In Wisconsin a Bank can foreclose without Mortgage Note

No Mortgage Note - A Foreclosure Case in Wisconsin

Case Law
Mitchell Bank v. Schanke,
Spouses Waltke, State of Wisconsin Department of Revenue and
Internal Revenue Service
No. 01-1590

and

Schanke v. Mitchell Street State Bank
No. 01-1591
February 27, 2004

Two cases were consolidated, i.e. actions for declaratory judgment and foreclosure. The validity of a mortgage involving lands in Genesee, Wisconsin executed in favor of Mitchell Bank by Waltke was disputed by Schanke considering that he has interest on part of the land. Schanke purchased this in a former foreclosure action which he filed for the purpose of collecting a debt which the wife of Waltke made.

Schanke filed a declaratory judgment action for the declaration of the Bank’s mortgage on the Genesee property as invalid. After several months, the Bank filed an action for foreclosure of the mortgage on the Genesee property. The action for declaratory judgment was consolidated with the foreclosure action.

The factual backdrop is as follows: Waltke owed numerous debts, executed guaranties and mortgages to different creditors—two of which were the Bank and Schanke. One of the loans executed by Waltke and his wife with Schanke consisted of $50,000 and secured with a mortgage of 34 hectare of Genesee property in Wisconsin. The deed of mortgage was signed by both parties under seal. Waltke defaulted in payments and Schanke brought an action for foreclosure which remained undisputed by Waltke. A default judgment was issued in favor of Schanke and he purchased half interest in the Genesee property.

The several loans with the Bank have been restructured and renewed and for which mortgages have been made. The Bank brought an action for foreclosure on the properties mortgaged to cover the remaining unpaid loans of Waltke and one of these properties is the Genesee property where Schanke has half interest. The Bank could not produce the note on which the several renewals were made because it was destroyed due to the flood in the Bank’s basement. Schanke filed an action for declaratory judgment to settle the issue of his claim that the mortgage executed over the Genesee property was invalid.

The Waukesha County Circuit Court which tried both actions dismissed the foreclosure action on the ground that the mortgage lacked consideration and therefore invalid. On appeal, the court affirmed the decision of the trial court. It further explained that the debt was not proven by the Bank and the 'dragnet clause' stated in the mortgage was unenforceable because the amount of the debt is not stated and is not identifiable in the mortgage documents.

Thus, an appeal was filed before the Supreme Court of Wisconsin. The only issue to be resolved is whether or not the mortgage disputed is enforceable. Corollary to this issue are issues: a) whether there was consideration for the mortgage; b) whether the Bank was able to prove the debt as the basis for the mortgage; and, c) whether the ‘dragnet clause’ as stated in the mortgage is enforceable.

The Supreme Court, on the issue of whether or not there is consideration, ruled in the affirmative. There is consideration for the mortgage. The law conclusively considers as proof of consideration the fact that an executed contract has been signed by the parties under seal. In the absence of evidence of fraud, the validity of the contract cannot be impugned and overthrown.

Although it is asserted that the contract is executory and therefore as such, it can only be a mere presumption of a sufficient consideration as ruled in several cases cited National Bank v. Cohen, 41 Wis. 2d 710, 719, 165 N.W. 2d 140 (1969) and Hoffman v. Wausau Concrete Co., 58 Wis. 2d 472, 486-87, was rejected by the Court. It defined ‘executory and executed contracts.’ Thus, "an executory contract is one in which the parties have bound themselves to future activity that is not yet completed, while an executed contract is one in which all promises have been fulfilled and nothing remains to be done." Clearly, the Court explained that the mortgage was signed under seal, delivered and recorded. The contract was completely performed and there was nothing more that any one of the parties could have done. The assertion of Schanke that no money exchanged hands and therefore the contract is still executory is without basis. Mortgage can be entered into as a consideration for a mere extension of the period within which to pay a debt or for purposes of renewal of pre-existing debts. Moreover, Schanke did not allege or prove fraud.

As to the issue of the Bank’s failure to prove the debt underlying the mortgage because it failed to produce the note, the court ruled that the parties where so bent on the production of the note when it’s destruction in good faith was already established. Secondly, the note merely is primary evidence of a debt. The mortgage secures this debt not the note bond or other evidence of debt. The Supreme Court citing the case of New England Bank v. Bedford Realty Corp., 680 A.2d 301, 310, the Bank is not required to present the note in physical form if it can prove the existence, terms, and conditions of the debt by secondary evidence. Thus, "the loss of the note supporting the mortgage is not fatal." Further citing the case of Doyone & Rayne Lumber Co.,196 Wis. at 390 "'A mortgage is only an incident to a debt, which is the principal thing."

In the instant case, the note referred to the debt of $50,000 which the Bank failed to prove. However, the antecedent debts were proved by the bank and were shown to be secured by the mortgage. Moreover by the language of the Mortgage, it clearly established that parties intended that the mortgage secure all antecedent debts.

Finally on the issue of enforceability of the dragnet clause, the Court ruled that it is valid and enforceable. Contrary to the assertion of Schanke, the dragnet clause need not specify the individual debts and specify the total amount. The Court citing the case of Capocasa v. First National Bank, 36 Wis. 2d 714, 154 N.W.2d 271 (1967),

"when a "dragnet" clause is made part of a mortgage executed by joint tenants, each mortgagor pledges his undivided interest in the mortgaged property to secure (1) the joint indebtedness or other indebtedness specifically named in the instrument, and any existing or future joint indebtedness of the mortgagors to the mortgagee; (2) any existing or future individual indebtedness to the mortgagee..."

The debts need not be listed and individually specified because the words of the dragnet clause are very clear that it refers to all debts previously granted or in the future to be granted. The pertinent part of the clause is reproduced herein verbatim:

"The term "Obligations" as used herein shall include, without limitation, all of the debts, notes, guaranties, obligations and liabilities of whatever nature or amount (and any extension, renewals or modification thereof) arising out of credit or other financial accommodation previously granted, contemporaneously granted or granted in the future by Mortgagee to or at the request of any Obligor..."

The Court reversed the ruling of the appellate and trial courts and remanded the case for further reception of evidence and hearing.

Lesson Learned: This is an appealed case from the Supreme Court of Wisconsin.

The case is significant in laying down the legal principle that the note is merely an evidence of a debt and therefore its loss in good faith, would not be fatal in a foreclosure case considering that the indebtedness may still be proven by secondary evidence. It also stressed the importance of the debt and not the mortgage because the latter simply secures the former. It also passed upon the necessary requirements of a dragnet clause in order for it to be enforceable.

Written by Kevin Levonas and Giselle G.