Daily Development for
Thursday, November 5, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; RELEASE: Where mortgage contains a partial release provision but does not specify the amount of the partial release payment, parol evidence is admissible to establish the amount of such release fee.

Jim Carpenter Company v. Potts, 495 S.E.2d 828 (Va. 1998).

Borrower acquired 46 lots with purchase money financing from an institutional lender, secured by a first deed of trust, and with seller takeback financing, secured by a second deed of trust. In addition, Borrower was indebted on open account to Creditor, and, pursuant to a workout agreement, obtained an additional credit line note of $100,000 secured by a third deed of trust on all of such lots. Such third deed of trust did not contain specified terms for partial releases or an express provision for the payment of a fixed release fee per lot. Lot 23 was sold in 1990 for $24,000, and the proceeds thereof were applied, among other things,to pay fixed partial release fees under the first two deeds of trust. After further payment of sales commissions and closing costs, net sales proceeds were slightly in excess of $4,500. There was a dispute about whether Borrower sought a release from Creditor at that time, but it was clear that in the end it paid no monies to Creditor and Creditor did not release its lien on the lot. The purchaser of Lot 23 subsequently improved it and resold it to Owner.

The facts suggest that Owner, at least, was unaware that the lien attached to her title following the closing. In November, 1991, the institutional lender foreclosed on all of the lots still owned by Borrower. In July 1992, the trustee under Creditor's deed of trust commenced foreclosure proceedings against Lot 23. Evidence was presented to the effect that Borrower's president and Creditor's credit manager would have a conversation about each lot to be sold, and, based upon such conversation, Creditor would release such lot. Creditor's credit manager maintained that no such conversation ever took place with respect to Lot 23.

It appears that, in the case of some lot sales, Creditor agreed to a partial release of its deed of trust without requiring the payment of any release fee.

The court recited the partial integration doctrine, which recognizes that the final form of a contract may not reflect the complete agreement of the parties or their course of dealing based upon their complete agreement. In such circumstances, where the entire agreement has not been reduced to writing, the court may admit parol evidence to show additional independent facts that the parties contemporaneously agreed upon in order to establish the entire contract.

Creditor's deed of trust expressly provided for partial releases, but was silent as to the terms under which those releases were to be given. The court found that such deed of trust contained a provision that could not be implemented absent additional terms or a collateral agreement and that it was an incomplete integration of the agreement between Creditor and Borrower. The parol evidence led the court to conclude that Lot 23 should be released in return for a payment of the net proceeds from the sale of that lot.

Comment 1: It is interesting to set this case alongside the recent case in which the parties did not fill in the blanks to identify the desired terms for a financing contingency. It that case the court found the contract fatally vague. In this case, however, the contract was only "partially integrated" and consequently parol evidence was admissible. Perhaps there was no parol evidence available in the other case to correct the deficiencies of the residential sale contract, but the use of such evidence to identify the true intent of the parties in cases where they obviously intended *something* seems to be an intelligent approach that might have been useful in both cases.

Comment 2: The above having been said, however, it is more problematic for the court to admitevidence of post contractual conduct in order to interpret the contemporaneous intent of the parties. Courts do that, but such post contract evidence often is of limited value. Here, it appears that the court may be concluding that the parties at the time of contract did nothing more than agree to discuss future releases at prices to be negotiated. If that is the case, isn't the court reading into the contract a "duty to negotiate in good faith" concerning future releases? Is this ever a wise alternative?

Comment 3: Admittedly, the problem is made tougher by the fact that the property is now in the hands of Owner, a third party who stands to lose her entire $155,000 investment if the property is saddled with Creditor's blanket mortgage, which is in excess of $100,000. And perhaps Creditor is somewhat to blame, at least by entering into such a vague mortgage. But wasn't the Owner or its professional advisers also careless when they carried out the acquisition of property for $155,000 subject to a recorded blanket mortgage of over $100,000 with uncertain release terms?

In fact, in this case, the intermediate seller who improved the property and resold it to Owner, included as defendants the escrow company, title company, seller, and lawyers who participated in transferring title subject to the mortgage. They are the true beneficiaries, it appears of thecourt's generous rewriting of the release clause. And their good fortune goes beyond that. Because of procedural matters, it appeared in the end that both they and the intermediate seller avoided liability to the Owner for the costs of obtaining the release or other damages that Owner ultimately sustained when this was all over. Although the record does not so indicate, it may be that Owner's title insurer was the real party in interest in this litigation all along.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.