Beneficial Finance Co. of Colorado v. Schmuhl

713 P.2d 1294, 1986 Colo. LEXIS 505

• Court: Supreme Court of Colorado
• Decided: February 10, 1986
• Docket: 84SC206
• Status: Published

Opinions

ERICKSON, Justice.

We granted certiorari to review the decision of the court of appeals in Centennial Savings & Loan Association v. Schmuhl, 690 P.2d 882 (Colo.App.1984), which held that documents that created a security agreement on a mobile home did not result in an implied waiver of the $6,000 statutory exemption for mobile homes which are used as residences. We reverse and remand to the court of appeals with directions to reinstate the order of the district court finding that the documents waived the $6,000 statutory residential mobile home exemption.

I.

On October 4, 1979, Gerald and Glenda Schmuhl executed a combined promissory note and security agreement in favor of Beneficial Finance Company of Colorado (Beneficial). The note was in the amount of $38,002.48. The transaction included a second deed of trust on two tracts of real property owned by the Schmuhls and a first lien on the Schmuhls’ mobile home, their place of residence. The lien on the mobile home was properly perfected by notation on the certificate of title as required by sections 4-9-302(3)(b), 2 C.R.S. (1985 Supp.) and 42-6-107(2), 17 C.R.S. (1984) (prior to June 15, 1983, mobile homes were considered motor vehicles for title purposes).

The security documents consisted of the Beneficial combined note and security agreement, which included an express, general waiver of all exemptions “permitted by law to be waived,” and a second deed of trust on the real property owned by the Schmuhls. In addition, the margin of the note had a separate, boxed-off area containing a detailed listing of “Personal Property Security,” including the Schmuhls’ 1977 Royalton mobile home. The clause also contained an express waiver of the Colorado homestead exemption for real property (§ 38-41-201.6, 16A C.R.S. (1982)) and other language reflecting a waiver.¹

The original plaintiff in the present action was Centennial Savings & Loan Association (Centennial), beneficiary of the first deed of trust on the Schmuhls’ two tracts of real property. The Schmuhls defaulted on their loan obligations to both Centennial and Beneficial. Centennial filed suit on December 7, 1981 to foreclose its first deed of trust on the real property, naming Beneficial, the party secured by the second deed of trust, as a defendant. Beneficial then cross-claimed against the Schmuhls for entry of judgment on their remaining loan obligation to Beneficial ($33,750) and to foreclose the second deed of trust on the real property and the lien on the mobile home. Beneficial’s appeal here deals only with the foreclosure of the mobile home lien.

The La Plata County District Court granted summary judgment and a decree of foreclosure in favor of Beneficial on October 13, 1982. On December 15, 1982, the La Plata County Sheriff levied on and seized the mobile home. On January 6, 1983, Gerald Schmuhl filed a claim of exemption for the mobile home with the district court under the Colorado personal property exemption statute, section 13-54-102, 6 C.R.S. (1985 Supp.), which provides that: “(1) The following property is exempt from levy and sale under writ of attachment or writ of execution ... (o)(II) one mobile home to the extent of six thousand dollars while used and occupied as a place of residence by the owner_” The district court denied the Schmuhls’ exemption claim, finding that the security documents on the mobile home created an implicit waiver of the statutory exemption. The mobile home was sold at public sale on February 16, 1983.

The court of appeals, in Centennial Savings & Loan Association v. Schmuhl, 690 P.2d at 882, reversed the decision of the district court on the waiver issue. The court of appeals held that a general, blanket waiver of statutory exemptions in a promissory note is void as against public policy. We must determine whether the general waiver provisions of a note are against public policy and foreclose interpretation of a security agreement to carry out the obvious intent of the parties.

II.

The court of appeals relied on Weaver v. Lynch, 79 Colo. 537, 246 P. 789 (1926). Weaver held that “a waiver in an executory contract, like a promissory note” “is void as against public policy.” 79 Colo, at 539, 246 P. at 789-90. Weaver invalidates the Schmuhls’ general waiver of exemptions contained in the loan note. However, Weaver does not address the issue of an implied waiver in a security agreement. Here we are faced with the question of whether the combined note and security agreement on a mobile home create an implied waiver of statutory exemptions as to the mobile home.

The issue was addressed in In re Rade, 205 F.Supp. 336 (D.Colo.1962). Weaver involved an express and general waiver in a cognovit note of all possible exemptions.

The waiver blanketed any statutory exemptions which the debtor could claim when judgment was entered and execution sought for failure to comply with the terms of the cognovit note.² However, in Rade, as here with the Schmuhls, the question was whether the security agreement, covering one item of personal property, created an implied waiver of the statutory exemption for that specific property only. The waiver in Weaver covered all of the debtor’s property, whereas in Rade it covered only the debtor’s automobile and in the present case only the Schmuhls’ mobile home with language indicating an intent to waive exemptions.

Rade executed a promissory note and unrecorded, automobile chattel mortgage in favor of the Denver Public Schools Credit Union. Rade later petitioned for bankruptcy, claiming an exemption on the mortgaged car under the 1961 Colorado statute exempting $300 of the value of any vehicle used for carrying on a gainful occupation. The court denied Rade’s claim and declared: “[Wjhere a mortgage is executed on exempt property, the prevailing view seems to consider the exemption waived by implication.” 205 F.Supp. at 339.

We can find no authority to the contrary. The note and security agreement, when read in its entirety, could be construed to be an express waiver of the exemption. However, the widely accepted rule is that a personal property security agreement creates an implied waiver of statutory exemptions as to the secured property when the property is described with particularity as it was in these documents. For example, in Aetna Finance Co. v. Antoine, 343 So.2d 1195 (La.App.1977), Louisiana held that a grant of a chattel mortgage in statutorily exempt household personal property creates an implied waiver of the statutory exemptions. The Louisiana statutory exemption in Aet-na Finance, like the Colorado statutory personal property exemption in the present case, was based on a state constitutional mandate for the state legislature to enact exemptions from seizure and sale. La. Const, art. 12, § 9; Colo. Const, art. XVIII, § 1.

Similarly, in State v. Avco Financial Service, Inc., 50 N.Y.2d 383, 406 N.E.2d 1075, 429 N.Y.S.2d 181 (1980), the New York Court of Appeals held that a security agreement on exempt personal property is proper despite the exemption statute. Further, “the law has not forbidden a debtor to execute a mortgage upon the property so protected and thus create a lien which may be foreclosed despite the property's exempt status....” 406 N.E.2d at 1077, 429 N.Y. S.2d at 184. See also P. Coogan, W. Hogan, D. Vagts & J. McDonnell, IB Secured Transactions Under the Uniform Commercial Code § 20AA.03[6] (1985); In re Furlow, 178 La. 637, 152 So. 315 (1933); City Loan & Savings Co. v. Keenan, 136 Ohio St. 125, 24 N.E.2d 452 (1939); Cammarano v. Longmire, 99 Wash. 360,169 P. 806 (1918).

In addition, the Colorado statutes dealing with secured transactions make no provision for reservation of exemptions upon foreclosure of a security interest in personal property. See §§ 4-9-102(1), 4-9-501 to -507, 2 C.R.S. (1973 & 1985 Supp.).

We hold that Beneficial’s combined note and security agreement on the mobile home resulted in an implied waiver of the Schmuhls’ statutory right to exempt $6,000 of the value of the mobile home. Our decision here is limited to the personal property exemption provided for mobile homes used as residences under section 13-54-102(l)(o)(II), 6 C.R.S. (1985 Supp.). We do not address the waiver requirements of any other personal property exemption enumerated in section 13-54-102 nor the Colorado real property homestead exemption for mobile homes, which covers debts incurred after December 31, 1983. § 38-

41-201.6, 16A C.R.S. (1982); see also Colo. Const, art. XVIII, § 1.

Our holding is supported by the expectations of the parties in secured transactions. A debtor who grants a security interest in specific property to a creditor expects foreclosure of that interest upon default. As a practical matter, a determination that a statutory exemption cannot be waived by a security agreement would severely restrict the availability of much-needed credit to debtors who, in many cases, have few assets to use as collateral. In this case the title reflected the lien, and it is clear that the Schmuhls intended to waive their residential mobile home exemption when they signed the security documents.

In view of our holding on the waiver issue, we need not reach the question of the timeliness of the Schmuhls’ exemption claim.

Accordingly, we reverse the judgment of the court of appeals and remand the case to the court of appeals with directions to reinstate the order of the La Plata County District Court.

DUBOFSKY, J., dissents, and QUINN, C.J., joins in the dissent.

1 . The "Personal Property Security” provision in the note reads as follows:

Personal Properly Security A check of one or more boxes below indicates a security interest under the Uniform Commercial Code has been created in the items of personal property listed alongside such checked boxes pursuant to a Security Agreement dated October 4, 1979 covering:

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x Other Personal Property 1977 Royalton Mobile Home Such Security Agreement secures all future advances and loans made by lender to Borrower(s), at Lender’s option, within 15 years of its date.

Proceeds of the above described collateral, including monies obtained from the payment of an insurance claim relating to property insured, also are covered.

Other Security

This note is secured by a waiver of the homestead exemption but only to the extent such waiver applies to the property covered by the Security Agreement and property covered by any Mortgage on real property.

2 . Numerous cases are addressed to the same type of express and general waiver in an executory contract like a note. See, e.g., Industrial Loan & Investment Co. v. Superior Court, 189 Cal. 546, 209 P. 360 (1922); Iowa Mutual Insurance Co. v. Parr, 189 Kan. 475, 370 P.2d 400 (1962); Mayhugh v. Coon, 460 Pa. 128, 331 A.2d 452 (1975); Sherwin-Williams Co. v. Morris, 25 Tenn.App. 272, 156 S.W.2d 350 (1941); Slyfield v. Willard, 43 Wash. 179, 86 P. 392 (1906).