Galantino v. Baffone

Decision Date16 April 2012
Docket Number2011.,No. 417,417
PartiesAngelo GALANTINO, and Mary Galantino, Defendants Below, Appellants, v. Alessio M. BAFFONE, Jr., and Nancy M. Baffone, Plaintiffs Below, Appellees.
CourtUnited States State Supreme Court of Delaware

OPINION TEXT STARTS HERE

Court Below: Superior Court of the State of Delaware, in and for New Castle County, C.A. No. 09L–07–212.

Upon Appeal from the Superior Court. REVERSED and REMANDED

.

David E. Matlusky and Brett Bendistis (argued), Esquires, of The Matlusky Firm, LLC, Wilmington, Delaware; for Appellants.

James F. Harker (argued) and Scott T. Earle, Esquires, of Cohen, Seglias, Pallas, Greenhall & Furman, P.C., Wilmington, Delaware; for Appellees.

Before HOLLAND, BERGER and JACOBS, Justices.

JACOBS, Justice:

25 Del. C. § 2108 grants priority to a “purchase money mortgage” that satisfies the conditions prescribed by that statute.1The issue presented on this appeal is whether the parol evidence rule requires that a person who claims to hold a “purchase money mortgage” must prove his purchase money mortgage holder status solely by reference to the mortgage instrument itself. The Superior Court answered that question in the affirmative, holding also that to obtain Section 2108 priority, the recorded mortgage instrument must self-declare (either verbatim or by reciting facts that otherwise establish) that it is a purchase money mortgage. We conclude that that is not the law of Delaware and reverse.

FACTUAL AND PROCEDURAL BACKGROUND2

The issue arose in the following way: Angelo and Mary Galantino, the defendants-below, appellants (the “sellers”), owned certain property located at 869 S. DuPont Highway in New Castle (the “property”) that is the subject of this foreclosure action. In 2007, the sellers agreed to sell the property to Donna and Warren Brady and Dean Miller (the “buyers”) for $1,050,000. The agreement of sale, as initially drafted, (the “original agreement”), called for the buyers to make a $100,000 down payment, and to finance $740,000 of the purchase price with a loan from a third party, to be secured by a mortgage on the property. The sellers agreed to make up the $210,000 difference by taking back a purchase money mortgage from the buyers in that amount. Thus, the buyers would acquire the property subject to two mortgages: a $210,000 purchase money mortgage held by the sellers and a $740,000 mortgage held by the third party. It is undisputed that under this initial arrangement, the sellers agreed to subordinate their purchase money mortgage—which would otherwise have priority by statute—to the mortgage held by the third-party financing source. But, the original agreement never became effective, because the initial deal fell apart.

Before the sale closed, the buyers learned that the original third-party financing terms were “so onerous” that their counsel advised them not to go forward on that basis. Instead, the buyers' counsel found a different lender—the appellees, Alessio and Nancy Baffone (the “third party lenders”). In the past, the Baffones had been involved in financing other real estate transactions, and in this case, they were willing to provide third party financing on more acceptable terms. The third party lenders insisted, however, that certain modifications to the original agreement of sale would have to be made. Under the agreement as revised (the “revised agreement”), the third party lenders would loan the buyers $550,000, to be secured by a mortgage on the property that would have priority over any other mortgage. In addition, the sellers would increase the amount of their purchase money mortgage from $210,000 to $400,000.

After the parties executed the revised agreement a dispute arose as to whether or not the sellers had agreed to subordinate their $400,000 purchase money mortgage to the third party lenders' $550,000 mortgage. The Galantinos claimed that they never did. Specifically, Mary Galantino testified that she instructed her real estate agent that, because their loan amount would be almost doubled, their purchase money mortgage securing that loan should have priority over the third party lenders' mortgage. The agent, however, did not recall any such instruction. Nor is there any evidence the sellers took any other steps to assure that their mortgage would have priority. On that issue, the trial court found that, “nothing in the revised agreement chang [ed] the [sellers'] earlier agreement to subordinate their mortgage.” 3

The modifications that the third party lenders insisted upon were written by hand on the original agreement. As thus modified, the agreement was never “retyped and re-signed.” Thereafter, the buyers' counsel conducted the closing of the transaction in two sessions, the first with the buyers and the second with the sellers. Buyers' counsel testified that the sellers “initial [ed] the hand written changes to the [revised] Agreement of Sale,” in which “the [sellers'] mortgage was described as a ‘2nd Mortgage.’ In court, the sellers denied that they initialed those handwritten modifications. They claimed that their initials had been forged, and that they never agreed to subordinate their mortgage to the third party lenders' mortgage.

In all events, the buyers' counsel recorded the buyers' deed and the third party lenders' mortgage on July 5, 2007. Counsel recorded the sellers' mortgage on July 6, the next day. The buyers later defaulted on their mortgage payments. Two years later, the third party lenders sued the buyers in a Superior Court mortgage foreclosure action. In December 2009, the sellers filed a similar foreclosure proceeding, and moved to intervene in the earlier action filed by the third party lenders.4 The Superior Court permitted the intervention and held an evidentiary hearing to determine the priority of the parties' respective mortgages.

In a Memorandum Opinion issued April 26, 2011, the Superior Court concluded that the third party lenders' mortgage had priority, because it was the first to be recorded and because the sellers' mortgage instrument did not recite, or otherwise establish within its four corners, that it was a purchase money mortgage entitled to priority under Section 2108. The court held that the question of purchase money mortgage status must be “resolved on the basis of the recorded [sellers'] mortgage because resort to extrinsic evidence is foreclosed by the parol evidence [rule].” The Superior Court further found that the sellers' recorded mortgage instrument was “complete unto itself” and “fully integrated,” and that “nothing in the [sellers'] mortgage [instrument] ... indicates it is a purchase money mortgage ... [or] identifies the [sellers] as the purchasers [sic].” 5 The trial court held that, because “there is nothing to distinguish the [sellers'] mortgage from the [third party lenders'] mortgage which was recorded the day before [their mortgage],” the sellers' mortgage was not a purchase money mortgage entitled to priority under Section 2108. This appeal followed.

ANALYSIS

On appeal, the sellers claim that the Superior Court incorrectly applied the parol evidence rule—a doctrine rooted in contract law—to decide what is ultimately an issue of statutory interpretation. The sellers contend that: (i) the parol evidence rule does not apply to a determination of whether a mortgage qualifies as a “purchase money mortgage” under Section 2108; (ii) by relying upon that evidentiary rule, the Superior Court “deviat[ed] from the clear guidelines of 25 Del. C. § 2108 by adding new requirements not found in the statutory text, thereby violating settled principles of statutory interpretation; and (iii) the recorded transactional documents establish, on their face, that the sellers hold a purchase money mortgage having priority over the third party lenders' mortgage.

In response, the third party lenders contend that the trial court applied the correct analytical approach, and properly found that: (i) the sellers' mortgage does not satisfy the statutory requirements for a purchase money mortgage within the four corners of that document; and (ii) as recorded, the sellers' mortgage instrument “fails to provide proper notice” to the public of its purchase money mortgage status.

Those arguments raise a legal issue of first impression, namely, what evidence may a court consider in determining whether a mortgage is a “purchase money mortgage” entitled to priority under 25 Del. C. § 2108? We review questions of law, including those that require the interpretation of statutes and contractual terms, de novo.6

Our analysis begins with the “default” priority rule, embodied in Delaware's “race statut[ory] scheme that accords priority to mortgagees on a first-to-file basis.725 Del. C. § 2108 carves out an exception to that default rule in the case of purchase money mortgages. Section 2108 provides:

If lands or tenements are sold and 1 or more mortgages on the same, or any part thereof, are made by the purchaser to the vendor for securing the purchase money or any part thereof, and if such mortgages are recorded within 5 days after the deed conveying such land or tenements from such vendor to such purchaser shall be recorded, the lien of the mortgages on the lands or tenements or any part thereof shall have preference to and priority over any judgment against the mortgagor or any other lien created or suffered by that mortgagor, although such judgment or lien is of a date prior to the mortgages. 8

By its plain text, Section 2108 gives priority to a purchase money mortgage—even if it is not the first-filed—if three requirements are satisfied. First, the seller of the property must provide a loan, secured by the property, to the buyer of the property (the “identity requirement”). Second, the mortgage must be granted for the purpose of “securing the purchase money” for the property (the “purpose requirement”). And third, the mortgage must be recorded within five days after the buyers' deed is recorded (...

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