Daily Development for
Monday, October 20, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; PRIORITY; CROSS COLLATERALIZATION: Cross-collateralization provisions of mortgage modification agreements, agreed to by second priority lienholder, will be viewed as granting holders of first mortgage first priority position with respect to entire indebtedness owed them.

Parsons v. Biscayne Valley Investors Ltd., L.P., 935 P.2d 218 (Kan. Ct. App. 1997).

Plaintiffs loaned funds to defendant, evidenced by two promissory notes, each secured by first mortgages on one of two apartment buildings. A bank (junior) later loaned additional funds to defendant and took a second priority blanket mortgage covering both buildings. When the defendant later encountered financial difficulties, it and both creditors executed a modification agreement that included a cross-collateralization clause by which each building secured the debt under its note and the note and mortgage on the other property as well. As a condition of its consent, the junior lienholder also required that plaintiffs would not advance any additional funds to defendant.

The language of the cross collateralization agreement stated simply that "each respective Mortgage shall secure, in addition to the debt evidenced by the respective Notes, the liabilityies under the noterh Note and Mortgage securing it, and any other liabilities of the Borrower to the Lender, direct or indirect, secured or unsecured, now dur or to become due."

As part of the deal, the junior secured the agreement of the senior lender that there would be no future advances under either of the senior loans.

When defendant later defaulted, plaintiffs sought to foreclose on both mortgages, and the junior protested, arguing that the cross-collateralization clause only granted plaintiffs a third priority lien behind the junior as to one property for any deficiency plaintiffs might incur through foreclosure of their mortgage on the other property.

The trial court found for the senior lenders, and the junior appealed.

Held: affirmed. The court held that the mortgages and the modification agreement must be construed together, and so construed, unambiguously evidenced the parties' intent that the plaintiffs have a first priority lien securing the entire amount owned them. To construe the cross-collateralization clause as the junior urged, the court concluded, would render it meaningless, for the junior's consent would therefore have been unnecessary, as would the junior's insistence on the provision that the plaintiffs would not advance any further funds to defendants, had the clause only granted the plaintiffs a lien subordinate to the junior's.

In dicta, the court also affirmed the trial court's alternative holding that even if the documents were not clear and unambiguous, based on testimony from the plaintiffs' attorney regarding his reasons for seeking the bank's consent to the modification agreement, the evidence demonstrated the parties intent that the plaintiffs have a first priority lien on both properties.

Comment 1: The editor might quibble with the notion that a junior lender never has an interest in whether there are future obligations secured by liens junior to its own. A "subject to encumbrances" clause is not uncommon, and in fact the court discusses such a clause in the senior mortgages in this case. Consequently, the junior's consent might have been necessary with regard to the creation of liens either senior *or* junior to its own, and it might well have had a concern about future advances that would be secured even by a lien junior to its own.

Comment 2: The above having been said, however, if the junior got advice at the time that the import of the documents was most likely to create a "split" priority of claims under the first mortgages, then the junior clearly got bad advice. Where a junior consents to a contract provision that says that a given debt is secured by a senior mortgage, the junior ought to be seen as consenting both to the security and the priority status of that security arrangement. If the junior wants a different result, it is up to the junior to clarify the documents. A mortgage lien, absent special arrangements or intervening equities in innocent parties, has one priority. That is almost certainly the intent of the parties where the documents do not indicate otherwise.

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