Even Though Loan Was Non-Recourse, Court Awards Lender Real Estate Tax Refund Due To Borrower
May 23, 2016
Lesson. Depending of course upon the language in a particular mortgage, lenders generally hold a security interest in real estate tax refunds owed to borrowers – even in cases of non-recourse loans.
Case cite. 2513-2515 South Holt Road Holdings v. Holt Road, 40 N.E.3d 859 (Ind. Ct. App. 2015).
Legal issue. Whether, in the context of a non-recourse loan, the foreclosing lender could recover a $307,193.76 refund paid to the borrower following a successful appeal of a real estate tax assessment.
Vital facts. Holt Road was a commercial foreclosure case concerning a non-recourse loan. Black’s defines such a loan as a “type of security loan which bars the lender from action against the borrower if the security value falls below the amount required to repay the loan.” In the commercial real estate context, this means that the lender’s recovery of the debt is limited to the mortgaged property. If there is a deficiency, the borrower, personally, is not on the hook. What made Holt Road unique was that, during the foreclosure case, the borrower received a sizable refund of real estate taxes (aka property taxes) from the county as a result of a tax appeal. Since the sheriff’s sale of the mortgaged real estate resulted in a deficiency, the lender sought recovery of the refund paid by the county in further satisfaction of the judgment/debt.
Procedural history. The trial court entered judgment in the borrower’s favor on the tax refund question, and the lender appealed. The Holt Road opinion is from the Court of Appeals. Following the opinion, the Indiana Supreme Court granted transfer, which automatically vacated the opinion. However, the Supreme Court later reinstated the Court of Appeals opinion, which today is good law.
Key rules. Holt Road is not rule heavy. The opinion slices and dices language in the mortgage. The Court cites to dictionaries more than law.
Holding. The Court reversed the trial court and bought the lender’s argument that the tax refund fell within its security interest, as articulated in Paragraph (K) of the mortgage dealing with “funds,” “claims,” and “general intangibles.” The Court awarded the refund, which was being held in escrow, to the lender.
Policy/rationale. The borrower asserted that the refund was a personal asset that was protected by the non-recourse nature of the deal – sort of like income. Arguably the outcome was contrary to the essence of a non-recourse loan. But the lender’s winning argument was that the funds were connected to the real estate, over which the lender held a broadly-defined security interest. The Court examined in detail the language in the mortgage and found the tax refund to fall within the scope of the applicable lien provisions. Close call.
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