Lesson. Today’s post is not about a foreclosure case. Nevertheless, the case provides insight into why lenders should have “anti-merger” clauses in their deeds-in-lieu of foreclosure. Without anti-merger language, the lender’s prior mortgage may be extinguished by the subsequent deed, jeopardizing the lender’s lien in the real estate. For more, see the “related posts” below.
Legal issue. Whether a prior contract relating to rights in real estate merged into a subsequent deed so as to extinguish the contract.
Vital facts. Scott deeded real estate that he owned individually to himself and his girlfriend, Hemingway, as joint tenants. Immediately before the conveyance, the two signed a contract in which Hemingway agreed that, if she cheated on Scott, she would re-convey her interest in the real estate to him. The contract was not recorded with or referenced in the deed, however. Hemingway later was impregnated by someone other than Scott, gave birth to a child and moved out of the house.
Procedural history. Scott sought a court-ordered conveyance of the real estate back to him. The trial court sided with Scott, concluded that Hemingway breached the contract and ordered Hemingway to deed the real estate back to Scott. Hemingway appealed.
- The Indiana Court of Appeals in Hemingway cited to this general rule: “[w]hen two parties have made a simple contract for any purpose, and afterwards have entered into an identical engagement by deed, the simple contract is merged in the deed and becomes extinct. This extinction of a lesser in a higher security, like that extinction of a lesser in a greater interest in land, is called merger.”
- The so-called “doctrine of merger” says that “in the absence of fraud or mistake, all prior or contemporaneous negotiations or executory agreements, written or oral, leading to the execution of a deed are merged therein by the grantee’s acceptance of the conveyance in performance thereof.”
- However, rights or obligations that are “collateral or independent” survive the deed “because their performance is not necessary to the conveyance” and, as such, “there is no need to merge them.”
- Indiana’s test of merger is the express or implied intention of the parties. “To ascertain the parties’ intent, words and phrases of the contract cannot be read in isolation but must be read in conjunction with the other language contained in the contract.”
Holding. The Indiana Court of Appeals affirmed the trial court and concluded that the doctrine of merger did not apply. Hemingway was required to convey back to Scott all of her right, title and interest in the real estate.
Policy/rationale. The contract executed the day of the deed required the contract to be attached to the deed. Even though that didn’t happen, the language was evidence of the parties’ clear intent for the contract to survive the deed. Further, the obligation of fidelity was not one whose performance was needed for the completion of the conveyance. Instead, the obligation was “prospective in nature” and addressed conduct that would trigger a remedy, namely re-conveyance of the real estate. The contract therefore survived the deed.
- Indiana Supreme Court Speaks To The Doctrine Of Merger And The Remedy Of Strict Foreclosure
- Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why and How
I represent parties in commercial mortgage foreclosures and workouts. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. You also can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted to your left.