Balch v. Leader Federal Bank

868 S.W.2d 47, 315 Ark. 444, 1993 Ark. LEXIS 682

• Court: Supreme Court of Arkansas
• Decided: December 20, 1993
• Docket: 92-1100
• Status: Published

Opinions

Philip D. Hour, Special Justice.

On May 13, 1970, the owner of four certain real estate lots in downtown Little Rock (the hotel lots) entered into a Net Ground Lease (ground lease) with a lessee who intended to construct a building on the lots for use as a hotel. The lessee owned four adjacent lots (the adjacent lots) which the lessee intended to use as a parking garage in conjunction with the hotel. Paragraph 17 of the ground lease contained the following language:

MORTGAGE OF THE FEE. The Lessor agrees that this lease will be subject and subordinate to the lien of first mortgage to be held by Liberty National Life Insurance Company of Birmingham, Alabama, its successors and assigns, placed or to be placed upon the leased premises as the permanent loan financing for improvements to be erected upon said premises, the maximum term of said mortgage not to exceed thirty (30) years. This agreement on the part of the Lessor to mortgage the fee shall apply only to the original construction loan and permanent financing loan and any renewal, extension or refinancing thereof. .. . Provided, however, that this lease shall be subordinated only for the actual cost of the improvements placed upon the demised premises or the amount of the loan, whichever is less.

The lessee obtained a loan from Liberty National Life Insurance Company (Liberty National) to finance the construction of the hotel, and the repayment of the loan was secured by a mortgage on the hotel lots that was signed by both the owner and the lessee.

Later the appellants, Memory B. Balch and Beverly Balch Price (the Batches), became the owners of the hotel lots, and The Crestwood Company (Crestwood) became the tenant under the ground lease and the owner of the adjacent lots. The parties have stipulated that the ground lease remained binding on the Balches and Crestwood, and that the mortgage to Liberty National was effective to encumber the fee simple absolute interest in the hotel lots.

On August 24, 1987, when the Liberty National loan was in default, Crestwood obtained a loan from appellee, Leader Federal Bank for Savings (Leader Federal), in an amount that was substantially equal to the unpaid balance of the Liberty National loan. The proceeds of the Leader Federal loan were used to pay off the Liberty National loan, and the mortgage securing the Liberty National loan was released.

All of the documents for the Leader Federal loan were prepared by or at the direction of Leader Federal. The loan was evidenced by a note signed by Crestwood, and it was secured by a mortgage on the hotel lots owned by the Balches, and also on the adjacent lots owned by Crestwood. Only Crestwood and its partners signed the mortgage, in which Crestwood acknowledged that it owned only a leasehold interest in the hotel lots. The Balches were not asked to sign the mortgage with Crestwood, nor did they do so. However, the Balches were asked to sign separate but identical Estoppel and Subordination Certificates (Certificate) which state:

TO: Leader Federal Savings & Loan Association

THIS IS TO CERTIFY THAT:

1. The undersigned is the Lessor under that. . . Net Ground Rental Lease ....

2. That said Net Ground Rental Lease has not been modified,... in any respect and is the only Lease between the undersigned and the Lessor ....

3. That the Net Ground Rental Lease is not in default....

4. Lessor acknowledges and consents to the loan in the amount of approximately $1,924,000.00 by Leader Federal Savings & Loan Association to The Crestwood Company to be secured by a mortgage on the premises which is the subject of the Net Ground Rental Lease. Lessor recognizes that the proceeds of such loan are to repay the loan to Liberty National Life Insurance Company and therefore pursuant to Paragraph 17 of the Net Ground Rental Lease, the Net Ground Rental Lease is subordinate to the loan and mortgage in favor of Leader Federal Savings & Loan Association.

5. That this Estoppel and Subordination Certificate is made to induce Leader Federal Savings & Loan Association to consummate a mortgage loan secured by a mortgage on the premises described above, knowing that Leader Federal Savings & Loan Association relies upon the truth and accuracy of this certificate in disbursing said funds for this loan.

Crestwood defaulted in the payment of the Leader Federal loan, and Leader Federal sued to foreclose the fee interest in the hotel lots and its improvements, as well as the adjacent lots. Leader Federal contends, and the lower court found, that the Certificate, when considered with the lease, is tantamount to a lien on the Balches’ fee interest in the hotel lots. The Balches contend that they were not a party to the mortgage and that the Certificate only subordinates their interest in the ground lease, and not their fee interest in the hotel lots, to Leader Federal’s mortgage.

The case was submitted to the chancellor on a stipulation of facts, depositions and oral arguments of counsel. The record indicates that the chancellor may have had difficulty in determining the intent of the parties with respect to the meaning of the various documents involved, but the chancellor ruled that Leader Federal is entitled to foreclose the Balches’ fee interest in the hotel lots under the mortgage.

For reversal, the Balches contend that (1) the chancellor erred in holding that the ground lease and Certificate collectively constitute a lien upon which Leader Federal could foreclose the Balches’ fee interest in the hotel lots; (2) the chancellor erred in applying a “preponderance of the evidence”, instead of a “clear and convincing”, standard to the proof offered by Leader Federal to establish that the Certificate and the ground lease, considered together, constitute a lien on the Balches’ fee interest in the hotel lots; and (3) the chancellor erred by not making a finding on the extent of the Balches’ subordination in light of the limiting language of the ground lease.

We find the chancellor’s decision to be in error.

It is conceivable that a lessor might effectively subject his fee interest in real estate to the lien of a mortgage that is signed only by the lessee. Such a result would occur if the lessor signs a subordination agreement or other document that contains language indicating that he clearly and unequivocally thereby intends to subject his fee interest to the mortgage, or if that intent can clearly and reasonably be determined from other attendant circumstances. The same result would occur if the lessor signs a document that gives to another, such as the lessee, authority to sign the mortgage in behalf of the lessor. However, the intention of the parties at the time of execution of the documents, as expressed by the language employed therein, governs. Lightle v. Rotenberry, 166 Ark. 337, 266 S.W. 297 (1924).

In this case, the Certificate appears on its face to be an act of the Balches that was intended to subordinate their interest in the ground lease to Leader Federal’s mortgage. The Certificate refers only to the Balches’ interest in the ground lease; and there is no clear reference in the Certificate to any intent by the Balches to subordinate their fee interest in the hotel lots, unless that intent can be found in the following language in the Certificate:

Lessor . . . consents to the loan ... to be secured by a mortgage on the premises which is the subject of the Net Ground Rental Lease ....

. . . [T]his . . . Certificate is made to induce Leader Federal ... to consummate a mortgage loan secured by a mortgage on the premises described above[.]

Leader Federal insists that such an intent is found in the totality of the transaction, including the language in the Certificate when considered together with the language contained in Paragraph 17 of the ground lease. We disagree.

To some extent, the language used in Paragraph 17 of the ground lease is confusing. Paragraph 17 is captioned “Mortgage of the Fee”. The first sentence in Paragraph 17 states, “[t]he lessor agrees that this lease will be subject and subordinate to the lien” of a certain mortgage. The next sentence states, “[t]his agreement on the part of the Lessor to mortgage the fee”; and then the last sentence states, “this lease shall be subordinated only for . . . .” (Emphasis added).

Interpreting the ground lease most favorably to Leader Federal, it gave to the lessee the right to require the lessor to mortgage the fee interest in the lessor’s land. The Balches’ predecessor executed such a mortgage relative to the loan made by Liberty National, but they were not asked to execute a mortgage relative to the loan made by Leader Federal, nor did they do so. No language in the Certificate, standing alone, is facially sufficient to be construed as the granting of a lien by the Balches on their fee interest in the hotel lots. On its face, the purpose of the Certificate appears to have been to (1) identify the Balches as the lessors under the ground lease; (2) confirm that the ground lease had not been modified and that no other lease existed; (3) confirm that the ground lease was not in default; (4) evidence the Balches’ consent to a loan to be made to Crestwood by Leader Federal in a specific amount, to be secured by a mortgage on the hotel lots and on the adjacent lots (but without specifying who would be asked to sign the mortgage), and to subordinate the Balches’ interest in the ground lease to such mortgage; and (5) establish that the truth of the statements contained in the Certificate was an inducement to Leader Federal to make the loan to Crestwood. Absent an actual request for the lessor to sign a mortgage, a reasonable lessor who is presented such a document as the Certificate would logically deduce that the lender intended to take a mortgage only on the lessee’s leasehold interest in the land. One would not normally think that by signing such a document he would be encumbering the fee interest in his land.

Therefore, the pivotal question to be resolved here is whether the Certificate, which appears on its face to be a subordination of the Balches’ interest in the lease, was actually intended to be a subordination of their fee interest in the hotel lots.

In cases where a deed, absolute on its face, is alleged to actually constitute a mortgage, we have consistently held that the document is presumed to be what it appears to be, and that the party alleging it to be otherwise has the burden of proof by clear and convincing evidence. Carter v. Zachary, 243 Ark. 104, 418 S.W.2d 787 (1967); Wilson v. Mason, 191 Ark. 472, 86 S.W.2d 555 (1935); Blanton v. Davis, 107 Ark. 1, 154 S.W. 947 (1913); Duvall v. Laws, Swain & Murdoch, P.A., 32 Ark. App. 99, 797 S.W.2d 474 (1990); Brown v. Cole, 27 Ark. App. 213, 768 S.W.2d 549 (1989); Wensel v. Flatte, 27 Ark. App. 5, 764 S.W.2d 627 (1989). Clear and convincing evidence is that degree of proof that will produce in the trier of fact a firm conviction of the allegations sought to be established. First Nat’l Bank v. Rush, 30 Ark. App. 272, 785 S.W.2d 474 (1990).

Applying those principles to this case, the Certificate must be presumed to be what it appears to be on its face — a subordination of the Balches’ interest in the ground lease — unless Leader Federal proves otherwise by clear and convincing evidence. Leader Federal argues that in cases where no parol evidence is produced to vary the terms of a document, “preponderance of the evidence” is the quantum of proof that should be required, while “clear and convincing” is the standard that should be applied only where parol evidence is offered. Leader Federal has cited no positive case law to support that view, and the argument is without merit. It is inconceivable that a party who has the burden of proving a proposition by clear and convincing evidence might avoid that standard of proof, and take advantage of a lesser standard, by abstaining from offering parol evidence. Further, in Hickman v. Trust of Heath, House and Boyles, 310 Ark. 333, 835 S.W.2d 880 (1992), the “clear and convincing” standard was applied to the interpretation of two documents when no parol evidence was offered to assist in the interpretation.

As the proponent of the proposition that the Certificate, when considered with the ground lease, was intended to constitute an encumbrance of the Balches’ fee interest in the hotel lots, Leader Federal has the burden of proving that proposition. Since the Certificate does not appear on its face to encumber the fee, Leader Federal is required to meet its burden of proof by clear and convincing evidence, whether or not it chooses to present parol evidence.

At best, an ambiguity exists when the provisions of the Certificate are considered together with the applicable provisions of the ground lease. The Certificate states on its face that the Balches are subordinating their interest in the ground lease, while the ground lease, if given its most liberal interpretation, contains only an agreement to mortgage the fee. An agreement to mortgage property is an agreement to execute (or sign) and deliver a mortgage. It does not, in and of itself, grant a lien on the property. Does the agreement to sign a mortgage, which is contained in the ground lease that was signed long before the Certificate, modify the Balches’ otherwise clear statement of intent in the Certificate to subordinate only their interest in the ground lease? We think not.

There is nothing in the Certificate to reasonably indicate that the Balches intended to confer upon Crestwood the authority to execute the mortgage on their behalf; and the mortgage does not indicate that Crestwood was acting in a representative capacity for the Balches in signing the mortgage. In fact, the mortgage recites that Crestwood had only a leasehold interest in the hotel lots. Further, there is no clear indication in the Certificate that the Balches thereby intended to subordinate anything other than their interest in the ground lease. To the contrary, the Certificate clearly states, “therefore, pursuant to Paragraph 17 of the . . . Lease, the . . . Lease is subordinate to the loan and mortgage in favor of Leader Federalf.]”

If Leader Federal had wanted a lien on the Balches’ fee interest in the hotel lots, it could have insisted that the lien be granted in the conventional manner by requiring the Balches to sign a mortgage; or, in the alternative, it could have insisted on a lien in a less conventional manner by preparing the Certificate in such a way as to make it clear that the Balches were subordinating their fee interest, and not just their interest in the ground lease. A third way that Leader Federal could have obtained a lien on the Balches’ fee interest would have been to prepare the Certificate in such a manner to make it clear that the Balches were appointing Crestwood as their attorney-in-fact to execute the mortgage in their behalf. None of those methods was successfully employed by Leader Federal.

The record indicates that the Certificate was prepared by or at the direction of Leader Federal. The record does not reflect who prepared the ground lease, but Leader Federal adopted the language of the ground lease by referring to it in the Certificate. The Certificate does not clearly reflect an intention by the Balches to encumber their fee interest or to subordinate their fee interest to Leader Federal’s mortgage. When the provisions of the Certificate are considered with the applicable provisions of the ground lease, the most that can be said is that an ambiguity exists which must be resolved against Leader Federal, as the author of the Certificate. Planters Nat’l Bank of Mena v. Townsend, 197 Ark. 267, 123 S.W.2d 527 (1938).

The intention of an owner to encumber his property should never be established by mere inference or speculation. Where a document, which appears on its face to be only a subordination of an interest in a lease to a mortgage, is alleged to actually constitute an encumbrance of the fee interest in the land that is the subject of the lease, the document is presumed to be what it appears to be, and the party alleging it to be otherwise has the burden of proof by clear and convincing evidence. Blanton, 107 Ark. 1, 154 S.W. 947.

The only evidence in the record that might be found. to establish an obligation on the Balches to encumber their fee interest is the language contained in Paragraph 17 of the ground lease. If that language is so construed, the Balches’ obligation thereunder would be to mortgage their land if requested to do so. For reasons which are not clear in the record, neither Crest-wood nor Leader Federal requested the Balches to sign a mortgage to secure Leader Federal’s loan to Crestwood, and the Balches did not do so. The Certificate clearly states on its face that the ground lease, and not the Balches’ fee interest, is subordinate to the mortgage; and the Certificate did not authorize Crest-wood to sign the mortgage in behalf of the Balches. Therefore, it cannot be logically and reasonably concluded from the record that by signing the Certificaté the Balches intended to encumber their fee interest in the hotel lots.

The Balches’ contention that the chancellor erred by not making a finding as to the extent of their subordination should be resolved regardless of whether the Balches are found to have subordinated their interest in the ground lease or their interest in the fee. We find the Balches’ position on this point to be without merit. By signing the Certificate, the Balches effectively either (1) agreed that the amount of the Leader Federal loan was equal to or less than the cost of the improvements placed on the hotel lots or (2) waived the applicable provisions of the ground lease regarding that limitation.

For the reasons stated, the decision below is reversed and the case is remanded to the lower court for the purpose of entering a decree that is consistent with this opinion.

Hays, J., Special Chief Justice Eugene Hunt, and Special Justice C. Joseph Calvin dissent. Holt, C.J., Dudley and Brown, JJ., not participating.