Orville Payne (Payne) appeals from partial summary judgment entered against his assertion of certain affirmative defenses and also from judgment of foreclosure based upon his promissory note, which had been assigned to Mundaca Investment Corporation (Mundaca). We affirm in part and reverse in part.
Mundaca filed a complaint on a promissory note and requested foreclosure based upon its allegation that Payne had executed and delivered the note to Scott County-Canco Federal Credit Union (Canco) in
Payne answered the complaint with a general denial but also alleged that the note had been prepared by Canco after he had signed a blank sheet of paper. He claimed he had signed a note but not the note produced by Mundaca in its complaint. He also alleged he had borrowed the funds represented by the note for a period of 25 years and discovered for the first time when this suit was filed that the note fully matured only three years after its execution. Payne therefore alleged he was misled and defrauded by Canco by reason of the actual terms of the loan. He also alleged that Mundaca, as successor in interest, could not benefit from Canco's fraud.
Did the trial court improperly grant Mundaca's motion for summary judgment over Payne's assertion of the affirmative defenses of fraud in the inducement and of the illegality of the note?
Summary judgment is appropriate only where no genuine issue of material fact exists and the movant is entitled to judgment as a matter of law. Nahmias v. Trustees of Indiana University (1983), Ind. App., 444 N.E.2d 1204. In reviewing the propriety of a summary judgment, the facts alleged by the party opposing the motion must be taken as true. The material on file must be construed in favor of the opponent of the motion. Carrell v. Ellingwood (1981), Ind. App., 423 N.E.2d 630.
FRAUD IN THE INDUCEMENT.
On the issue of fraud in the inducement, the trial judge provided the following decision:
The trial judge undoubtedly referred to the federal law cited by Mundaca in its supplemental memorandum in support of summary judgment, 12 U.S.C. § 1787(i) (now 12 U.S.C. § 1787(p)):
The Board referred to in the statute means the National Credit Union Administration Board (the NCUAB). 12 U.S.C. § 1752(4).
Thus, the trial judge determined that the terms of the second subsection of 12 U.S.C. § 1787(p) prevented any agreement between Payne and Canco which tended to diminish or defeat the right, title, or interest of Mundaca, as successor in interest to the NCUAB. This view is apparent from the trial judge's statement that the "problem with the defenses and counterclaim of the Defendant is the pre-emption by the Federal Law which confers upon the insurance corporation, and its assigns, a legal status which cuts off all defenses" (emphasis supplied).
However, the trial court further stated in its order on the motions for summary judgment:
The NCUAB has the authority to place a federal credit union in involuntary liquidation and to appoint a liquidating agent for it. 12 U.S.C. § 1766(b)(2). Upon its finding that a federal credit union insured under the Federal Credit Union Act [12 U.S.C. §§ 1751-1795k], is bankrupt or insolvent, the Board shall close such credit union for liquidation and appoint itself liquidating agent for it. 12 U.S.C. § 1787(a)(1). The liquidating agent has the power and authority, subject to the control and supervision of the Board, to sell, enforce the collection of, and liquidate all assets and property of the credit union. When it does so, the liquidating agent may make distributions and payments to creditors and members, as their interests may appear, and also execute such documents and papers and do such other acts and things which it may deem necessary or desirable to discharge its duties. 12 U.S.C. § 1766(b)(3).
With these powers, we consider the effect of the above subsection, which the trial judge deemed controlling: 12 U.S.C. § 1787(p). The NCUAB, as the liquidating agent of federal credit unions, which have been closed for liquidation on account of bankruptcy or insolvency, may offer the assets of such credit unions for sale to itself as the Board. In addition, the NCUAB may offer those assets, in its capacity as liquidating agent for the ailing
However, no agreement which tends to diminish or defeat the right, title, or interest of the Board in any asset acquired by it under this subsection, either as security for a loan or by purchase, shall be valid against the Board unless such agreement (1) is in writing; (2) was executed by the ailing credit union and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the credit union; (3) was approved by the board of directors of the credit union, which approval was reflected in the minutes of such board; and (4) was, continuously from the time of its execution, an official record of the credit union.
This case involves Mundaca's attempt to collect upon a promissory note alleged to have been executed by Payne. A promissory note is a negotiable instrument under Indiana's version of the Uniform Commercial Code. IND. CODE 26-1-3-104. The note's character as a negotiable instrument is not stripped from it even though it is collateralized by a mortgage. Smith v. Union State Bank (1983), Ind. App., 452 N.E.2d 1059. As a negotiable instrument, the note and mortgage are governed by Article 3 of the Uniform Commercial Code, as codified in Ind. Code 26-1-3.
We believe we must consider the purpose of the U.C.C. in order to determine whether the above federal statute should be extended to a successor in interest to the Board. One obvious purpose of Article 3 of the U.C.C. is that instruments covered by the article be freely negotiable. To that end, a party who takes a negotiable instrument as a holder in due course takes subject to real defenses but not subject to personal defenses. A party who takes as a mere holder of a note takes subject to both classes of defenses. See IND. CODE 26-1-3-305 through 307. This distinction shows one advantage of the negotiable instrument. One may take it as a holder in due course and again freely transfer it without worry of attack from a party who can subsequently assert a valid personal defense. However, when a prior defense may successfully be asserted, the instrument cannot be said to be freely negotiable.
We believe the purposes of Article 3 of the U.C.C. would be frustrated if the defenses given the NCUAB under 12 U.S.C. § 1787(p) were transferable to successors in interest, so as to pre-empt Article 3, absent explicit statutory provisions to that effect. Without such provisions, the trial court improperly determined that Mundaca should benefit from the statute as assignee of the NCUAB. The Board alone is entitled to benefit from the statute, and the Board is not a party to this case.
Given that Mundaca was not entitled to benefit from the statute as could the NCUAB, we must now determine whether a genuine issue of material fact survives with respect to Payne's affirmative defense of fraud in the inducement. The evidence most favorable to Payne reveals his claim that he executed a note, which has not been produced, and signed a blank sheet of paper, which was subsequently completed and which now constitutes the note sued upon. Payne also claims he was fraudulently induced to obtain the loan upon the express condition it would last 25 years and the interest rate would be changed to the prevailing prime rate after three years. These claims conflict with the language contained on the face of the note.
The evidence most favorable to Payne as the non-movant raises a genuine issue of material fact with respect to his defense of fraud in the inducement. See Gonderman v. State Exchange Bank (1975), 166 Ind.App. 181, 334 N.E.2d 724. Therefore, Mundaca was not entitled to judgment as a matter of law. The findings of the trial court reveal that the trial judge considered
We next address Payne's assertion that the trial judge erroneously granted summary judgment over his affirmative defense of illegality of the note. Payne cites 12 U.S.C. § 1757 and alleges the transaction he and Canco entered into was illegal because Canco lacked authority to enter into an agreement for a note over 12 years in duration. This allegation tracks his claim that he originally signed a note upon the express condition the loan would last 25 years but the interest rate would be changed to the prevailing prime rate after three years. These claims conflict with the language contained on the face of the note, which states that the loan installments would continue monthly for three years and would be computed as if amortized over 25 years.
In his findings, the trial judge stated the following with respect to Canco's authority to enter into the loan transaction:
We agree that regulatory bodies would be interested in acts which exceeded Canco's authority and that Payne cannot win on this issue. Except in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state. Erie R. Co. v. Tompkins (1937), 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188. This case involves a congressional act designed to regulate federal credit unions. We therefore begin our analysis of this issue with an application of interpretations of federal law as it relates to the parties before us.
We find interpretations of the National Banking Act instructive:
Thompson v. Saint Nicholas Nat'l. Bank (1892), 146 U.S. 240, 251, 13 S.Ct. 66, 69, 36 L.Ed. 956. See also, Schuyler National Bank v. Gadsden (1903), 191 U.S. 451, 458-459, 24 S.Ct. 129, 131, 48 L.Ed. 258.
We find this principle equally applicable to the parties and facts before us. The provisions of the Federal Credit Union Act state that a credit union shall have the power to make loans, the maturities of which shall not exceed twelve years. This is not a case where Congress has stated that a federal credit union may not make loans. Canco had authority to make a loan to Payne. However, even if Canco made a loan to Payne with terms beyond those authorized by the statute, Congress provided no penalty or forfeiture applicable to this executed transaction. Therefore, the validity of the transaction between Canco and Payne can be questioned only by the United States, in all probability by regulatory authorities, and not by Payne himself as a private party.
Moreover, Payne raises his defense of illegality, or, more precisely, incapacity, under these facts, under Ind. Code 26-1-3-305(2)(b). The Uniform Commercial Code Comment number 5 states that this subsection covers such areas as mental incompetence, ultra vires acts or lack of corporate capacity to do business, or any other incapacity apart from infancy. Such incapacity is largely statutory. Its existence and effect is left to the law of each state. We therefore also look to the laws of this State as they involve illegality or incapacity in this transaction.
Wittmer Lumber Co. v. Rice (1899), 23 Ind.App. 586, 591, 55 N.E. 868, 869.
We see no reason not to apply these doctrines to the present facts. Here, Payne obtained a loan from Canco and acknowledges the funds were transferred to his account. Canco executed the loan agreement and fully performed its part of the bargain. Payne cannot now complain the credit union exceeded its authority with regard to the terms of that agreement.
Indiana has recognized this reasoning in the context of loans. In Voris v. Star City Building and Loan Association (1898), 20 Ind.App. 630, 50 N.E. 779, the court did not allow Voris to claim his contract with the association was ultra vires and void because it had no authority to make the contract. The court stated:
Id. at 643-644, 50 N.E. at 783.
No genuine issue of material fact exists with regard to Payne's affirmative defense of illegality, or, more precisely, incapacity. Congress authorized Canco to enter into loan agreements with persons like Payne. If Canco exceeded its authority with regard to the terms of the loan agreement in this case, the federal government, not Payne, may complain. Moreover, Canco fully performed its part of the agreement when it transferred the funds to Payne's account. Payne therefore will not be heard to complain that the credit union had no authority to enter into a loan agreement for so long a period. The trial judge correctly decided that Canco was entitled to judgment as a matter of law on this issue. We will not disturb that decision.
Did the trial court improperly admit a photocopy of the sued upon note without proper foundation in violation of the best evidence rule and without authentication?
Payne claims the trial court improperly admitted a photocopy of the note sued upon when the original sat in Mundaca's corporate vault and could have been produced. When Mundaca offered the note for admission, Payne objected about the authenticity and foundation because of a lack of proof that Payne had signed the note. Payne did not, however, object to the note because it was not the original. After defense counsel had cross-examined the custodian of the note about the original in the corporate vault, Payne renewed his objection to the note. The trial judge stated he did not understand the basis of this objection, that is, whether Payne claimed this note had been substituted for the one actually signed, so he took the objection under advisement. Payne did not proceed to specify the basis of his objection.
With regard to the best evidence claim, Payne did not specifically object to the note on that ground and therefore failed to preserve any error on that issue for purposes of appeal. First Nat. Bank of New Castle v. Acra (1984), Ind. App., 462 N.E.2d 1345. We will not consider Payne's
Payne's claims of lack of authenticity and lack of foundation, to show the document admitted was the document he signed, also do not convince us that the copy of the note should have been excluded. Payne alleged in his answer to the complaint that the note involved was not typed out until after his signature was placed upon the blank sheet of paper. According to Ind. Code 26-1-3-307, unless specifically denied in the pleadings, each signature on an instrument is admitted. When the effectiveness of a signature is put in issue, the burden of establishing it is on the party claiming under the signature; but the signature is presumed to be genuine or authorized except where the action is to enforce the obligation of a purported signer who has died or become incompetent before proof is required.
The custodian of the note testified the note was a copy of the note purchased and contained in Mundaca's records with regard to Orville Payne. After the note had been admitted, Mundaca called Payne to the stand, where he testified he had signed a blank sheet of paper and the note had been filled in around the signature. Payne testified at the trial; he was therefore neither dead nor incompetent. Payne never stated the signature on the note produced by Mundaca was not his signature. Therefore, not only could the trial court justifiably have considered that Payne had admitted the signature on the note was his, it could also have presumed the signature was genuine. The trial court committed no error when it admitted the copy of the note into evidence.
This cause is reversed in part as to the issue of summary judgment and affirmed in all other respects.
Reversed in part and affirmed in part.
RATLIFF, C.J., and GARRARD, J., concur.