Daily Development for Monday, February 20, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

MORTGAGES; PRIORITY; SUBORDINATION; DRAGNET CLAUSE:  A clause covering subordinating an identified loan “and all other interests” of subordinating party successfully subordinates all mortgages of the subordinating party in existence at time of subordination.

VATACS Group, Inc. v. Homeside Lending, Inc., 2005 WL 2840301 (Ga.App., October 31, 2005).

Homeside’s predecessor had a first lien mortgage, dated 1991, on certain residential property.  Later, in January, 1993, the mortgagor took out a second mortgage with AG for $6000.  In November of the same year, the mortgagor and AG agreed that AG would make a new $9000 loan, which paid replaced the $6000 debt and added additional loaned funds as well.  Instead of cancelling the $6000 mortgage, AG obtained a new $3000 mortgage.  No explanation was given by the court for this somewhat bizarre behavior.  But there were claims by Homeside, as described below, that this was all part of a fraudulent scheme (for $9000???)

Less than a month after the arrangement described above,  the mortgagor negotiated a refinancing of the first mortgage, and AG agreed to subordinate to that mortgage.  It executed a subordination agreement that specifically stated that it subordinated its November, 1993 mortgage (specifically referenced and described) and all other AG interests in the property, to the refinancing mortgage. 

:
"Grantee does hereby subordinate its all right, title and interest under said outstanding Deed to Secure Debt above set forth, or otherwise in or to the property therein described, as against said loan to be made by [Homestead’s predecessor.]”

[Note, the reference to “Deed” is a refence to a Georgia “deed to secure a debt,” which is elsewhere here described as a mortgage.]

Four years later, the AG loan was in default, and AG sold its interest for $6000 to Andjar, which commenced foreclosure only on the January, 1993 mortgage) and apparently rapidly built up interest, late charges, and other secured claims against the property.   Shortly thereafter, while the foreclosure was in progress, Andjar sold its interest for $42,000 to VATACS, which completed a non judicial foreclosure and rapidly flipped the property (after, the court says “improving the property”) to H&I for $95,000.  This entire set of transactions took place between March and June of 1997.  (Pretty good money in defaulted debt.)

Homestead, holder of the rights of the original first mortgage, brought an action for declaratory relief and fraud, claiming that H&I and the others were asserting that their interests were not subordinate to the rights of Homestead, and desiring a declaration that in fact Homestead still had a first mortgage on the property.

At issue, of course,  was whether the subordination agreement subordinated the January, 1993 mortgage, even though it  not specifically referenced in the subordination.  The court, on summary judgment,  held that it did, crediting the language subordinating interests “otherwise in or to the property therein described” as effecting a subordination of the January mortgage. 

The court said that the language was unambiguous, but that, even if it were ambiguous, it would interpret the intent of the parties to be to effect a subordination to both interests.  It noted that the subordination agreement was recorded and that the subsequent takers of AG’s interest had constructive notice of it, as it was executed by AG and modified AG’s rights.  It swept aside an absurd argument based upon the claim that the successors in interests were BFP’s because they relied on the title as set forth in the January 1993 instrument and did not have to look beyond that in the record.  (True, in Georgia apparently, as to subsequent recordings of the mortgagor’s acts, but not as to recordings of acts by AG, the mortgagee.)

The parties asserting subordination also argued that the senior part was estopped by laches from asserting its position after so much had gone on, and they argued at least that they should be permitted to present evidence on the point.  The court stated that in Georgia the equitable doctrine of laches is not available in a legal action for declaratory relief.  (That’s right, folks!!)

Comment 1: The court characterizes the sweeping characterization of all interests “otherwise held by AG” as a “dragnet clause.”  In mortgage law, the term is more often used to describe the collecting together of all claims against a borrower to be secured by one lien, rather than to describe a collecting together of all interests in the property held by a third party, such as a subordinating party.  This strikes the author as more akin to a “Mother Hubbard Clause,” which applies the terms of an agreement to “everything in the cupboard” whether named or not, and (sometimes) whether in the cupboard now or later.  Of course, here there is no attempt to include any later claims against the property arising in favor of AG, just to sweep in other, undescribed claims. 

Comment 2: Regardless of what we call this kind of clause, other courts might be more reluctant to credit its precise language to include interests that the parties should have known about and didn’t describe with the same specificity of certain others described with precision.  In fact, the editor likes the idea of leaving the parties with the consequences of their language at least where, as here, we’re talking about the rights of commercial parties, and not consumers.  But for a very different view as to philosophy, if not as to the precise facts, see NAB Asset Venture III, L.P. v. Brockton Credit Union, 815 N.E. 2d 606 (Mass. App. 2004) (The DIRT DD for 3/21/05) (First lienholder’s agreement to subordinate its interest to a junior lienholder is not an agreement to subordinate to future advances subsequently made pursuant to a future advance clause in the junior lien, despite the fact that subordination does not exclude the future advance feature of the loan made prior by!

  the a
greement.) 

Comment 3: And what about that language continuing the law/equity separation - making equitable defenses such as laches unavailable to legal remedies such as declaratory relief?  This certainly provides all kind of tactical challenges and opportunities for litigators, but does it really make any sense in the modern world?  Is the consequence that laches will not apply here but that at some other point in the process the court will reinject laches to prevent relief based upon the rights declared?  Or does this holding in fact mean that in some actions in Georgia special concerns of fairness reflected in the notion of laches simply don’t apply?  Hmmmmm. 

Comment 4: Here’s a report on the above issue from UMKC’s Remedies Professor, Barbara Glesner-Fines:  The notion that laches (and a few other equitable defenses such as unclean hands and undue hardship) is unavailable outside equity still applies in most jurisdictions but what makes the analysis here unusual I think is the fact that the court was calling the action for declaratory judgment a legal action.  Declaratory judgment actions, being creatures of statute, have been variously characterized as equitable or legal for purposes of applying the equitable defenses.  Compare Abbott Labs. v. Gardner, 387 U.S. 136, 155 (1967) (holding that a declaratory judgment suit challenging administrative action is equitable, and that equitable defenses are therefore available) and Green v. Mansour, 474 U.S. 64, 72 (1985) ("The propriety of issuing a declaratory judgment may depend upon equitable considerations") with Simler v. Conner, 372 U.S. 221, 223 (1963) (holding that a declaratory !

 judgme
nt suit raising legal issues is legal, and that jury trial is therefore available).  So much of mortgage law falls under the equity side that I find it interesting that this court found the declaratory judgment regarding the interpretation of the mortgage to be legal.  Certainly, if the plaintiff had asked for some kind of injunctive relief or stay with the declaration of rights, the action would have been equitable and the court would have entertained the laches defense.

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