MORTGAGES ‑- CHATTEL ‑- RELEASE WHEN LOAN IS RENEWED.
A licensee under the small loan act is under a mandatory duty to release security only when the security is in fact legally discharged.
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September 7, 1961
Honorable Joseph C. McMurray
Supervisor of Banking
General Administration Building
Cite as: AGO 61-62 No. 61
By letter previously acknowledged, you requested an opinion of this office on a question which we paraphrase as follows:
Must a licensee under the small loan act release a chattel mortgage held as security for the payment of a loan when that loan has been "prepaid in full," as that phrase is used in § 5 (3) (b), chapter 212, Laws of 1959, by a new loan, renewal loan, or refinancing, and the licensee has surrendered the note representing the original debt and has taken a new note and mortgage?
We answer this question in the negative as explained in the analysis.
The small loan act, which relates to the business of making loans in the amount of $1,000 or less, was originally enacted by our legislature in 1941. See, chapter 208, Laws of 1941. In 1959, the legislature, by the enactment of chapter 212, Laws of 1959, made several significant amendments to the basic 1941 law. Section 6, chapter 212, Laws of 1959 (RCW 31.08.170), reads in pertinent part as follows:
"It shall be the duty of every licensee to:
". . .
[[Orig. Op. Page 2]]
"(4) Upon payment of the loan in full, mark indelibly every obligation signed by the borrower with the word 'paid' or 'cancelled' and release any mortgage and restore all notes and collateral which no longer secures a loan and to which the borrower may be lawfully entitled: Provided, however, That in case any such document or obligation is in custodia legis these requirements shall not be applicable; and
". . . (Emphasis supplied.)
The underlined portion of the foregoing statute was added to the 1941 Law by amendment in 1959. Consistent with the source of the small loan act, the sixth draft of the Uniform Small Loan Law proposed by the Russell Sage Foundation, RCW 31.08.170 (4) contains the only provision within the act which obligates the licensee to release security. It is clear from the express language of the statute that a mandatory duty has been imposed upon every licensee to release any mortgage "which no longer secures a loan" when payment of the loan in full has been made by the borrower. Thus, in order to completely and adequately answer your inquiry, it is necessary to determine when a mortgage no longer secures a loan.
The key phrase in the above statute, "which no longer secures a loan," is not defined in the legislative enactment. InState v. Vosgien, 82 Wash. 685, 687, 144 Pac. 947 (1914), our court said:
"It is a primary rule of statutory construction that, in the absence of a statutory definitionor a well established technical meaning, ordinary words andphrases of a well known and definite sense when used in a statute must be accorded that meaning unless clearly controlled by the context. . . ." (Emphasis supplied.)
We believe that the phrase in question has a well-established technical meaning in law. Accordingly, it is the opinion of this office that it was the intent of the legislature in inserting the phrase "which no longer secures a loan," to make it quite clear that the duty of a licensee to release security arises only when the security is in fact legally discharged. Only when discharge occurs does the mortgage or other security document cease to act as security for the loan. As long as the security interest held by the licensee is [[Orig. Op. Page 3]] legally capable of fulfilling its intended function it need not be released by the licensee. A security interest is discharged involuntarily, i.e., by operation of law, when the obligation or obligations which it secures are discharged. Voluntary discharge is achieved by the consensual agreement of the parties in which the holder of security agrees, upon sufficient consideration, to part with his security interest.
At this point, it should be mentioned that we have not overlooked the context in which your inquiry was made. RCW 31.08.160 (3) as amended by § 5 (3), chapter 212, Laws of 1959, which allows charges to be precomputed in certain instances, provides in part as follows:
". . . Such precomputed charge shall be subject to the following adjustments:
". . .
"(b) If the loan contract is prepaid in full by cash, a new loan, refinancing, or otherwise before the final installment date, the portion of the precomputed charge applicable to the full installment periods following the installment date nearest the date of such prepayment shall be rebated. . . ."
A similar provision was added to existing law by § 11, chapter 212, Laws of 1959 (RCW 31.08.175 (2)), allowing, inter alia, the insuring of the borrower's life, and provides in part as follows:
". . . If the loan contract is prepaid in full by cash, a new loan, renewal, refinancing, or otherwise, a portion of such life insurance charge shall be rebated according to the method established in paragraphs (a) and (b) of subsection (3) of RCW 31.08.160. . . ."
These provisions do not in any way affect our conclusions respecting the mortgagee's duty to release security. It is, of course, a well-established rule that in the process of construing a statute, the intention of the legislature must be extracted from a consideration of all the provisions of the act in question. DeGrief v. Seattle, 50 Wn. (2d) 1, 297 P. (2d) 940 (1956). In applying this basic rule it will readily be noticed, as mentioned above, that RCW 31.08.170 (4), contains the only provision within the act which obligates the licensee to release security, and that the above quoted provisions relate to and are solely concerned with the licensee's obligation to make rebates when the loan contract is prematurely extinguished or modified by the substitution of a new contract. While [[Orig. Op. Page 4]] the language "prepaid in full" would indicate that the situations giving rise to the duty to make rebates would bring into play the obligation to release security, as the latter duty is predicated upon "payment of the loan in full," the addition of the phrase "which no longer secures a loan" makes clear the legislature's intent that the licensee's duty to release security only arises when the security is in fact legally discharged.
Since the obligation to release security arises when that security has been discharged, it is important, and in fact necessary, to know exactly when and under what conditions discharge occurs. When a renewal note is given by a borrower under a loan contract it may be given in various ways; e.g., in payment of the old note representing the obligation under the loan contract, as security for it, or as conditional payment of it with or without the old note as security. In the latter cases it is obvious that the original debt remains as does the old note, albeit in the background in some instances, and there is no question of the mortgage's operative effect as security for the debt. When the renewal note is given and accepted as payment of the old note, usually evidenced by marking the note as paid or cancelled and surrendering it to the borrower, the mortgage is still operative for it secures the obligation evidenced by the old note and that obligation remains, although in a different form.
"The substitution and taking of a new note for one secured by mortgage do not extinguish the debt evidenced by the latter so as to discharge the mortgage, unless such was the intention of the parties, shown by something besides what arises from the mere act of substitution. The reason is that the mortgage secures the debt, not merely the evidence of it, and as a change in the evidence does not pay the debt, the lien of the mortgage is not thereby affected. . . ." 10 Am.Jur. Chattel Mortgages, § 228, p. 865.
Our supreme court has stated:
". . . The fact that the original $3,000 note has been renewed does not change the character of the debt. The rule is that a change in the form of a debt does not affect the security. . . ."Lincoln County State Bank v. Martin, 112 Wash. 186, 190, 191 Pac. 815 (1920).
[[Orig. Op. Page 5]]
Of course, the parties may agree that a renewal note taken as payment will have the effect of discharging the mortgage, but in the absence of such an agreement the mortgage is still operative. Tahoma Finance Co. v. Shannon, 138 Wash. 90, 244 Pac. 271 (1926); National Bank v. Jose, 10 Wash. 185, 38 Pac. 1026 (1894);Dove v. Cowlitz Valley Bank, 191 Wash. 429, 71 P. (2d) 555 (1937); Annotation: Renewal note as discharging original obligation or indebtedness, 52 A.L.R. 1416.
In the instances where the new note given in payment for the old represents both the unpaid balance of the original obligation and a new loan, the mortgage will be operative only with respect to that part of the total amount which represents the old obligation unless the mortgage contains a "future advance" clause. Such a mortgage is frequently referred to as an "open-end" mortgage.
The taking of a new mortgage as security for the renewal note or a note which embraces both a renewal of the original obligation and a future advance (falling within or without a future advance clause in the old mortgage) is not a substitute for an agreement that the new note and mortgage will operate as a discharge of the old obligation and its security.
"The mere taking of a new note and mortgage for the same debt and covering the same property does not discharge or displace the lien of an existing mortgage unless such was the intention of the parties. . . ." 10 Am.Jur. Chattel Mortgages, § 229, p. 866.
With respect to third persons' claims the new mortgage may well stand in an inferior position of that of the original security. The mortgagee should not be deprived of the superior status of his original security without his voluntary agreement. Such a situation arose inMutual Reserve Association v. Zeran, 152 Wash. 342, 277 Pac. 984 (1929), wherein it was unsuccessfully contended that the plaintiff's trust deed (equivalent to a mortgage for the purposes of this opinion) covering a sixty-two thousand five hundred dollar obligation was discharged by taking a new bond and trust deed for the increased sixty-five thousand dollar obligation. The court found no clear intention to affect a discharge of the original trust deed. Such a clear intention is a necessary requirement, because dire results, avoided inBormann v. Hatfield, 96 Wash. 270, 164 Pac. 921 (1917), on the purely equitable ground of misrepresentation, may follow the premature discharge of original security. See, Annotation: Discharge of mortgage and taking back of new mortgage as affecting lien intervening between old and new mortgages, 33 A.L.R. 149, supplemented by 98 A.L.R. 843. Elsewhere it is stated that:
[[Orig. Op. Page 6]]
"Where the new transaction involves the payment and satisfaction of the first mortgage, the mortgagee's rights are dominated by intervening liens of third persons acquired subsequently to the execution of the first and prior to the execution of the second mortgage. Thus, where the intention of the parties is to cancel the original note and mortgage and to substitute a new note secured by a new mortgage on different property, the original mortgage becomes functus officio. . . ." 10 Am.Jur. Chattel Mortgages, § 229, p. 866.
It should be noted that if a contrary interpretation were placed on the licensee's duty to release security, he would be forced to subordinate his position to intervening creditors' claims under pain of rendering the entire obligation unenforceable by reason of the penal provisions of RCW 31.08.210. Such a harsh and unjust result cannot be attributed to the same legislature which has expressly approved the licensee's utilization of security transactions for his protection.
In conclusion, it is our opinion, as previously stated, that a small loan act licensee is under no duty to release a chattel mortgage until and unless the obligation or obligations thereby secured are discharged or he has voluntarily agreed to release his security. This result is fully in agreement and consistent with the statutory duty of all chattel mortgagees to satisfy and release mortgages of record. RCW 61.16.040;Stusser v. Gottstein, 178 Wash. 360, 35 P. (2d) 5, (1934).
We trust that the foregoing will be of assistance to you.
Very truly yours,
JOHN J. O'CONNELL
DAVID C. CUMMINS
Assistant Attorney General