Daily Development for Tuesday, November 6, 2001

 

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

MORTGAGES; WASTE; PASSIVE WASTE: Failure to renew parking rights on adjacent property does not, as a matter of law, amount to waste as against a mortgagee's interest.

 

Boucher Investments, L.P., v. Annappolis-West Limited Partnership, 2001 WL 1340563 (10/31/2001)

 

Mortgagor owned an office building with relatively limited parking.  A previous owner of the building had entered into a twenty year lease with an adjacent shopping center to provide parking.  The lease expired in 1991, but the building's tenants continued to use the shopping center lot until 1996, when the center's owners erected a fence.

 

The property was subject to a 1984 second mortgage that the present mortgagee acquired in 1988.  The mortgage secured a non-recourse note and the non-recourse clause contained no "carve outs."  The mortgagor began defaulting on this mortgage note in 1991, and problems continued, despite restructurings, until 1999, when the mortgagee defaulted on the first mortgage as well, and the foreclosure of that first mortgage wiped out the junior mortgagee, plaintiff in this case.

 

Faced with no deficiency rights and no security, the mortgagee did the only thing it could do - sued for waste.  It alleged that the failure to maintain or secure additional parking rights devalued the property and constituted waste - a tort which would be outside the restrictions of the non-recourse clause.   It alleged that if additional parking were not permitted, the local planning agency intended to rescind the current occupancy permit and issue a new permit with lowered occupancy maximums.

 

The trial court granted summary judgment for the mortgagors on the waste claim, and the Maryland Court of Special Appeals here affirmed. The appeals court stated that the appellant mortgagee had presented no substantiation for its claims that the property's land use permits would be modified or that the property's market value had in fact been reduced due to the parking problems, but in the end, it appears, that this lack of substantiation proved moot, since the court ruled that as a matter of law the failure to provide for parking on adjacent premises does not constitute mortgage waste.

 

The court noted that there was scant Maryland authority on the subject of mortgage waste, and relied upon the definition of waste contained in the Restatement of Mortgages

 

.

(a) Waste occurs when, without the mortgagee's consent, the mortgagor:

 

(1) physically damages the real estate, whether negligently or intentionally, in a manner that reduces its value;

 

(2) fails to maintain and repair the real estate in a reasonable manner, except for repair of casualty damage or acts of third parties not the fault of the mortgagor;

 

(3) fails to pay before delinquency property taxes or governmental assessments secured by a lien having priority over the mortgage;

 

(4) materially fails to comply with covenants in the mortgage respecting the physical care, maintenance, construction, demolition, or insurance against casualty of the real estate or improvements on it; or

 

(5) retains possession of rents to which the mortgagee has the right of possession under [another Restatement Section].

 

The court noted that there was nothing in the Restatement dealing with the failure to maintain the value of the mortgaged improvements by neglecting to maintain interests in adjacent property.  In general, it concluded that the notion of "passive waste" as an actionable tort was quite limited, focussed primarily on failure to pay taxes or to comply with maintenance covenants.  Thus, presumably even if the failure to renew the lease on the adjacent property did lead to significant diminution in the security value and loss to the mortgagee, it was not actionable as waste, and mortgagor were protected from any deficiency claim by the non-recourse clause.

 

Comment 1: Perhaps the most spectacular recent mortgage waste case was reported on DIRT as the DD for 1/29/01, The Nippon Credit Bank. Ltd. v. 1333 North California Blvd., 2001 WL 51611 (1/23/01) (Mortgagor is liable for tortious waste for deliberate nonpayment of taxes, and for punitive damages when nonpayment was used as a weapon against mortgagee in continuing negotiations to revise existing loan.), where the court upheld a punitive damages claim in favor of the lender for almost $2 million.

 

Comment 2: The editor concurs in the result in the instant case, but the editor's reflections on cases like this, and on the Nippon Credit Bank case, have led the editor to wonder increasingly whether waste is an appropriate concept any longer in the law of mortgages.

 

The editor suggests that it ought to be left to the parties to identify in the mortgage the proper care that mortgagors should take of the mortgagee's security.   This is not a game for the tort courts.  Abolishing tortious waste would do few mortgagees any injury, since the bulk of them include in their mortgage specifically what responsibilities the mortgagor has for the maintenance of the property and preservation of its value as security.  To conclude that, in light of this widespread practice of contracting to establish the mortgagor's duties, there is also a duty sounding in tort is to elevate protection of the mortgagee's interest to an issue of public duty.  Surely this is not consistent with modern thinking on this issue.

 

The mortgagee in this case probably pursued its claim all the way through an appeal and argument to the Maryland appeals court because the vagueness of the standard of waste gave it some grounds for argument, and thus for grinding attorney's fees out of the mortgagor to defend.  The court properly rejected the mortgagee's claim, but the mortgagor was still stuck with the costs of defense.  Further, the court, in an unfortunate final paragraph, noted an Alaska territorial case suggesting that failure to maintain an insurance policy might also be tortious waste, thus adding additional mischief for future Maryland litigation.

 

The editor is not claiming that a failure to insure or a failure to pay taxes ought not to be actionable exceptions to a non-recourse promise.  He is suggesting that such obligations ought to be seen as  arising out of contract, and not be articulated as torts, with the possibility of punitive damages and the wide open standard setting that public policy consideration dictates.

 

The editor notes that the Restatement of Mortgages adds fuel to the fire when it makes the violation of a mortgage covenant relating to maintenance into tortious waste.  The editor confesses that this is probably consistent with the authority, but the existence of contrary didn't stop the reporters of the Restatement from doing what they perceived to be right on other instances, and the editor proposes that they might have taken that approach here as well.

 

On the other hand, the editor readily admits that the concept of mortgage waste has been around for more than a century, and perhaps it is so infused into our common law at this point that vested expectations and inertia arguably require that it continue to fester for a few centuries more.

 

Comment 3: In McNeese v. Hutchinson, 1998 WL 850050 (Miss. 1998) The DIRT DD for 1/16/99,  the Mississippi Supreme Court  considered and  rejects another element of the Restatement approach on waste.  It adopted a standard that a mortgagee can claim waste due to actions of mortgagor when (and only when) the fair market value of property has declined from time of mortgage conveyance.  Normally, of course, property values tend to increase over time, and in many cases a reduction in absolute value will not result in a value lower than that in existence at the time the mortgage was made.

 

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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