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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