 9, 1983, Slack executed
a promissory note to ARCO, secured by a mortgage on the four tracts
of land. The mortgage, which named Slack as the mortgagor and ARCO
2
as the mortgagee, was recorded in Carbon County on May 11, 1983 at
9:50 a.m. The deed and the mortgage both contain the same legal
description of land as to Township, Range, Sections and portions
of Sections. The mortgage provided in part:
That Mortgagor hereby mortgages to Mortgagee all
that property described on attached Exhibit A,
incorporated herein by this reference, located in Carbon
County, Montana, as security for the payment to Mortgagee
of Three Hundred Thousand Dollars ($300,000.00) on or
before May 1, 1988, with interest thereon at the rate of
eleven percent (11%)' as required in that certain Note
of even date herewith.
Exhibit A, attached to the mortgage, provided that the mortgage
covered "[all1 ARCO1s right, title, and interest in the following
described tracts: . . . . This language was followed by the
correct legal description of the four tracts of land. Exhibit A
was in error. It should have stated "[all1 Slack's right, title,
and interest in the following described tracts: .... II
On September 27, 1984, the defendants and appellants, Les
Hardy, Jr. and Bert E. Arnlund, obtained a judgment against Slack
in the amount of $78,312.10. An abstract of the judgment was
recorded in Carbon County on October 4, 1984. The appellants had
no actual notice of the existence of the Slack-ARC0 mortgage and
their judgment lien has never been satisfied.
On October 2, 1987, ARCO assigned its interest in the Slack-
ARCO mortgage and promissory note to the plaintiff and respondent,
Dennis R. Washington. The assignment of the mortgage was recorded
on July 1, 1988. Slack failed to pay the full amount of principal
and accrued interest on or before May 1, 1988, as required by the
promissory note secured by the mortgage. On April 10, 1989, the
respondent commenced a foreclosure action on Slack's interest in
the tracts of land described in the mortgage; he asserted that the
mortgage had priority over the appellantst judgment lien.
On April 26, 1989, the appellants answered and cross-claimed,
asserting that their judgment lien had first priority based upon
the error in the attachment to the respondent's mortgage. The
parties filed cross-motions for summary judgment on the issue of
priority. The District Court determined that the respondent's
mortgage and the appellantse judgment lien were valid liens against
the real property and that the mortgage had priority over the
judgment 1 ien . The court concluded that the error in the
attachment to the mortgage was not material and, as a matter of
law, that the appellants had constructive notice of the mortgage.
The District Court then granted the respondent's motion for summary
judgment, denied the appellants' motion, and ordered foreclosure.
Other facts relevant to this appeal will be discussed as necessary.
Did the District Court err in concluding that the error
contained in the respondent's mortgage was not material and
therefore, as a matter of law, that the appellants, as subsequent
judgment lienholders, had constructive notice of the respondent's
prior recorded mortgage?
The appellants maintain that when ARCO deeded the tracts of
land to Slack and reserved for itself the oil and gas interest in
those tracts, two separate estates were created. They assert that
Slack's mortgage to ARCO, stating that it covered all of ARCOts
interest in the tracts, contained a material error insofar as the
rights of third parties are concerned because the mortgage
identified ARCO's oil and gas estate as the encumbered property and
did not disclose an encumbrance upon Slack's interest in the
surface estate.
The appellants further contend that the recording of the
defective mortgage did not impart constructive notice to them as
Slack's subsequent judgment creditors. Citing Poncelet v. English
(l99O), 243 Mont. 481, 795 P.2d 436 and Ely v. Hoida (l924), 70
Mont. 542, 226 P. 525, they argue that a mortgage describing the
wrong property is not constructive notice as to other property
which the parties to the mortgage intended to, but did not,
describe.
In Poncelet, the property owner executed to Poncelet a
mortgage containing an erroneous legal description. The mortgage
described "Lot ' A ' of the Amended Plat of Lots 11 and 12 in Block
6, City of Polson, Lake County, Montana, according to the official
plat . . . ." The description left out "of Riverside Addition."
After recordation of the Poncelet mortgage, the property owner
executed another mortgage which was subsequently assigned to
Colonial Savings and Loan Association (Colonial). This mortgage
contained a correct legal description. Thereafter, Poncelet
brought suit for foreclosure and reformation of his defective
mortgage, naming Colonial as a defendant. Colonial moved for
summary judgment on the basis that its mortgage had priority over
Poncelet's earlier, but defective, mortgage. This Court affirmed
summary judgment in favor of Colonial, holding that the second
mortgage had priority over the first.
The form of recording of conveyance is paramount unless
a party has actual notice of a prior claim. (Citations
omitted.) While this rule may have an undeniably harsh
effect where Poncelet is concerned, we cannot minimize
the import of full compliance with proper legal
descriptions for the purpose of constructive notice from
recorded instruments. It was incumbent upon Poncelet to
make certain that the recorded mortgage contained an
accurate legal description of the property.
In Elv v. Hoida ( 1 9 2 4 ) , 70 Mont. 5 4 2 , 2 2 6 P. 525,
a case on all fours with the one at bar, this Court
stated that in order to qive a mortqaqe wrioritv as
aaainst a subsequent mortqaqee, the mortqaqe must
describe the land covered bv it with sufficient accuracy
to enable one examininq the record to identify the land.
In the present case, as in &r, the mortgage described
land other than the land intended to be mortgaged. The
subsequent mortgagee had no duty to inquire further when
the mortgage appeared on its face to describe some
property but not specific property
added. )
.... (Emphasis
Poncelet, 243 Mont. at 484, 795 P.2d at 438.
In gl.~, Ely's prior recorded mortgage described lots 17 and
18 in block 1, Lenox addition. This block did not contain any lots
numbered 17 and 18. The later Bateman mortgage included an
accurate legal description of the property located outside the
Lenox addition. In holding that the second mortgage had priority
over the first, this Court stated:
When Bateman took her mortgage, if she desired to
protect herself against prior recorded conveyances or
mortgages of the property embraced therein, it was, of
course, her duty to examine the records. If she did so
and discovered that the Ely mortgage covered lots 17 and
18 in block 1, Lenox addition, even though she actually
read this instrument she was under no obligation to
pursue her inquiry further. There is nothinq uwon the
face of the Elv mortqaqe to indicate that there was anv
mistake or imwerfection therein. . ..
and one readinq
it would have a riqht to assume that it was correct, and
would have no duty imposed uwon him to qo bevond the
record for the purpose of ascertaining that the parties
intended to cover land located entirely outside the Lenox
addition. . .. (Emphasis added.)
m, 70 Mont., at 547-48, 226 P. at 527
Construing the Poncelet and decisions together, the
property covered by the mortgage will be held to be described with
sufficient accuracy, and will impart constructive notice through
the operation of the recording statutes, if one examining the
mortgage may, from the language of the mortgage and the information
gained from the inquiry clearly suggested by the language of the
mortgage, identify the specific land intended to be included.
Because each case depends on its own facts, the determination of
what constitutes "sufficient accuracy" must be made on a case-by-
case basis.
The appellants are correct in their assertion that when ARCO
deeded the tracts of land to Slack and reserved the oil and gas
interest in those tracts, two separate estates were created. See
In re Hume's Estate (1954), 128 Mont. 223, 272 P.2d 999. However,
it is also true in this state that, although the oil and gas
interest is a separate estate, its boundaries continue to be
dictated by the boundaries of the severed surface estate. Jackson
v. Burlington Northern Inc. (1983), 205 Mont. 200, 204, 667 P.2d
406, 408. Therefore, we are presented here with a factual
situation where more than one property interest exists within the
boundaries of the land; as such, the case at bar is distinguishable
from both Poncelet and m.
In this case, there is no error in the legal description
contained in the mortgage executed by Slack to ARCO. The legal
7
description contained in Exhibit A would lead one examining the
record directly to the four tracts of land owned by Slack and which
were the subject of the mortgage. The question then becomes
whether the mortgage sufficiently denotes the specific property
interest in those tracts of land which was intended to be covered
by the mortgage.
Upon examining the mortgage in its entirety, it is obvious
from the face of the mortgage that it contains a mistake in its
reference to the specific property interest encumbered. Slack
executed the mortgage as mortgagor and was expressly named as
mortgagor on pages one and three of the instrument. The mortgage
also provided:
That Mortgagor hereby mortgages to Mortgagee all
that property described on attached Exhibit A .. .
as
security for the payment to Mortgagee of Three Hundred
Thousand Dollars ($300,000.00). ...
In Exhibit A, there is language immediately preceding the legal
description that states: "All ARCO1s right, title, and interest
in the following described tracts: . . . . This language is
inconsistent with the body of the mortgage which clearly denotes
Slack as the mortgagor and ARCO as the mortgagee, since it is
axiomatic that a mortgagor cannot mortgage a mortgagee's interest
in property. This mistake in the mortgage is made even more
obvious by the specific reference to the oil and gas interest
reserved by ARCO immediately following the legal description of the
four tracts of land in Exhibit A. This reference was a clear
indication that the reserved interest was excepted from the
mortgaged property.
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Under these particular facts, it is obvious from the face of
the mortgage that the parties to the mortgage intended the mortgage
to cover Slack's interest in the surface estate. Unlike the
factual circumstances in Poncelet and m, one examining the
mortgage containing this obvious error would at least have a duty
to inquire into the mortgage and would be chargeable with
constructive notice of all the information in the public records
which would be gained if the inquiry was pursued to the full extent
to which it led. Guerin v. Sunburst Oil & Gas Co. (1923), 68 Mont.
365, 371, 218 P. 949, 951. From the public records, the
constructive notice given thereby, and the mortgage and deed
instruments, it is illogical to assert that the mortgage contained
a material error.
We hold that the District Court did not err in concluding that
the error contained in the mortgage was not material and therefore,
as a matter of law, that the appellants, as subsequent judgment
lienholders, had constructive notice of the respondent's prior
recorded mortgage. Where, as here, the specific property intended
to be mortgaged can be identified from the instrument itself or
from inquiry clearly suggested by the language of the instrument,
such error does not affect the validity of the instrument.
Affirmed. i
June 13, 1991
CERTIFICAE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the
following named:
Carol Hardy Conrad
Pedersen & Conrad
1645 Ave. D
Billings, MT 59102
Evonne Smith Wells
Attorney at Law
P.O. Box 9410
Missoula, MT 59807
James D. Slack, Jr.
P.O. Box 1369
Red Lodge, MT 59068
ED SMITH
CLERK OF THE SUPREME COURT
STATE QF MONTmA