Court Opinion

ID: 7825424
Source: CourtListenerOpinion
Date Created: 2022-09-07 18:05:51.172628+00
Date Added: 2024-06-11T16:30:51.187636
License: Public Domain

Eugene Hunt, Special Chief Justice, dissenting. The majority takes the position that the fee interest owned by a lessor cannot be the subject of a foreclosure decree, regardless of the facts, unless the holder of that fee interest signs or authorizes another to execute a mortgage encumbering the fee interest. On September 10, 1992, the chancery judge found that Leader Federal Bank for Savings (Leader Federal) the lender to The Crestwood Company, the lessee, had a right to foreclosure upon the fee interest held by Beverly Balch Price and Memory B. Balch (the Balches) even though, the Balches, owners of the fee interest had not been a party to the mortgage encumbering their interest. On May 13, 1970, the predecessors in title of the Balches entered into a lease of lots one (1), two (2), three (3), and four (4) of Block 106, Original City of Little Rock, Pulaski County, Arkansas, which is entitled Net Ground Rental Lease with the predecessors of The Crestwood Company. All parties have agreed that they are bound by the acts of their predecessors, therefore the mesne transactions which placed title in the Balches and The Crestwood Company need not be described in this opinion. Under the terms of the lease, the Balches would retain fee title to the land owned by them and receive rental payments from The Crest-wood Company. The Crestwood Company as lessee of the property would build a hotel on the land owned by the Balches. Lots nine (9), ten (10), eleven (11) and twelve (12) in block 106 to the Original Town of Little Rock, Pulaski County, Arkansas, are owned by The Crestwood Company. A parking garage was constructed upon the foregoing described land owned by The Crest-wood Company which is adjacent to the hotel. The Balches and The Crestwood Company realized that it would be necessary to borrow money to finance construction of the hotel, and they provided for this expected occurrence in the lease so the Balches agreed to subordinate their fee interest to the lender who financed the development or to the successors who agreed to refinance the original construction loan. The hotel was constructed by a loan made by Liberty National Life Insurance Company (Liberty National) to the Crestwood Company lessee. The Crestwood Company executed a mortgage to Liberty National which mortgage encumbered land owned by the Balches and the land owned by The Crestwood Company. The hotel was constructed and is known as the “Holiday Inn City Center.” The operation of the hotel did not generate sufficient cash flow to keep the mortgage to Liberty National current and foreclosure was threatened. The Balches were aware that unless the Liberty National loan was brought current through refinancing or some other means they would lose their land. On August 24, 1987, The Crestwood Company borrowed $1,923,829.68 from Leader Federal. The loan closing documents were a promissory note and a mortgage by The Crestwood Company on the real property it owned upon which a parking garage is located adjacent to the hotel, the improvements located on the property owned by the Balches, and the leasehold estate held by The Crestwood Company in the property owned in fee by the Balches to Leader Federal. In addition to the mortgage, the Crest-wood Company assigned its rights in the Net Ground Rental Lease and also assigned all rents to be collected on the hotel property to Leader Federal. The Balches signed separate documents entitled “Estoppel and Subordination Certificate” prior to the loan closing between Leader Federal and The Crestwood Company. After the loan was closed, Liberty National was paid in full and it released the lien of first mortgage held by it on the property. The mortgage encumbered both, the Net Ground Rental Lease between the Balches and The Crestwood Company and the fee interest of The Crestwood Company. On September 17, 1990, The Crestwood Company filed bankruptcy and Leader Federal sought and secured relief from the automatic stay to pursue foreclosure of its security interest in the Holiday Inn City Center. On November 27, 1991, Leader Federal filed a complaint in the chancery court of Pulaski County, Fifth Division, seeking to foreclose not only the interest of The Crestwood Company which is lots nine (9), ten (10), eleven (11) and twelve (12) in Block 106, Original Town of Little Rock, Arkansas, but also the fee simple interest held by the Balches in lots one (1), two (2), three (3) and four (4), Block 106, Original City of Little Rock, Arkansas. The case was submitted to the chancellor upon the stipulations of the parties. On September 10, 1992, a decree of foreclosure was entered foreclosing the fee simple interest of the Balches. The relevant portion of Paragraph 17 of the Net Ground Rental Lease reads: MORTGAGE OF THE FEE. The Lessor agrees that this lease will be subject and subordinate to the lien of first mortgage to be held by Liberty National Life Insurance Company of Birmingham, Alabama, its successors and assigns, placed or to be placed upon the leased premises as the permanent loan financing for improvements to be erected upon said premises, the maximum term of said mortgage not to exceed thirty (30) years. This agreement on the part of the Lessor to mortgage the fee shall apply only to the original construction loan and permanent financing loan and any renewal, extension or refinancing thereof. Paragraph 4 of the “Estoppel and Subordination Certificates” provides that: Lessor acknowledges and consents to the loan in the amount of approximately $1,924,000.00 by Leader Federal Savings & Loan Association to The Crestwood Company to be secured by a mortgage on the premises which is the subject of the Net Ground Rental Lease. Lessor recognizes that the proceeds of such loan are to repay the loan to Liberty National Life Insurance Company and therefore pursuant to Paragraph 17 of the Net Ground Rental Lease, the Net Ground Rental Lease is subordinate to the loan and mortgage in favor of Leader Federal Savings & Loan Association. A ruling in this case turns upon an interpretation of the effect of the foregoing language from the instruments executed by the Balches and their predecessors in interest. The chancellor found at Paragraph 8 in the foreclosure decree that Leader Federal, as a result of the mortgage from The Crest-wood Company, the Estoppel and Subordination Certificates from the Balches and the Net Ground Rental Lease between the Balches and their predecessors in interest, holds a first mortgage on the property and its right to foreclose is absolute. The court granted Leader Federal an in rem judgment against the mortgaged property in the principal amount of $2,191,996.32 plus interest as of February 2, 1992, and attorneys fees as provided in the note which evidenced the debt between Leader Federal and The Crest-wood Company. The chancellor found that Leader Federal, as a.result of the mortgage from The Crestwood Company, the Estoppel and Subordination Certificates from the Balches and the Net Ground Rental Lease between The Crestwood Company and the Balches holds a first mortgage on the property and its right to foreclose is absolute. This finding is clearly supported by the record. This court has not answered the question presented in this appeal in any of its previous decisions. The majority has looked to this court’s well developed body of law governing real estate foreclosure without an in depth analysis and has said that a party must execute a document identified as a mortgage before a foreclosure decree will lie. Such a finding ignores the transaction that occurred between the Balches, The Crestwood Company and Leader Federal. The majority appears to be paying blind homage to their conclusion that there cannot be a foreclosure without a mortgage of the fee simple interest. The issue of whether the fee holder or lessor must sign a lessee’s mortgage was addressed by the Kansas Supreme Court in G. Credit Co. v. Mid-West Land Dev., Inc., 485 P.2d 205 (Kan. 1971). The Kansas court held that if the landlords had intended that all mortgages to which their fee interest was subordinated by the terms of the lease be executed by them, they could have included that condition in the lease. The court concluded that it is not necessary to have the lessors’ signatures on the mortgage unless there is an express condition in the lease agreement making lessors’ signatures on the mortgage contract necessary. There is no such condition in lessors’ lease to lessee. There is a clearly stated agreement to mortgage the fee to a refinancing lender in Paragraph 17 of the lease. The Balches effectively subordinated their interest to the lessee’s mortgage, by their execution of the Estoppel and Subordination Certificates. The Estoppel and Subordination Certificates and the Net Ground Rental Lease were effective in providing a basis upon which the Balches’ fee interest could be foreclosed upon only because The Crestwood Company executed a mortgage to Leader Federal covering the land described in both the Net Ground Rental Lease and the Estoppel and Subordination Certificates. The authority given The Crest-wood Company to mortgage the fee owned by the Balches is contained in the Net Ground Rental Lease. The Estoppel and Subordination Certificates cause the interest of the Balches to be inferior to that of Leader Federal in this foreclosure action. By virtue of subordinating the ground lease, the fee interest of lessors is subordinated to the mortgage held by Leader Federal. As explained in a University of Miami Law Review: The landowner who enters into a subordinated ground lease not only surrenders control of the property to his tenant . . ., but he also covenants to subject the property to a mortgage, the proceeds of which go to the tenant. The mortgage or mortgages to which the landlord subordinates are fee mortgages, since they not only encumber his interest in the land, but his tenant’s as well. Seneca B. Anderson, Negotiating and Drafting Leases for the Landlord, 25 U. of Miami L. Rev. 361, 390-91 (1971). To understand the transaction and that it resulted in the subordination of the fee, a focused study of the language of the two documents signed by the Balches as lessors and holders of the fee interest is necessary. The Balches signed the Estoppel and Subordination Certificates and their predecessor in interest signed the Net Ground Rental Lease. A close review of Paragraph 4 of the Estoppel and Subordination Certificates confirms that such agreement signed by the lessors effectively subordinates the ground lessors’ fee interest to the Leader Federal mortgage. Paragraph 4 of the Estoppel and Subordination Certificates states, inter alia, that: Lessor acknowledges and consents to the loan in the amount of approximately $1,924,000.00 by Leader Federal Savings & Loan Association to The Crestwood Company to be secured by a mortgage on the premises which is the subject of the Net Ground Rental Lease. Lessor recognizes that the proceeds of such loan are to repay the loan to Liberty National Life Insurance Company and therefore pursuant to Paragraph 17 of the Net Ground Rental Lease, the Net Ground Rental Lease is subordinate to the loan and mortgage in favor of Leader Federal Savings & Loan Association. The foregoing paragraph must be read in conjunction with the Net Ground Rental Lease. When the two documents are read together, it is clear that the Balches, the owners of the fee interest and lessor herein agreed to subordinate their fee interest in the land to the mortgage of Leader Federal. In the first sentence of Paragraph 4 of the Estoppel and Subordination Agreement, the ground lessors agree to give a mortgage on the premises which is the subject of the Net Ground Rental Lease. It was not necessary for the Balches to follow up and execute a mortgage. The Balches’ consent to the loan was relied upon by Leader Federal. The “premises” described in the Net Ground Rental Lease is not a building, but Lots 1-4, which is the description of the land contained in the mortgage from The Crestwood Company to Leader Federal. The second sentence of Paragraph 4 states that “pursuant to Paragraph 17 of the Net Ground Rental Lease, the Net Ground Rental Lease is subordinate to the loan and mortgage in favor of Leader Federal Savings & Loan Association.” By connecting this language to that contained in Paragraph 17 of the Net Ground Rental Lease, it is clear that the agreement is to subordinate the fee interest to the mortgage. Paragraph 17 is entitled “Mortgage of the Fee.” The language of Paragraph 17 of the Net Ground Rental Lease states: “This agreement on the part of the Lessor to mortgage the fee shall apply only to the original construction loan and permanent financing loan and any renewal, extension or refinancing thereof.” By inserting the reference to Paragraph 17, the Balches, as ground lessors-fee owners agreed to subordinate their fee interest to the lender providing funds for the purpose of refinancing the original loan. By signing the Estoppel and Subordination Certificates, the Balches, as ground lessors, signed the documents which evidenced their present agreement. Signing an agreement to subordinate their fee interest to the Leader Federal mortgage has the same effect upon the Balches as The Crestwood Company’s signing the lessee’s mortgage to Liberty National and subsequently to Leader Federal. Well-settled Arkansas law requires that different clauses to a single agreement be construed, not in isolation, but as a whole and in light of the circumstances surrounding the execution of the agreement. Because Paragraph 17 of the Net Ground Rental Lease is incorporated by reference into the Estoppel and Subordination Certificates, Paragraph 17 must be read as a clause of the agreement. This court has long followed the principle that these clauses be harmonized by ascertaining the intention of the parties within the context of the transaction under review: In seeking to harmonize different clauses of a contract, we should not give effect to one to the exclusion of another even though they seem conflicting or contradictory, nor adopt an interpretation which neutralizes a provision if the various clauses can be reconciled. The object is to ascertain the intention of the parties, not from particular words or phrases, but from the entire context of the agreement. RAD-Razorback Ltd. Partnership v. B.G. Coney Co., 289 Ark. 550, 554, 713 S.W.2d 462, 465 (1986) (citing Wynn v. Sklar & Phillips Oil Co., 254 Ark. 332, 493 S.W.2d 439 (1973)) (emphasis added). In interpreting the meaning of contracts, the object is to determine the intention of the parties from the entire context of the agreement. Intent is ‘“ascertained, not by a process of dissection in which words or phrases are isolated from their context, but rather from a process of synthesis in which the words and phrases are given a meaning in accordance with the obvious purpose of the . . . contract as a whole.’” Republic Nat’l Life Ins. Co. v. Lorraine Realty Corp., 279 N.W.2d 349, 354 (Minn. 1979) (quoting Cement, Sand & Gravel Co. v. Agricultural Ins. Co., 30 N.W.2d 341, 345 (Minn. 1947)). When Paragraph 17 of the Net Ground Rental Lease and Paragraph 4 of the Estoppel and Subordination Certificates are read together, and when the words are given meaning in accordance with the obvious purpose of the contract as a whole, it is clear that the Balches intended to and did subordinate their fee to Leader Federal’s mortgage. Judge Brantley honored the terms of the two documents and found that, as a matter of law, the Estoppel and Subordination Certificates when read in conjunction with the Net Ground Rental Lease served as a sufficient predicate upon which a foreclosure action may lie. Chancery cases are tried de novo on the record on appeal. Dopp v. Sugarloaf Mining Co., 288 Ark. 18, 702 S.W.2d 393 (1986); Rose v. Dunn, 284 Ark. 42, 679 S.W.2d 180 (1984); Walt Bennett Ford, Inc. v. Pulaski County Special School Dist., 274 Ark. 208, 624 S.W.2d 426 (1981). The findings of the chancellor are not against the preponderance of evidence. Leader Federal met its burden in this case and there is sufficient evidence to undergird the chancellor’s decision. I must respectfully dissent. Hays, J. and Special Justice C. Joseph Calvin join in this dissent.