DD 3/11 Mortgagee Takings Claims EMINENT DOMAIN; INVERSE CONDEMNATION; MORTGAGEES: A mortgagee cannot bring an inverse condemnation action until such time as the mortgage is foreclosed Barket v. City of St. Louis, 903 S.W.2d 269 (Mo. Ct. App. 1995)

City denied a demolition permit for a downtown building which had been designated as a landmark. Mortgagee claimed that its property had been taken by virtue of the fact that the real estate constituting its security had no economic viability. We are not told the amount of the note or the details concerning the value of the security. The trial court granted summary judgment for the city on an overriding legal issue. The appeals court here affirms the dismissal on the grounds that the suit was premature.

The court agreed that a mortgagee may have a right to compensation for a taking because the mortgagee's interest is considered "property". The court concluded, however, that the right to compensation is contingent upon (1) whether there has been a default under the mortgage, and (2) whether the mortgagee can show that its security interest was impaired by the taking.. Since, in the present case, there had been no default and foreclosure, the court held that the mortgagee's action was premature.

"[Mortgagee's] cause of action where the property is damaged for public use, or where damaged by an individual, accres after default in the mortgage and foreclosure and after his loss, in any, is determined."

This had been established law in Missouri, but the mortgagee argued that the recent Supreme Court cases on takings, particularly Lucas, created a cognizable right in a mortgagee to bring an action when the economic value of the mortgagee's interest clearly was decreased.

Comment 1: The result makes sense, but it is unfortunate the court does not give us more of the factual detail to explain why the mortgagor was not suing and the mortgagee was. The original notes were made in 1981 by a limited partnership borrower. In light of the financing customs of the time, it is likely that the notes were non-recourse. Effectively, the real estate owed the money. And if the value in the real estate was gone, this certainly lent some moral poignancy, if not legal weight, to the mortgagee's argument.

Comment 2: When does the statute of limitations run on the mortgagee's takings claim? When there is a default? A foreclosure? If there is a deficiency right, does the mortgagee have to demonstrate that it is uncollectable? (Editor - no, yes, no).

Comment 3: If the mortgage has been securitized and is trading like a bond, a change in the value of the security will have a direct and immediate impact on the bondholder's investment value. Is this a different situation? The editor thinks the answer is no, because the market value of the security is not the "property right" in question.

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