Money Store Inv. Corp. v. Summers

Decision Date27 June 2006
Docket NumberNo. 02S03-0508-CV-355.,02S03-0508-CV-355.
PartiesThe MONEY STORE INVESTMENT CORPORATION d/b/a First Union Small Business Capital, Appellant (Plaintiff below), v. Neal A. SUMMERS, Happy Hiker, Inc., Mangy Moose Enterprises, Inc., National City Bank of Indiana f/k/a Fort Wayne National Bank, Paula Phillips, et al., Appellees (Defendants below).
CourtIndiana Supreme Court

Mark R. Galliher, Craig D. Doyle, Joann B. Friedmeyer, James L. Shoemaker, Indianapolis, IN, Attorneys for Appellant.

John Burt, G. Martin Cole, Jeremy J. Grogg, Jeffrey Clark, Fort Wayne, IN, Attorneys for Appellee Paula Phillips.

On Petition to Transfer from the Indiana Court of Appeals, No. 02A03-0404-CV-170

SHEPARD, Chief Justice.

Junior creditors usually wish they were higher up the priority ladder. Here, the junior creditor took an assignment of the first mortgage holder's "dragnet" mortgages, seeking to "tack on" her judgment lien and "leapfrog" the second mortgage holder. Understandably, this constitutes a matter of first impression. Our conclusion: this was a nice try, but the original parties to the dragnet mortgages did not intend to secure a subsequent debt owed by the mortgagor to a third party.

Facts and Procedural History

From 1992 to 1996, Neal Summers granted eleven mortgages on three parcels of his real estate to Fort Wayne National Bank as security for a series of loans. Three of these mortgages contained dragnet clauses.

In February 1998, Paula Phillips sued Summers and the company in which he was the sole shareholder, Mangy Moose Enterprises, Inc. Her complaint raised a dispute over the ownership of the trademark/trade name "Paula's Seafood." The parties entered into a written settlement agreement on September 21, 1999, and the suit was subsequently dismissed without prejudice.

On September 15, 2000, Summers and Mangy Moose borrowed $508,275 from the Money Store Investment Corporation d/b/a First Union Small Business Capital and granted a mortgage on the same three parcels used to secure the Fort Wayne National mortgages (to which National City succeeded), plus an additional six lots. On the same day, Mangy Moose, by Summers as president and secretary, borrowed $471,000 from Money Store, and granted a mortgage on the same real estate.

Prior to these loans, on August 30, National City sent to Money Store's title company three pay-off statements that included the daily interest. National City assured the title company that eight mortgages and two assignments of rents and leases would be released upon the proper payoff of the three loans. On September 15, National City received three payments, but one payment came up $375 short of the amount reflected on the pay-off statements. (Appellant's App. at 271-274.) National City did not release any of the mortgages and was still owed some $4700 on Mangy Moose's overdrawn checking account.1

Phillips filed a motion to enforce the settlement agreement on August 10, 2001. Just over a month later, Money Store filed a complaint for foreclosure and appointment of a receiver. On February 5, 2002, the trial court in the Phillips' action found that Summers and Mangy Moose had failed to comply with an earlier order and granted Phillips a $205,700 judgment.

Phillips then purchased National City's nine mortgages and two assignments of rents and leases, and National City assigned all of its interest to Phillips. In March 2002, Phillips filed a complaint to foreclose these mortgages, and also moved to intervene in the Money Store foreclosure action. Both Phillips and Money Store moved for summary judgment.

The trial court entered its judgment and decree foreclosing both Phillips' and Money Store's mortgages. (Appellant's App. at 48m-o, r.) It held that "dragnet" clauses contained in three of the mortgages assigned to Phillips secured "all debts or obligations owed to Paula Phillips by Summers," which included Phillips' judgment lien against Summers, Mangy Moose's overdrawn checking account, collection fees, attorneys fees, and interest. (Appellant's App. at 48h-i.) It granted Phillips priority over Money Store on the three Summers' lots used as collateral in the mortgages assigned to Phillips.

The Court of Appeals affirmed, holding that "the mortgage dragnet clauses support[ ] the trial court's conclusion that the monetary judgment resulting from Summers' failure to comply with his written settlement agreement was, after Phillips acquired the mortgage through assignment by National City, `secured by' the dragnet mortgages." The Money Store Inv. Corp. v. Summers, 822 N.E.2d 223, 229 (Ind.Ct.App.2005) vacated. We granted transfer.2

I. Equitable Estoppel

Money Store argues on appeal that National City would have been equitably estopped from asserting the priority of its mortgages "after inducing Money Store to make new loans of over $900,000 . . . in the belief that its new loans would be secured by a first mortgage." (Appellant's Br. at 17-18.) Since an assignee of a mortgage takes no greater rights than the assignor, Strafford v. Lane, 124 Ind. 592, 24 N.E. 683 (1890), Money Store argues that Phillips' claim is subject to Money Store's equitable estoppel claim.

"The party claiming equitable estoppel must show its `(1) lack of knowledge and of the means of knowledge as to the facts in question, (2) reliance upon the conduct of the party estopped, and (3) action based thereon of such a character as to change his position prejudicially.'" City of Crown Point v. Lake County, 510 N.E.2d 684, 687 (Ind.1987) (quoting Damler v. Baine, 114 Ind.App. 534, 542-43, 51 N.E.2d 885, 889 (1943)).

Money Store fails to satisfy the first requirement: that it lacked the means of knowledge as to the facts in question. Money Store says it could not know that National City would assign its mortgage seventeen months after the loan. But the "fact in question" here is whether Money Store had the means of knowing whether or not the mortgages had been released, and it unquestionably did. When the debt and interest that a mortgage secures has been fully paid, the owner shall release, discharge, and satisfy of record the mortgage. IND. CODE ANN. §§ 32-28-1-1, 32-29-11-1 (West 2002). A simple title search and/or communications with National City would have revealed that the mortgage had not been released.

II. Dragnet Clauses

Indiana law adheres to the principle that the assignee of a mortgage assumes the rights of the original mortgage holder as well as the obligations. 20 I.L.E. Mortgages § 72 (2001). See also Strafford v. Lane, 124 Ind. 592, 24 N.E. 683 (1890); Porter v. Bankers Trust Co. of California, 773 N.E.2d 901 (Ind.Ct.App. 2002). Phillips' assignment interest therefore depends on what rights the original mortgage holder (National City) possessed by virtue of the language of the mortgage, specifically the dragnet clause.

Of all the mortgages National City assigned to Phillips, three contained dragnet clauses. Two of those mortgages "secure the payment of any and all other notes or obligations of the Mortgagor to the Mortgagee, direct or indirect, due or to become due, now existing or hereafter contracted.. . ." (Appellant's App. at 114, 312.) The third mortgage "secure[s] the payment and performance of all present and future indebtedness, liabilities, obligations and covenants of Borrower or Mortgagor. . . to Lender. . . ." (Appellant's App. at 315.)

While dragnet clauses that create open-ended mortgages are valid, IND. CODE ANN. § 32-29-1-10 (West 2002), they are strictly construed against the drafting party. Citizens Bank & Trust Co. of Washington v. Gibson, 490 N.E.2d 728 (Ind.1986). The main consideration in construing dragnet clauses is the parties' intention. Merchs. Nat'l Bank & Trust Co. of Indianapolis v. H.L.C. Enters., Inc., 441 N.E.2d 509 (Ind.Ct.App.1982). More particularly, a debt not specifically described is secured by the mortgage if the parties intended it to be secured based on the surrounding circumstances and the mortgage language. Id. at 513. The mortgage language need not literally describe the debt, but "the character of the debt and the extent of the encumbrance should be defined with such reasonable certainty as to preclude the parties from substituting other debts than those described, thereby making the mortgage a mere cover for the perpetration of fraud upon creditors." New v. Sailors, 114 Ind. 407, 410, 16 N.E. 609, 610 (1888).

Phillips' interpretation of the dragnet clauses is that the parties' intention was to secure National City for "any and all indebtedness, liabilities, or obligations owed by Summers." (Appellee's Br. at 15-16, 18.) This ignores plain language of the contract limiting the debts to those between the mortgagor and the mortgagee. Applying Phillips' rationale, the mortgages secured any debt owed by Summers to any creditor crafty enough to obtain an assignment of the mortgages. This simply cannot be. There is no indication whatsoever that National City and Summers contemplated that debts owing from Summers to third parties could be "tacked on" to the mortgages. The New v. Sailors holding thus prohibits the substituting of Summers' debt to Phillips for those debts described in the mortgages.

While it is true that Phillips stepped into the shoes of the mortgagee, this entitled her to collect debts secured in accordance with the terms of the mortgages, not her...

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