Lori Enfield, Richard Enfield, Marvin Enfield, Thomas E. Wilson as Guardian for Sharon Enfield, and Steuben County Treasurer v. The Farmers & Merchants State Bank (mem. dec.) ( 2017 )


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  • MEMORANDUM DECISION
    Pursuant to Ind. Appellate Rule 65(D),
    FILED
    this Memorandum Decision shall not be                              Feb 08 2017, 9:00 am
    regarded as precedent or cited before any                              CLERK
    Indiana Supreme Court
    court except for the purpose of establishing                          Court of Appeals
    and Tax Court
    the defense of res judicata, collateral
    estoppel, or the law of the case.
    ATTORNEY FOR APPELLANT                                   ATTORNEYS FOR APPELLEE
    John J. Schwarz,II                                       Thomas B. Trent
    Hudson, Indiana                                          Andrew L. Palmison
    Fort Wayne, Indiana
    IN THE
    COURT OF APPEALS OF INDIANA
    Lori Enfield, Richard Enfield,                           February 8, 2017
    Marvin Enfield, Thomas E.                                Court of Appeals Case No.
    Wilson as Guardian for Sharon                            76A05-1603-MF-579
    Enfield, and Steuben County                              Appeal from the Steuben Superior
    Treasurer,                                               Court
    Appellants-Defendants,                                   The Honorable William C. Fee,
    Judge
    v.                                               Trial Court Cause No.
    76D01-1503-MF-118
    The Farmers & Merchants State
    Bank,
    Appellee-Plaintiff
    Altice, Judge.
    Case Summary
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017     Page 1 of 13
    [1]   The Farmers & Merchants State Bank (the Bank) filed a mortgage foreclosure
    complaint against Marvin Enfield (Marvin) and others. The Bank and Marvin
    filed cross-motions for summary judgment. After a hearing, the trial court
    granted summary judgment in favor of the Bank. Marvin appeals, presenting
    two issues for our review, which we consolidate and restate as: Did the trial
    court err in granting the Bank’s motion for summary judgment?
    [2]   We affirm.
    Facts & Procedural History
    [3]   For decades, Marvin has owned approximately 260 acres in Steuben County
    (the Enfield Farm).1 At some point prior to these proceedings, Marvin had a
    judgment rendered against him for approximately $100,000. To pay off this
    and other debt, Marvin intended to sell forty acres of the Enfield farm. Richard
    Enfield,2 Marvin’s son, agreed to purchase what Marvin believed to be a forty-
    acre tract of the Enfield Farm for $236,500.00.3 On July 11, 2013, Marvin and
    Richard executed a warranty deed conveying property from Marvin to Richard,
    but reserving a life estate interest in the real estate for Marvin. Marvin
    1
    The Enfield Farm is comprised of ten separate tracts of land.
    2
    For clarity, references to Richard are inclusive of his wife, Lori.
    3
    According to Marvin, this amount was about the market price at the time for forty acres of low quality farm
    ground in Steuben County.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017          Page 2 of 13
    maintains that unbeknownst to him, the deed he executed conveyed the entire
    Enfield Farm to Richard.4
    [4]   The following day, July 12, 2013, Richard executed and delivered to the Bank a
    Promissory Note, by which he promised to pay to the Bank the sum of
    $236,500.00, together with interest (Note 1). The specified purpose of Note 1
    was to purchase farmland. Contemporaneously therewith, Richard and Marvin
    executed a mortgage, which included a “MAXIMUM OBLIGATION LIMIT”
    providing that “[t]he total principal amount secured by this [mortgage] at any
    one time shall not exceed $ 236,500.” Appellant’s Second Corrected Appendix at
    62. The mortgage expressly indicated that it secured Note 1 and “future notes
    and other debt instruments to be executed from time to time.” 
    Id. In a
    separate
    provision, the mortgage secured additional loans from the Bank to any of the
    individuals who signed the mortgage “under any promissory note, contract,
    guaranty, or other evidence of debt existing now or executed after this
    [mortgage].” 
    Id. The entire
    260-acre Enfield Farm was provided as collateral
    for the mortgage. Marvin maintains that he was not apprised of this fact and
    4
    Marvin asserts that he is legally blind and therefore was unable to read the document Richard presented to
    him. Marvin maintains that he intended to convey only forty acres to Richard and that he relied upon
    Richard to apprise him of the content of the document Richard asked him to sign. Upon learning that the
    warranty deed conveyed the entire Enfield Farm to Richard and that the entire farm served as collateral for
    the mortgage, Marvin filed a tort action in the Steuben Superior Court against Richard and the Bank. In that
    tort action, Marvin alleged undue influence, fraud, theft and conversion, trespass, intentional infliction of
    emotional distress, negligent misrepresentation, breach of fiduciary duty, and breach of contract with regard
    to the execution of the warranty deed and subsequent mortgage. The tort action was consolidated into the
    foreclosure action for purposes of discovery and pretrial proceedings. By stipulation of the parties, the Bank
    was later dismissed from the tort action.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017            Page 3 of 13
    asserts that at all times he was under the impression that only forty acres of the
    Enfield Farm was to be encumbered by the mortgage.
    [5]   Later that same day, Richard executed a second Promissory Note (Note 2) in
    the amount of $67,480.88 and specified that the loan served to purchase farm
    equipment. Note 2 indicated that it was secured by the same mortgage as Note
    1. Marvin claims that he did not know that Richard borrowed additional
    money under Note 2 and that he was never made aware that such debt was also
    secured by the mortgage.
    [6]   By December 2013, Richard was failing to make the monthly payments as
    required by the terms of Notes 1 and 2, thereby resulting in default. The Bank
    repossessed the farm equipment purchased with funds provided under Note 2.
    On March 19, 2015, the Bank filed a Complaint for Foreclosure. Thereafter,
    the Bank filed a motion for summary judgment on September 30, 2015, with
    regard to foreclosure of the mortgage based upon Note 1 only.5 Marvin filed his
    response and a cross-motion for summary judgment on November 9, 2015.
    The trial court held a hearing on the competing summary judgment motions on
    January 5, 2016.
    [7]   On February 25, 2016, the trial court issued its order granting the Bank’s
    motion for summary judgment and denying Marvin’s cross-motion for
    5
    The Bank acknowledges that the indebtedness secured by the mortgage is limited to a principal amount of
    $236,500 (i.e., the Maximum Obligation Limit), plus interest, fees, and other charges.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017        Page 4 of 13
    summary judgment. The trial court thereafter entered an in rem and in personam
    judgment against Marvin and Richard. Marvin requested a stay of the
    judgment, which the trial court denied. Marvin appealed to this court.6 Upon
    Marvin’s motion, this court granted a stay of the judgment. Additional facts
    will be provided as necessary.
    Discussion & Decision
    [8]   Marvin argues that the trial court erred in granting summary judgment to the
    Bank. An appellate court reviewing summary judgment analyzes the issues in
    the same way as would a trial court. Pfenning v. Lineman, 
    947 N.E.2d 392
    , 396
    (Ind. 2011). A party seeking summary judgment must establish that “the
    designated evidentiary matter shows that there is no genuine issue as to any
    material fact and that the moving party is entitled to a judgment as a matter of
    law.” Ind. Trial Rule 56(C). The party moving for summary judgment bears
    the initial burden of establishing its entitlement to summary judgment.
    
    Pfenning, 947 N.E.2d at 396-97
    . “Only then does the burden fall upon the non-
    moving party to set forth specific facts demonstrating a genuine issue for trial.”
    
    Id. at 397.
    The reviewing court must construe the evidence in favor of the non-
    movant, and resolve all doubts against the moving party. 
    Id. The party
    appealing the grant of summary judgment has the burden of persuading this
    6
    No other named defendants participate in this appeal.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 5 of 13
    court that the ruling was erroneous. See Perkins v. Stesiak, 
    968 N.E.2d 319
    , 321
    (Ind. Ct. App. 2012), trans. denied.
    [9]    The fact that the parties make cross-motions for summary judgment does not
    alter our standard of review. Huntington v. Riggs, 
    862 N.E.2d 1263
    , 1266 (Ind.
    Ct. App. 2007), trans. denied. Instead, we must consider each motion separately
    to determine whether the moving party is entitled to judgment as a matter of
    law. 
    Id. Material Alteration
    [10]   We begin by observing that “[o]ne who, with the knowledge of the creditor,
    furnishes collateral to secure the loan of another stands in the relation of surety
    to the debtor.” Owen Cnty. State Bank v. Guard, 
    217 Ind. 75
    , 84, 
    26 N.E.2d 395
    ,
    398-399 (1940). We have also concluded that a person who mortgages his land
    to secure another’s debt is a surety. See SPCP Grp., LLC v. Dolson, Inc., 
    934 N.E.2d 771
    , 776 (Ind. Ct. App. 2010). Under Indiana law, a surety is treated
    the same as a guarantor, Farmers Loan & Trust Co. v. Letsinger, 
    652 N.E.2d 63
    , 66
    (Ind. 1995), and is given special status as a “favorite of the law” who “must be
    dealt with in the utmost good faith.” First Fed. Bank of Midwest v. Greenwalt, 
    42 N.E.3d 89
    , 94 (Ind. Ct. App. 2015).
    [11]   Here, Marvin pledged his partial interest (i.e., life estate) in the Enfield Farm as
    collateral for the mortgage that served as security for Richard’s loans. Like the
    parties, we will assume that Marvin is in the position of a surety.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 6 of 13
    [12]   With regard to a surety’s obligation, the Indiana Supreme Court has found that
    a surety is discharged and the surety’s collateral is released “by any action of the
    creditor which would release a surety, such as the extension of the time of
    payment of the debt, the acceptance of a renewal note, or the release of other
    security.” 
    Guard, 217 Ind. at 84
    , 26 N.E.2d at 399 (citations omitted).
    Additionally, a surety may be discharged due to a material alteration of the
    underlying obligation. Keesling v. T.E.K. Partners, LLC, 
    861 N.E.2d 1246
    , 1251
    (Ind. Ct. App. 2007). We have previously held that
    [g]uarantors and sureties are exonerated if the creditor by any
    act, done without their consent, alters the obligation of the
    principal in any respect or impairs or suspends the remedy for its
    enforcement. Moreover, when the principal and obligee cause a
    material alteration of the underlying obligation without the
    consent of the guarantor, the guarantor is discharged from further
    liability. A material alteration which will effect a discharge of the
    guarantor must be a change which alters the legal identity of the
    principal’s contract, substantially increases the risk of loss to the
    guarantor, or places the guarantor in a different position. The
    change must be binding.
    
    Id. (citation and
    internal quotation marks omitted). This court has also stated
    that “[a]lteration of the contract giving rise to discharge of a surety entails either
    a change in the physical document itself or a change in the contract between the
    creditor and the principal debtor which creates a different duty of performance
    on the part of the principal debtor than that which the surety guaranteed.”
    
    Greenwalt, 42 N.E.3d at 95
    (quoting White v. Household Fin. Corp., 158 Ind.App.
    394, 400, 
    302 N.E.2d 828
    , 832 n. 3 (1973)).
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 7 of 13
    [13]   Marvin does not contest his signature on the mortgage, nor does he dispute that
    Richard defaulted. Marvin’s argument is that because of the Bank’s material
    alteration to the mortgage, he, as surety, was discharged. Marvin identifies the
    material alteration as the Bank’s extension of additional credit through the
    issuance of Note 2 to Richard. Specifically, Marvin asserts that Note 2
    increased the principal secured by the mortgage by almost thirty percent, which
    nearly doubled his default liability. Marvin also asserts that the obligation
    under Note 1 and the additional obligation under Note 2 exceeded the
    maximum obligation limit under the mortgage.7 Thus, Marvin contends that
    the issuance of Note 2 was a material alteration that discharged him as surety.
    Finally, Marvin maintains that Note 2 was executed without his knowledge or
    consent.
    [14]   In support of his argument, Marvin directs us to this court’s decision in
    Greenwalt. Marvin claims that Greenwalt holds that when a third-party mortgage
    contains a debt limit, and the underlying borrower’s obligation is increased to
    exceed that limit, the surety is released. We disagree with Marvin’s reading of
    Greenwalt.
    [15]   In Greenwalt, a bank extended a loan to a corporate borrower in the form of an
    interest-only revolving line of credit. The loan was secured by a guaranty from
    7
    Contrary to Marvin’s argument, the Bank’s extension of additional credit to Richard through Note 2 did not
    alter Martin’s liability under the mortgage. Regardless of the extension of credit through Note 2, pursuant to
    the express terms of the mortgage, Marvin’s maximum obligation remained $236,500.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017           Page 8 of 13
    the owner and a mortgage on two parcels of real estate that was signed by the
    owner and his wife. The debt secured by the mortgage was limited to the
    revolving line of credit and any renewals or replacements. The mortgage also
    provided that “[t]he lien of this Mortgage shall not exceed at any one time
    
    $300,00.00.” 42 N.E.3d at 91
    (quoting Appellant’s Appendix at 17). Shortly after
    the mortgage was executed, the owner and his wife divorced. As part of the
    divorce settlement, each was awarded one of the mortgaged properties.
    [16]   Over the course of the next eleven years, the bank renewed the note in the
    principal amount of $300,000. During that time, the bank also extended the
    corporate borrower additional credit as well as an additional “over line” credit,
    all which purported to be secured by the original mortgage. These subsequent
    extensions of credit to the corporate borrower were made without wife’s
    knowledge or consent. Eventually, the additional loans were consolidated into
    a single term note, which, taken with the unpaid principal under the original
    note, brought the total outstanding debt secured by the mortgage to
    $456,117.95.
    [17]   In 2009, the original interest-only revolving line of credit was converted into a
    closed line of credit that required the corporate borrower to make payments of
    principal together with accrued interest. In 2011, the owner filed bankruptcy.
    During the bankruptcy proceedings, all collateral, with the exception of the real
    estate parcel that was awarded to wife, was liquidated and all proceeds were
    applied to amounts due and owing under the single term note rather than the
    original obligation. The bank then filed a complaint to foreclose its interest in
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 9 of 13
    wife’s parcel of real estate pursuant to the mortgage. Wife denied that her
    parcel was subject to the mortgage. In response to the foreclosure action, wife
    moved for summary judgment, arguing that her parcel had been discharged
    from the lien under the mortgage because of the bank’s unapproved alteration
    of the original note and mortgage. The trial court granted partial summary
    judgment in favor of wife, concluding that the Bank breached the terms of the
    mortgage by applying proceeds and payments first to obligations in excess of
    $300,000, which were unapproved obligations.
    [18]   On appeal, the bank argued that there was no material alteration of the
    underlying indebtedness that would have released wife’s parcel as collateral
    under the mortgage. Wife focused on the additional extensions of credit in
    excess of the original amount as being in violation of the mortgage terms and
    thereby serving to discharge her as surety. The court, however, explicitly stated
    that its decision would be based on whether there was a “material alteration” of
    the agreement between the bank and corporate borrower. 
    Id. The court
    explained:
    the fact that the lien of the Mortgage by its terms could not
    exceed $300,000 does not impact whether the changes to [the
    corporate borrower’s] loan terms constituted material alterations;
    indeed, the relevant inquiry is whether there were material
    alterations made in the principal debtor’s underlying obligation
    such that it was no longer the contract which the surety agreed to
    guaranty.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 10 of 13
    
    Greenwalt, 42 N.E.3d at 96
    (emphasis supplied). This court then held that the
    bank’s conversion of the original note from an interest-only line of credit to a
    term note with installment payments of principal and interest constituted a
    material alteration of the agreement between the bank and the corporate
    borrower in that it created a different duty of performance on the part of the
    corporate borrower. In other words, this alteration was such that the court
    deemed the contract was no longer the obligation to which the wife, as surety,
    agreed. The court expressly did not hold that additional extensions of credit
    over the maximum loan amount was a material alteration. Thus, in short,
    Greenwalt does not stand for the proposition asserted by Marvin. See also
    Keesling v. T.E.K. Partners, LLC, 
    861 N.E.2d 1246
    , 1251 (Ind. Ct. App. 2007)
    (holding that issuance of a second note that included additional funds,
    capitalized interest due on the first note, and extended the time for payment
    constituted a material alteration thereby discharging the guarantors from
    liability under the mortgage).
    [19]   Other than his argument that he was discharged as surety because the issuance
    of Note 2 exceeded the maximum indebtedness clause in the mortgage, Marvin
    makes no other argument with regard to a material alteration of the underlying
    agreement. Indeed, there is no dispute that there has been no renewal,
    modification, or extension of Note 1 since its execution. Marvin’s obligations
    as surety remain the same as when the mortgage was executed. Marvin has
    failed to establish that there was a material alteration of the mortgage
    agreement that would have discharged him as surety.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 11 of 13
    [20]   On a final note, the mortgage clearly indicated it could serve as security for
    additional obligations beyond Note 1. For instance, the title of the mortgage
    states that it was a real estate mortgage “With Future Advance Clause”.
    Appellant’s Second Corrected Appendix at 61. Further, the mortgage defined the
    secured debt as all promissory notes plus future notes and other debt
    instruments to be executed from time to time. It also expressly secured the
    repayment and performance of any and all additional obligations of any of the
    mortgagors to the Bank, whether such obligations already existed or arise in the
    future. Thus, by signing the mortgage, Marvin and the others consented to the
    mortgage securing additional loans such as Note 2.
    Fraud
    [21]   Marvin also argues that he presented a prima facie case of fraud thereby
    creating a question of fact so as to preclude summary judgment in favor of the
    Bank. As noted by the parties,
    [a] surety who has been misled by the principal as to the
    character and extent of an obligation signed and assumed at the
    request of the latter cannot make the fraud of the principal
    available as a defense, unless he can also show that the payee or
    obligee participated in, or had knowledge of, the fraud or
    deception.
    
    113 Ind. 521
    , 16 N.E.196, 196 (1888).
    [22]   Marvin’s fraud claim is based upon his belief that he conveyed to Richard only
    forty acres of the Enfield Farm. Marvin asserts that Richard fraudulently
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 12 of 13
    obtained a deed to the entire Enfield Farm and then pressured him into
    executing the mortgage with the entire Enfield Farm put up as collateral. With
    regard to the Bank, Marvin points to the fact that his initials do not appear on
    the second page of the mortgage where the collateral is identified by reference
    to Exhibit A, which provides the legal description for each tract of land that
    comprises the Enfield Farm. We note, however, that Exhibit A appears to bear
    Marvin’s initials. Without more, Marvin cannot succeed on his claim that the
    Bank participated in or had knowledge of the fraud or deception that Marvin
    asserts against Richard. The trial court properly granted summary judgment in
    favor of the Bank.
    Judgment affirmed.
    Bradford, J. and Pyle, J., concur.
    Court of Appeals of Indiana | Memorandum Decision 76A05-1603-MF-579 | February 8, 2017   Page 13 of 13