Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment
Indiana Court Orders Release of Mortgage

This Time, Lender Did Not Relinquish Its Right To A Receiver In Subordination Agreement

What if, as a foreclosing lender/mortgagee, you want a receiver, but you entered into a subordination agreement with a de facto senior lender/mortgagee who does not?  As the subordinated lender, can you still obtain one?  According to PNC Bank v. LA Development, 2012 Ind. App. LEXIS 368 (Ind. Ct. App. 2012), it depends upon the language in the subordination agreement.

Subordination circumstances.  In 2004, PNC entered into a mortgage loan with LA Development concerning residential developments called Harrison Crossings and Kingston Village.  In each mortgage, LA Development, as the borrower/mortgagor, stipulated to the appointment of a receiver in the event of a default.  In 2008, the subject promissory notes had matured, but INTA agreed to advance $705,000 to LA Development to complete the Harrison Crossings project.  What resulted was a closing involving PNC, INTA and LA Development in which (a) PNC and LA Development entered into a forbearance agreement, (b) INTA and LA Development entered into a promissory note secured by a mortgage on Harrison Crossings and (c) PNC and INTA entered into a subordination agreement, which essentially provided for the subordination of PNC’s mortgage in favor of INTA’s.  (For more on the specific language in the subordination agreement, please read the opinion.) 

Legal proceedings.  In 2011, PNC filed a lawsuit to foreclose based on LA Development’s default under the 2008 forbearance agreement.  PNC simultaneously sought the appointment of a receiver to complete the Harrison Crossings development.  INTA filed a cross-claim/counter-claim for foreclosure of its mortgage, but for reasons not specified in the PNC opinion, INTA objected to PNC’s request for a receiver. 

PNC’s contentions.  PNC alleged that the appointment of a receiver was mandatory under Indiana law, as detailed by my July 25, 2008 postSee also, Ind. Code § 32-30-5-1(4)(C).  Indeed INTA did not dispute that, given LA Development’s default and written stipulation in the subject mortgage, PNC satisfied Indiana’s receivership statute.

INTA’s contentions.  INTA instead argued that PNC “relinquished its right to the mandatory appointment of a receiver in the subordination agreement.”  INTA’s position was that the subordination agreement deprived PNC of its rights and remedies derived from its loan documents. 

Lien rights vs. enforcement rights.  PNC asserted that, although the PNC/INTA agreement contemplated the subordination of “liens” and “priorities,” it did not subordinate all of PNC’s rights.  The Court agreed.  PNC did not relinquish its enforcement rights and remedies.  For example, PNC elected to foreclose on Harrison Crossings, and INTA conceded that the subordination agreement authorized such action. 

If [PNC] waived all of its enforcement rights and remedies under the mortgages by executing the subordination agreement, then the right to foreclose on Harrison Crossing would be included.  Either [PNC] subordinated all of its enforcement rights and remedies in the mortgages or it did not.  INTA cannot pick and choose which rights and remedies [PNC] subordinated to support its argument.

Different result?  Neither PNC nor this post stands for the proposition that a subordinate lender will always get a receiver over the senior lender’s objection.  The language of the subordination agreement is critical.  The Court in PNC emphasized the necessity of using specific language to limit rights and remedies of junior mortgagees.  Citing to legal commentator Patrick E. Mears, the Court suggested that senior mortgagees should require junior mortgagees, in subordination agreements, to waive their rights to marshal assets and to postpone any enforcement rights that they may have.  If the subordination agreement in PNC had done that, then I think the result would have been different.