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Swanson v. Krenik (2/11/94), 868 P 2d 297
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Notice: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
MARIE O. SWANSON, )
) Supreme Court No. S-5315
Appellant, ) Superior Court Nos.
) 3PA-88-154/412 CI
(Consolidated)
)
v. ) O P I N I O N
)
THOMAS KRENIK and )
LEILA KRENIK, ) [No. 4050 - February 11, 1994]
)
Appellees. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Palmer,
Brian C. Shortell, Judge.
Appearances: Ernest Z. Rehbock,
Anchorage, for Appellant. Bernd C.
Guetschow, Anchorage, for Appellees.
Before: Moore, Chief Justice,
Rabinowitz, Burke, Matthews, and Compton,
Justices.
MOORE, Chief Justice.
This case presents a single legal issue regarding the
rights between an original mortgagor/grantor and the first
grantee of real property when the second grantee defaults. The
superior court ruled that the original mortgagors, the Kreniks,
were subsureties and therefore entitled to indemnification from
the first grantee, Marie Swanson. On appeal, Swanson argues that
she and the Kreniks became cosureties when the second grantees
assumed the mortgage obligation. Swanson contends that, as a
cosurety, she is entitled to contribution from the Kreniks for a
proportionate share of the deficiency judgment resulting from the
default.
We affirm.
I.
The facts are not in dispute. In 1977 Thomas Krenik
and Leila Krenik executed a promissory note secured by a deed of
trust on their property in favor of the Alaska Federal Savings
and Loan Association of Juneau (Alaska Federal).
In 1981 the Kreniks conveyed the property to Keith
Swanson and Marie Swanson, who assumed the Alaska Federal note
and deed of trust. Alaska Federal consented to this assumption
without releasing the Kreniks. The Swansons also executed a
second deed of trust in favor of the Kreniks.
In August 1983, Marie Swanson1 conveyed the property to
Ray Rush and Howard Luther, Jr. With the consent of all parties,
Rush and Luther assumed the Alaska Federal note and deed of trust
as well as the second deed of trust. Rush and Luther executed a
third deed of trust in favor of Swanson.
In 1986 Rush and Luther defaulted on the Alaska Federal
obligation. In 1988 Alaska Federal filed suit against the
Kreniks, Swanson, and Rush and Luther, seeking judicial
foreclosure. Both Rush and Luther filed for bankruptcy in 1989.
Swanson then filed a cross-claim against the Kreniks, alleging
that she and the Kreniks were "joint co-debtors"and therefore
jointly liable for any deficiency judgment. In turn, the Kreniks
filed a cross-claim against Swanson, seeking entry of judgment
against her based on the 1981 assumption agreement.
Superior Court Judge Brian Shortell granted Alaska
Federal's motion for summary judgment in its foreclosure action
on the first deed of trust. The court issued a decree of
foreclosure and sale of real property and entered final judgment.
In the following months, both Swanson and the Kreniks
moved for summary judgment on their respective cross-claims.
Swanson argued that she and the Kreniks became cosureties when
Rush and Luther assumed the mortgage debt. The Kreniks
maintained that Swanson had no right of contribution from them
and that Swanson had a duty to indemnify them for any amounts
they were forced to pay Alaska Federal.2 The court ruled in
favor of the Kreniks.
After the foreclosure sale, the court issued a
deficiency judgment to Alaska Federal against both Swanson and
the Kreniks for a sum of $1,173,992. Swanson paid the judgment.
This appeal followed.
II.
This case presents no disputed issues of material fact
and may be resolved as a matter of law. See Alaska R. Civ. P.
56; Drake v. Hosley, 713 P.2d 1203, 1205 (Alaska 1986). We
review a question of law de novo and adopt the rule of law that
is most persuasive in light of precedent, reason and policy.
Foss Alaska Line, Inc. v. Northland Servs., 724 P.2d 523, 526
(Alaska 1986).
III.
As both parties in this case recognize, when an
original mortgagor transfers mortgaged land to a grantee who
assumes the mortgage, the assuming grantee becomes the principal
mortgage obligor and the mortgagor becomes a surety. Restatement
of Security 83(c) and cmt. e (1941); see also First Interstate
Bank v. Nelco Enters., 822 P.2d 1260, 1263 (Wash. App. 1992);
Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 803
P.2d 911, 912 n.3 (Ariz. App. 1990); Moss v. McDonald, 772 P.2d
626, 627 (Colo. App. 1988); Grant S. Nelson & Dale A. Whitman,
Real Estate Finance Law 5.10, at 283-84 (1985).
The parties agree that in 1981 the Swansons expressly
assumed the Kreniks' mortgage obligation under the Alaska Federal
note and deed of trust. The assumption agreement states in part
that the Swansons "assume and agree to pay the [Kreniks']
indebtedness evidenced by the Note and Deed of Trust, and to
perform all of the obligations provided therein." In 1981,
therefore, the Swansons became the principal obligors on the
debt. The Kreniks, who were not released from their obligation
to Alaska Federal, became sureties. In the event of a default by
the Swansons, Alaska Federal retained its right of recourse
against both the Swansons and the Kreniks for any amount
outstanding on the loan. If the Kreniks satisfied any amount
due, their status as sureties would entitle them to
indemnification from the Swansons. See First Interstate Bank,
822 P.2d at 1263 (if the surety discharges the mortgage debt, it
is entitled to indemnification from the assuming grantee).
Conversely, the Swansons would not be entitled to indemnification
or contribution from the Kreniks for any deficiency satisfied by
the Swansons.
Swanson's contention is that, upon Rush and Luther's
assumption of the deed of trust in 1983, she and the Kreniks
became cosureties. Her claim is based largely on Paragraph 10 of
the 1983 Rush and Luther assumption agreement, which states:
Rush and Luther, [the Kreniks] and Marie
O. Swanson, whether principal, surety,
grantor, endorser or other party hereto,
agree to be jointly and severally bound . . .
and expressly agree that the Note or any
payment thereunder may be extended from time
to time and consent to the acceptance of
further security including other types of
security all without in any way affecting the
liability of said parties.
(Emphasis added). Swanson argues that this paragraph
demonstrates the Kreniks' express consent to become joint debtors
with her on the Alaska Federal deed of trust.
Swanson misinterprets this provision. Indeed, the fact
that Paragraph 10 also binds Rush and Luther as jointly and
severally liable with Swanson and the Kreniks would defeat
Swanson's interpretation of the clause. We conclude that the
language of Paragraph 10 establishes the Kreniks' agreement to be
jointly and severally bound with all assuming grantees as to the
mortgagee, Alaska Federal, in the case of a default on the loan.
It does not, however, establish any relationship or hierarchy
among the successive grantors regarding contribution or
indemnity.
The relationship between Swanson and the Kreniks is
clarified in Paragraph 13 of the 1983 Rush and Luther assumption
agreement, which states:
[The Kreniks] and Marie O. Swanson agree
that their present liability under the Note
and Deed of Trust shall not be impaired,
prejudiced or affected in any way whatsoever
by this Agreement or by sale or conveyance of
said premises, or by the assumption by Rush
and Luther of the Note and Deed of Trust or
by any subsequent change in the terms, time,
manner or method of payment of said
indebtedness, or any part thereof contracted
by [Alaska Federal] and Rush and Luther or
the transferees of Rush and Luther, whether
or not such changes or transfers have been
consented to by [the Kreniks] and Marie O.
Swanson.
(Emphasis added).
The unambiguous terms of this provision indicate that
the 1983 assumption agreement did not alter Swanson's obligations
to the Kreniks under the previous assumption agreement.
Accordingly, Swanson and the Kreniks did not become cosureties in
1983 as Swanson maintains. As between themselves, they remained
principal obligor and surety, respectively. Therefore, with
respect to Rush and Luther, who became the principal obligors,
Swanson and the Kreniks became surety and subsurety,
respectively. In this relationship, the Kreniks' liability on
the deed of trust remains one step removed from that of Swanson,
as it was under their original agreement. Therefore, Swanson is
liable for the deficiency resulting from Rush and Luther's
default on the deed of trust, and she is not entitled to
contribution from the Kreniks. We find that, absent some express
agreement to the contrary, a second grantee's purchase of
property and assumption of a mortgage obligation does not modify
the surety-principal obligor relationship created between the
mortgagor and the first grantee in their previous transaction.
Swanson contends that the Restatement of Security
supports her claim of cosuretyship, since it establishes a
presumption of cosuretyship where two sureties agree to be bound
for the same duty. Under the Restatement, cosuretyship is
defined as
the relation between two or more
sureties who are bound to answer for the same
duty of the principal, and who as between
themselves should share the loss caused by
the default of the principal.
Restatement of Security 144 (1941). Subsuretyship is defined
as
the relation between two or more
sureties who are bound to answer for the same
duty of the principal where one, the
principal surety, in respect of the other,
the subsurety, has the whole duty of
performance.
Restatement of Security 145 (1941). To determine which
relationship exists between two sureties in a given case, the
Restatement provides in part: "The sureties are cosureties in
the absence of agreement or stipulation of either to the contrary
or of duties or equities imposing the principal liability on one
of them." Restatement of Security 146(b) (1941). Swanson
maintains that she and the Kreniks became cosureties pursuant to
Section 146(b) when they acknowledged joint liability to Alaska
Federal in the Rush and Luther assumption agreement.
Given our conclusion that Swanson and the Kreniks'
joint liability to Alaska Federal does not compel their joint
liability as to each other, we reject this contention. Swanson
undertook a contractual duty to pay the mortgage debt in the
Kreniks' stead when she executed the first assumption agreement
with the Kreniks. The Rush and Luther assumption did not alter
this duty. Swanson's preexisting duty to the Kreniks therefore
imposes primary liability on her as the principal surety. See
Restatement of Security 146(a) (1941) (sureties may
conclusively determine their relationship by agreement).
The Iowa Supreme Court's decision in Security Trust &
Savings Bank v. Gallup, 191 N.W. 996 (Iowa 1923), supports our
conclusion here that a subsequent assumption of mortgaged
property does not alter the basic relationship between a previous
mortgagor and grantee. In Security Trust, as in the present
case, mortgaged property was transferred to successive grantees,
and both the first and second grantees explicitly assumed the
mortgage obligation. As here, the second grantee defaulted. Id.
at 997. The Iowa Supreme Court examined the rights and
relationships between the original mortgagor and the successive
grantees to the property. It concluded that, upon his assumption
of the deed of trust, the second grantee became primarily liable
for the entire debt as the principal obligor, and the original
mortgagor and first grantee became liable as sureties in inverse
order. Id. Thus, as between the original mortgagor and the
first grantee, the grantee remained a principal and the mortgagor
a surety. They did not become cosureties. Id.
Commentators have similarly observed that, where there
is a series of conveyances accompanied by a chain of assumptions,
"the liability for the mortgage debt is cast upon the grantees in
the inverse order of assumption." Milton R. Friedman, Discharge
of Personal Liability on Mortgage Debts in New York, 52 Yale L.J.
771, 774 n.13 (1943); see also Frederic P. Storke & Don W. Sears,
Transfer of Mortgaged Property, 38 Cornell L.Q. 185, 198 (1953)
(In an assumption chain, any grantee is a surety for subsequent
grantees and a principal for earlier grantees.). This general
rule is consistent with basic principles of contract law
governing assumptions. See 2 Samuel Williston, A Treatise on the
Law of Contracts 386, at 1039 (Walter H. E. Jaeger ed., 3d ed.
1959) (Each assuming grantee makes "a valid contract to pay the
mortgage, which he cannot abrogate by selling the premises,
though he may get such protection as any promise to assume the
mortgage made by a subsequent grantee can give."). The cases on
which Swanson relies do not support her assertion that a
mortgagor and an assuming grantee necessarily become cosureties
when a second grantee, in turn, assumes the mortgage debt. See
Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 803
P.2d 911 (Ariz. App. 1990); Matthews v. Saleen, 812 P.2d 1186
(Colo. App. 1991); Moss v. McDonald, 772 P.2d 626 (Colo. App.
1988); Seronick v. Levy, 527 N.E.2d 746 (Mass. App. 1988); Fluke
Capital & Management Servs. v. Richmond, 724 P.2d 356 (Wash.
1986); First Interstate Bank v. Nelco Enters., Inc., 822 P.2d
1260 (Wash. App. 1992).
Lastly, we are unpersuaded by Swanson's argument that
the equities of this case mandate a finding of cosuretyship. See
Restatement of Security 146(c) (1941) ("A surety is a subsurety
if he has so stipulated . . . except to the extent that his
stipulation will inequitably increase the obligation of another
surety."). In our view, the equities in the present situation
fall on the side of the Kreniks. As original mortgagors, they
had no real influence over their grantee's decision to convey the
property to a second grantee, or over the selection of that
grantee. They did not stand to directly benefit from the
transfer. Their only real involvement in the transaction
consisted of a reacknowledgement of their underlying obligation
to Alaska Federal, so that the transfer could be accomplished.
While it is unfortunate that Swanson is faced with a substantial
obligation in this case, it would seem patently unfair to
actually enlarge the Kreniks' original liability under the 1981
assumption agreement simply because Swanson transferred the
property to a second grantee.
IV.
We conclude that upon Swanson's conveyance of the
mortgaged property to Rush and Luther, the Kreniks became a
subsurety to Swanson. We reject Swanson's cosurety theory as
contrary to the terms of both the 1981 and 1983 assumption
agreements, and we find that no equitable principle requires the
abrogation of the Kreniks' express contractual rights.
The decision of the superior court is AFFIRMED.
_______________________________
1 Keith Swanson died in March 1983.
2 The Kreniks also sought summary judgment against
Swanson based on the second deed of trust.
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