                                            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 - ,
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Jus 'ces
