Bernhardt & Randolph’s Top Real Estate Law Developments, January, 2004

PLI Edition

Roger Bernhardt

Professor of Law

Golden Gate Law School

Patrick A. Randolph, Jr.

Elmer E. Pierson Professor of Law

UMKC School of Law

Of Counsel: Blackwell Sanders Peper Martin

Kansas City


Speaker’s Outline

1.Leases: Bankruptcy decisions endanger protections of landlords, tenants, and leasehold mortgagees: Section 365, de facto assignment restrictions; “free and clear sales;”   lease remedies:

1.1 Precision Industries, Inc. v. Qualitech, 327 F.3d 537, (T) 2003 U.S. App. LEXIS 7612 (7th Cir. April 23, 2003) Devastating Seventh Circuit case permits free and clear sale to wipe out all lease rights under 365(h).

1.2 LaSalle National Trust v. Trak Auto Corp., 288 B.R. 114, 2003 U.S. Dist. LEXIS 6029 (1/10/03) Shopping Center landlord may not enforce use clause restricting use to identified retail outlet and must demonstrate scheme of integration of tenant uses into a viable “tenant mix” through its leasing policies in order to argue that a change of use upon assignment is protected by “tenant mix” considerations under Bankruptcy Code Section 365(b)(3).

1.3 Circuit City Stores v Rockville Pike Joint Venture, 829 Atl 2d 976  (Md. Aug. 1, 2003). Shopping Center landlord may or may not have a duty to mitigate after a tenant abandons.

1.4 Solow v. PPI Enterprises (U.S.), Inc. , 324 F.3d 197 (3d Cir. 2003)

(1) It is not per se "bad faith filing" to file a Chapter 11 bankruptcy for the principle purpose of invoking the bankruptcy limitation for damages claims on an already defaulted lease.  Nor is Landlord an impaired creditor with rights to object to plan approval if the only "impairment" it suffers is the "cap" on damages recovery pursuant to Bankruptcy Code Section 502(b)(6).

2. Mortgages:

2.1. Dragnet and Similar Clauses: Do they cause more trouble than they are worth?


Cottingham v. The Citizens Bank, CV-01-14, 2003 Westlaw 133246 (Alabama 1/17/03)  A mortgage that provides that it secures a certain note, “and all renewals, extensions and modifications,” shall not be construed as a note securing future advances, and consequently, when the loan balance is paid down to zero, the mortgage is deemed cancelled.


Fisher v First International Bank, 109 Cal.App. 4th 1433 (June 25, 2003). Borrowers can overcome the fine print by testifying as to what was really intended.

2.1.3 Home Federal Bank v. First National Bank, 110 S.W.3d 433 (Tenn. Ct. App. 2003). What does the holder of dragnet clause mortgage have to tell juniors about the debts being foreclosed?


First Union National Bank v. Nelkin, 354 N.J. Super. 557, 808 A.2d 856 (App. Div. 2002). Where a refinancing lender is aware of a future advances feature in a prior mortgage and doesn't take steps to cancel the prior mortgage or the future advances feature when it pays off the balance of that mortgage, the refinancing lender will not be subrogated to the amounts paid on the first mortgage in preference to other advances later made pursuant to the future advance feature.


Kasdan, Simonds, McIntyre, Epstein & Martin v World Savings, 317 F.3d 1064 (Ninth Cir., January 28, 2003), (Borrower’s recovery from contractor for defective construction was not assigned to lender  so long as borrowers were not then in default, and so their law firm was not guilty of converting an asset belonging to beneficiary.)

2. 2.3 Equitable Subrogation. Is Iit Aautomatic for Rrefinancing Llenders?

2.3.1 Houston v. Bank of America, 2003 Nev. LEXIS 69 (Nev. Sup. Ct., Oct. 28,  2003).

2.3.2 Union Planters Bank v. FT Mortgage Co., 341 Ill. App.3d 921 (2003)

2.4 Foreclosure

McNeil Family Trust v Centura Bank, 60 P.3d 1277 (Wyo., January 8, 2003). Lenders fail again to set aside “defective” foreclosure on account of underbidding.

2.5 Late Payment, Prepayment and Default Interest

2.5.1 New Jersey lower court interprets and applies Metlife Capital - default interest, prepayment penalty on acceleration, upheld.  .In MONY Life Ins. Co. v. Paramus Parkway Bldg., Ltd., 2003 N.J. Super. 344 (Superior Ct. of N.J., Appellate Div., November 13, 2003)

2.5.2 The New Jersey Superior Court Appellate Division decides that the state should adopt the view espoused in the Restatement (Third) of Property: a prepayment penalty may be imposed on a mortgagor in default even when the mortgagee accelerates the payment of the debt.

Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P., 2003 WL 21692731 (N.J. Super. Ct. App. Div.)

2.5.3 Court rejects a variety of arguments that a particular agreed-upon default interest rate was an unenforceable penalty, including argument that permitting the lender to choose the higher of two possible rates at the time of default was fatally unreasonable.    Norwest Bank Minnesota, National Association v. Blair Road Associates, L.P., 252F.Supp.2d 86 (D. N.J. 2003); March 21, 2003.

3. Attorney Malpractice Issues in Real Estate Closings:

3.1. Failure to Oversee Recording: Attorney, but not recorder, may be liable when recorder fails to properly index a recorded document, the lawyer fails to double check the index later, and the interest thereafter is lost due to transfer to a BFP.  Antonis v. Liberati, 821 A. 2d 666 (Pa. Cmnwlth.  2003)

3.2. Failure to Evaluate Depositary for Escrowed Funds: Attorney who places millions in earnest money deposit funds into non-interest bearing account at bank that subsequently fails may be liable to client for breach of duty of care.  Bazinet v. Kluge, 764 N.Y.S. 2d 320, (N.Y.Sup. 2003).

3.3. Fiduciary Duty of Care to Non-Client in Escrow Transaction: Lawyer who receives monies from non-client in connection with real estate closing has duty of care to protect interest of party providing such monies when lawyer releases them to others.  Iacobellis v. Mainardi, A-6034-01T5 (N.J. App. 5/19/03) (unpublished opinion)

4.0 Uniform Laws Relating to Real Estate:

4.1 Uniform Real Property Electronic Recording Act

4.2 Uniform Nonjudicial Foreclosure Act

4.3 Uniform Environmental Covenants Act

4.4 Uniform Mortgage Satisfaction Act (in draft)

4.5 Uniform Assignments of Rents Act (in draft)