Nature's Sunshine Products, Inc. v. Wayne B. Watson and MoneyCode, Inc.

1 Wayne B. Watson appeals the district court's grant of
summary judgment in favor of Nature's Sunshine Products, Inc.
The appeal raises an important issue about the extent to which a
trust deed's dragnet clause will secure new indebtedness. We
affirm.

BACKGROUND1

2 On November 23, 1987, Watson gave a promissory note to First
Security Bank memorializing a home equity line of credit in the
amount of $75,000. The promissory note was secured by a trust
deed (the First Trust Deed) and constituted a lien against
valuable property (Hobble Creek) owned by Watson. The First
Trust Deed was recorded on November 24, 1987.

3 The First Trust Deed contains both a dragnet clause2 and a
modification clause. The dragnet clause provides, with our
emphasis, that the First Trust Deed was given
FOR THE PURPOSE OF SECURING (1) payment of
all obligations now or hereafter arising
pursuant to or otherwise related or connected
to that certain "First Security Home Equity
Line Agreement, Note, and Disclosure
Statement" of even date herewith executed by
the Trustor (the "Agreement"), which
Agreement evidences a revolving credit line
in the maximum principal sum of SEVENTY FIVE
THOUSAND AND 00/100 Dollars ($75,000.00)
together with interest, costs, and expenses,
as therein provided, payable to the order of
Beneficiary at the times, and in the manner
and with interest as therein set forth,
together with any extensions, renewals,
modifications, and future advances thereof or
thereunder; (2) the performance of each
agreement of Trustor herein contained; (3)
the payment of all sums expended or advanced
by Beneficiary under or pursuant to the terms
of this Trust Deed and/or the Agreement,
together with interest thereon as provided
therein.

The modification clause, contained in paragraph 10, provides in
part as follows:

At any time, and from time to time upon
written request of Beneficiary, . . .
Trustee may . . . grant any extension or
modifications of the terms of the

Agreement[.]

3. In its summary judgment ruling, the district court noted:
The effect of the [MoneyCode] Note and the
transaction which it memorialized was to
provide that the loan from MoneyCode to
Watson in the sum of $1,230,000 was secured
by the [First Trust Deed]; and that in the
event of default by Watson, MoneyCode could
foreclose the [First Trust Deed] and could
exercise all of the remedies which it
provided, including taking possession of the
property and receiving the rents and profits
derived therefrom.

4 On September 28, 1994, Watson borrowed $775,315 from
Nature's Sunshine Products (NSP). The loan was memorialized in a
promissory note and secured by a trust deed on Hobble Creek (NSP
Trust Deed), which was recorded on October 4, 1994. The NSP
Trust Deed was subordinate to the First Trust Deed. In 1998,
First Security Bank assigned the First Trust Deed to Carlos
Watters. On October 22, 2003, Watters further assigned the First
Trust Deed to MoneyCode, Inc. Also on October 22, 2003, Watson
and MoneyCode, purporting to "modify" the First Trust Deed
pursuant to the paragraph 10 modification clause, entered into an
agreement whereby Watson borrowed $1,230,000 from MoneyCode,
which was to be secured by the First Trust Deed. This agreement
recited:

Come now the parties, Beneficiary and
Trustor, of that certain Home Equity Line
Note dated the 23rd Day of November, 1987 and
[the First Trust Deed] of same date and agree
to modify them pursuant to and in accordance
with the language of the Note and Paragraph
10 of the [First] Trust Deed.[3]

5 On October 23, 2003, the day after Watson and MoneyCode
entered into the modification agreement, NSP's trustee held a
nonjudicial foreclosure sale under the NSP Trust Deed, Watson
having previously defaulted on his obligation secured by the NSP
Trust Deed. NSP, the successful bidder, thereby acquired
Watson's interest in Hobble Creek, subject to the rights of any
senior lienholders of record.

6 On November 16, 2003, Watson executed a deed in favor of
MoneyCode in lieu of foreclosure of the First Trust Deed. That
same day, MoneyCode leased Hobble Creek to Watson, and he
remained in possession. A few days later, NSP filed an unlawful
detainer action against Watson to secure his removal from Hobble
Creek. In that action, the trial court found that, inter alia,
"MoneyCode was not entitled to collect the rents on [Hobble
Creek] as [NSP], as the holder of the possessory interest in the
property, was entitled to those rents until that possessory
interest was extinguished by foreclosure."

7 In March 2004, MoneyCode recorded a notice of default under
the First Trust Deed. NSP then filed this action in district
court, seeking a declaratory judgment regarding the parties'
rights and priorities in Hobble Creek, including the amount
MoneyCode was properly owed under the First Trust Deed.

8 A few weeks later, NSP filed a motion for summary judgment,
arguing that Watson and MoneyCode
have attempted to unilaterally modify [the
First Trust Deed] from the maximum amount of
$75,000 to $1,230,000 with a new Note entered
into between MoneyCode and Watson. This
attempt was made one day prior to [NSP]'s
trustee's sale of [the NSP Trust Deed], and
without notice and the consent of [NSP].

This purported attempt is highly prejudicial
to the ownership rights of [NSP].

NSP requested "an Order that elevates [NSP]'s ownership interest
to a senior status to that of MoneyCode's for that amount above
the maximum $75,000 pledged originally and . . . a full
accounting as to what MoneyCode claims is due and owing from
Watson under the [First Trust Deed]."

9 The trial court granted NSP's motion for summary judgment.
In its ruling, it noted that "the modification [of the First
Trust Deed] is so extreme, so out of the ordinary and so unlike
the other ministerial actions which paragraph 10 authorizes a
trustee to make." It then concluded that MoneyCode and Watson's
modification of the First Trust Deed "cannot have a priority over
the former lien and now ownership interest of [NSP]" because the
modification materially prejudiced the junior lienholder, NSP.

The trial court reasoned that "[NSP]'s ownership position
(acquired at [the] foreclosure sale the day after the MoneyCode
modification) is severely impacted if the [F]irst [T]rust [D]eed
is changed from securing a revolving credit agreement with a
maximum principal of $75,000 to a $1,23[0],000 loan" because NSP,
"the new owner of the property," would be "holding property that
would have little, if any, equity." After ruling that the First
Trust Deed "d[id] not have a priority in the amount of
$1,23[0],000" over the NSP Trust Deed, the trial court also
granted NSP's request for an accounting from MoneyCode in order
to determine whether the original $75,000 under the First Trust
Deed had priority over the NSP Trust Deed.

4. In its accounting, MoneyCode attempted to introduce evidence
relating to a prior lawsuit between Watson and NSP that had been
dismissed with prejudice. The trial court subsequently entered
an order striking several documents submitted in support of
MoneyCode's accounting.

5. Additionally, Watson appeals the order that denied his motion
for reconsideration and revision of the summary judgment ruling,
as well as the order that granted NSP's motion to approve
payment, to reconvey the First Trust Deed, and to cancel
MoneyCode's notice of default. Because our affirmance of the
summary judgment ruling disposes of the other two orders, we do
not address them separately in this opinion.

10 In May 2005, Watson filed a motion for reconsideration,
which the trial court denied. A few days later, MoneyCode filed
an accounting as required by the summary judgment order.4 Nearly
a year later, NSP filed its "Motion to Approve Payment of the
1987 First Security Note, to Reconvey the 1987 Trust Deed and to
Cancel MoneyCode's Notice of Default." The trial court granted
NSP's motion, stating:

[T]he payoff amount for the 1987 First
Security Note is $80,479.51. Upon payment of
the stated amount, together with interest to
the date of payment, by [NSP] to MoneyCode,
the 1987 First Security Note will be
satisfied and paid in full; . . . upon
payment to MoneyCode, the trustee of the
[First] Trust Deed . . . is ordered to
reconvey the [First] Trust Deed of record
with the Utah County Recorder; . . .
MoneyCode upon receipt of payment is ordered
to cancel its Notice of Default . . . .
This appeal followed.

ISSUE AND STANDARD OF REVIEW

11 Watson argues that the trial court erroneously granted
summary judgment in favor of NSP.5 "We review a district court's
grant of summary judgment for correctness and afford no deference
to that court's legal conclusions." Afridi v. State Farm Mut.
Auto. Ins. Co., 2005 UT 53, 5, 122 P.3d 596.

ANALYSIS

I. The Modification Clause

12 Watson argues that pursuant to the modification clause in
the First Trust Deed, he and MoneyCode may modify the amount
secured by the First Trust Deed--apparently without any
limitation--and still retain priority over junior encumbrances,
including the NSP Trust Deed. NSP, on the other hand, contends
that Watson and MoneyCode created a new loan and not a mere
modification when they increased the amount of the original
obligation more than sixteen fold, from $75,000 to $1,230,000.
We agree with NSP. In light of the principles of notice and
reasonable reliance inherent in the nature and purpose of
recording trust deeds, as well as a realistic reading of the
terms "extension" and "modification," we conclude that the
agreement between Watson and MoneyCode, an assignee twice removed
from First Security, is not a modification of the First Trust
Deed but instead constitutes an entirely new loan that is
subordinate both to the First Trust Deed and the NSP Trust Deed.

13 We begin our analysis by noting that the purpose of
recording a trust deed is to provide notice of a security
interest in the property to lenders, beneficiaries, or subsequent
purchasers. See Utah Code Ann. § 57-3-102(1) (2000); Boyer v.
Pahvant Mercantile & Inv. Co., 76 Utah 1, 287 P. 188, 193 (1930);
Huffaker v. First Nat'l Bank of Brigham City, 52 Utah 317, 173 P.
903, 904 (1918) ("It is conceded, as a legal proposition, that a
conveyance made in trust and duly recorded is notice to all the
world of [its] existence[.]"); Larson v. Overland Thrift & Loan,
818 P.2d 1316, 1323 (Utah Ct. App. 1991) ("Recording protects the
beneficiaries of a trust deed against subsequent buyers by
imparting notice[.]"), cert. denied, 832 P.2d 476 (Utah 1992).
Cf. Timm v. Dewsnup, 2003 UT 47, 36, 86 P.3d 699 ("The purpose
of strict notice requirements in a nonjudicial sale of property
secured by trust deed is to inform persons with an interest in
the property of the pending sale of the property, so that they
may act to protect those interests.") (citation and internal
quotation marks omitted). Thus, notice allows subsequent lenders
to protect their interests by making loans based on what their
financial position will be in relation to senior encumbrances.
Stated another way, mortgage lenders are able to reasonably rely
on previously recorded trust deeds to provide them with an
estimate of what their financial position will be relative to
other security interests in the same property. This principle is
severely compromised, however, if Watson and MoneyCode are
permitted to use the modification clause in the First Trust Deed
to create an entirely new loan that will be secured by a trust
deed senior to junior liens already then of record, without any
notice to or consent of the junior lienholders.6
14 Furthermore, while it is unnecessary for us to attempt to
definitively define the terms "extension" or "modification," a
common sense reading of those terms simply does not support the
conclusion that the MoneyCode loan was a mere modification of the
obligation originally secured by the First Trust Deed. Nor is
such a strained interpretation supported by real estate financing
law principles. See Restatement (Third) of Property: Mortgages
§ 5.3 cmt. d, at 366 (1997) ("Some modifications may be so
extreme that they impose fundamentally different risks on the
transferor than those created by the original obligation. . . .
In such cases the transferor is entirely discharged."); Black's
Law Dictionary 622 (8th ed. 2004) (defining "extension" as "[t]he
continuation of the same contract for a specified period")
(emphasis added). Cf. Robert Kratovil & Raymond J. Werner,
Modern Mortgage Law and Practice § 38.04, at 551 (2d ed. 1981)
("The mere extension of the time of payment will not impair the
priority of [an] extended mortgage. The benefit of this doctrine
is watered down somewhat if the so-called extension agreement is
made a vehicle for more than the mere extension of the time of
payment. . . . [F]or example, . . . an increase in the interest
rate or additional principal indebtedness . . . in the extension
agreement will result in some loss of priority.") (emphasis
added) (citations omitted); 1 Grant S. Nelson & Dale A. Whitman,
Real Estate Finance Law § 9.4, at 891-92 (4th ed. 2002)
("Generally, [a modification resulting in] an increase in the
mortgage interest rate or principal amount results in a pro tanto
loss of priority to any intervening liens. On the other hand,
courts sometimes suggest that the modification can be so
prejudicial that complete rather than pro tanto loss in priority
is appropriate. . . . This sanction may also be called for where
the increase in the senior mortgage obligation is so substantial
that no equity whatsoever remains to secure junior liens.")
(emphasis in original) (footnotes omitted); 4 Richard R. Powell,
Powell on Real Property § 37.31, at 37-219 (Michael Allan Wolf
ed., 2000) ("An extension that merely alters the time period for
the payment of the obligation generally has no effect on the
priority position of the extended mortgage as against intervening
junior encumbrances. If, however, the extension also affects the
amount of principal to be paid, . . . the extended mortgage may
lose priority as to the amount of the increased obligation.")
(emphasis added) (footnotes omitted); Robert Kratovil & Raymond
J. Werner, Mortgage Extensions and Modifications, 8 Creighton L.
Rev. 595, 611 (1975) (noting that "an extension agreement which
increases the amount of indebtedness is ineffectual as against
subsequent encumbrances when the mortgage, as originally
recorded, did not provide for such advances").

15 Watson originally gave First Security Bank the First Trust
Deed to secure "a revolving credit line in the maximum principal
sum of . . . $75,000." Then, sixteen years later, Watson and
MoneyCode attempted to "modify" the First Trust Deed to secure a
new loan--totally unrelated to the original transaction--of more
than a million dollars. Certainly such a "modification" is "so
extreme that [it] impose[s] fundamentally different risks on the
[junior lienholder] than those created by the original
obligation." Restatement (Third) of Property: Mortgages § 5.3
cmt. d, at 366 (1997). Accordingly, we conclude that when Watson
entered into a new loan with a new lender, in an amount more than
sixteen times greater than the original $75,000 home equity line
of credit, this action was so far afield from the original
agreement under the First Trust Deed that the new loan simply
cannot be read as a mere "extension" or "modification" as those
terms are commonly used.

II. Applicability of Restatement

16 Watson and NSP agree that section 7.3 of the Restatement
(Third) of Property: Mortgages accurately summarizes the law that
should govern their dispute. They disagree, however, on whether
subsection (b) or subsection (c) applies to the modification
clause and NSP's junior interest in Hobble Creek. Watson argues
that subsection (c) should govern because his agreement with
MoneyCode was specifically drafted pursuant to the modification
clause, not the dragnet clause. And, based on subsection (c),
Watson asserts that the modified agreement has priority because
the modification clause in the original documentation allows
subsequent modifications even when a junior lienholder will
suffer material prejudice, because the parties included a
contractual reservation of the right to modify. See Restatement
(Third) of Property: Mortgages § 7.3(c) (1997).

17 NSP, on the other hand, contends that the dragnet clause
limits the modification clause and that the two provisions must
be read together. Therefore, NSP argues, subsection (b) governs
because the modification or new loan fell outside the scope of
the modification clause, as properly interpreted, and materially
prejudiced NSP. See id. § 7.3(b). Again, we agree with NSP.

18 Pursuant to general principles governing the interpretation
of written instruments, the First Trust Deed must be read as a
whole. See Bank of Ephraim v. Davis, 559 P.2d 538, 540 (Utah
1977) ("A mortgage is governed by the same rules of
interpretation that apply to written instruments generally.");
Johnson v. Morton Thiokol, Inc., 818 P.2d 997, 1003 (Utah 1991)
(stating that under "traditional rules of contract
interpretation," a contract should be interpreted as a whole,
"harmonizing all of the provisions"). Accordingly, in light of
the limiting language contained in the First Trust Deed's dragnet
clause, we conclude that the trial court correctly relied on the
Restatement's subsection (b), which states:

If a senior mortgage or the obligation
it secures is modified by the parties, the
mortgage as modified retains priority as
against junior interests in the real estate,
except to the extent that the modification is
materially prejudicial to the holders of such
interests and is not within the scope of a
reservation of right to modify as provided in
Subsection (c).

Restatement (Third) of Property: Mortgages § 7.3(b) (1997)
(emphasis added). The First Trust Deed did not reserve the right
to substitute, as the obligation secured by the First Trust Deed,
a new loan with a new lender in an unlimited amount. On the
contrary, the dragnet clause specifically provides, with our
emphasis, that the First Trust Deed's purpose is to secure
payment of all obligations now or hereafter
arising pursuant to or otherwise related or
connected to that certain "First Security
Home Equity Line Agreement, Note, and
Disclosure Statement" of even date herewith
executed by the Trustor . . . .

19 Thus, the dragnet clause specifically provides that the
First Trust Deed will secure future obligations "arising pursuant
to or otherwise related or connected to" the original First
Security Bank home equity loan. Moreover, the modification
clause in paragraph 10 does not expand upon what the First Trust
Deed secures but rather simply sets forth a number of duties the
trustee will fulfill at the written request of the beneficiary.
Accordingly, when read as a whole, the dragnet clause clearly
limits "the scope of [the] reservation of right to modify," in
paragraph 10, bringing the modification clause within the purview
of Restatement subsection (b). Restatement (Third) of Property:
Mortgages § 7.3(b). Accordingly, because MoneyCode's subsequent
loan did not "aris[e] pursuant to" and was not "otherwise
related" to the home equity loan originally secured by the First
Trust Deed, and because the subsequent loan is "materially
prejudicial" to NSP,7 we conclude that it does not have priority
over the NSP Trust Deed.8

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http://www.utcourts.gov/opinions/appopin/NSP120607.pdf