Summary
In Southard, the court held that the mortgagee was "obligated," not only according to the terms of R.C. 5301.232, but additionally under the Yarborough standard, requiring the advancement of "a certain and definite sum in a particular manner."
Summary of this case from Schalmo Builders, Inc. v. MalzOpinion
No. 78-296
Decided December 7, 1978.
Real property — Open-end mortgages — Priority over subordinate liens.
Pursuant to R.C. 5301.232(B), an otherwise subordinate lien will not receive priority over an advance made by the holder of an open-end mortgage if the mortgage holder is obligated to make such advance at the time the notice of lien is received.
APPEAL from the Court of Appeals for Green County.
In September 1973, Orville and Margaretta Southard (appellees herein) signed an open-end mortgage held by Colonial Mortgage Service Company (appellant herein). The mortgage, which was recorded on September 11, 1973, secured a maximum of $2,000,000 to be advanced at intervals by Colonial during the construction of an apartment complex the mortgagors proposed to have built on land owned by them in Greene County, Ohio. Under the building loan agreement which was incorporated into the mortgage and which set forth the details for making the advances, Colonial agreed, as long as certain conditions precedent were met and as long as the mortgagors were not in default, to advance money in installments paid at least one month apart to the mortgagors upon their request.
In January 1975, the mortgagors requested advance 13. Before that request was granted, Southard and an officer of Colonial, among others, met to deal with serious financial problems plaguing the project. They agreed at that meeting to complete the 84 apartment units that were nearly finished. On February 24, 1975, the advance was made. In the interim between the 12th and 13th advances a number of subcontractors performed work on the apartment units. All but one of them failed to file mechanics' liens before advance 13, and none of them furnished Colonial with written notice of work to be performed or materials to be furnished before Colonial made advance 13.
On April 22, 1975, Colonial instituted a foreclosure action against the Southards. The trial court found that Colonial had actual knowledge, by December 1974, of all work and labor performed and all machinery materials and fuel furnished or to be furnished by the above subcontractors. It then entered judgment in Colonial's favor in the sum of $1,276,929.91, including interest, but ruled that ten mechanics' lien claimants were entitled to priority over Colonial with regard to the distribution of the foreclosure proceeds.
The Court of Appeals affirmed the trial court's ruling. The cause is now before this court pursuant to an allowance of Colonial's motion to certify the record.
Messrs. Vorys, Sater, Seymour Pease, Mr. Stephen Buchenroth, Messrs. Meltzer Schiffrin, Mr. Herbert Linsenberg and Mr. Robert J. Klein, for appellant.
Mr. John T. Ducker and Mr. Harry P. Rife, for appellees.
The sole issue raised by the instant cause is whether, pursuant to R.C. 5301.232, the subcontractors are entitled to priority over Colonial with regard to the distribution of the proceeds from the foreclosure of the Southards' mortgage.
R.C. 5301.232 controls the instant cause. The mortgage held by Colonial was a properly recorded open-end mortgage securing any advances made by Colonial up to the total $2,000,000 which Colonial agreed to advance (R.C. 5301.232[A]) and doing so regardless of when, after recording, those advances were made (R.C. 5301.232[B]). As such, Colonial's mortgage is also subject to the lien priority provisions of R.C. 5301.232. These provide, in pertinent part:
"(B) * * * If such an advance is made after the holder of the mortgage receives written notice of a lien or encumbrance on the mortgaged premises which is subordinate to the lien of the mortgage, and if such holder is not obligated to make such advance at the time such notice is received, then the lien of the mortgage for the unpaid balance of the advance so made is subordinate to such lien or encumbrance. * * *"
Under R.C. 5301.232(B), an advance made by the holder of an open-end mortgage has priority over other liens unless the mortgagee (1) has notice of the other liens and (2) is not obliged to make the advance. Because the two conditions are joined by an "and," meaning "in addition to," both conditions must be met before the advance may be subordinated to the other liens. Courts will sometimes treat the conjunctive "and" and the disjunctive "or" as interchangeable, but they will not do so when such a construction will do violence to the plain meaning of the statute. See In re Estate of Marrs (1952), 158 Ohio St. 95, 99. In the instant cause, the meaning of the statute is clear. Moreover, most American cases follow the rule that obligatory advances made after liens like those in the instant cause enjoy priority over those liens whether or not the mortgagee has notice of those liens. Osborne on Mortgages, 295, Section 120. Given the fact that open-end mortgages serve mortgagors by saving them money on interest and refinancing charges and mortgagees by allowing them to withhold portions of the total loan until the value of their collateral increases (Osborne, supra, 276, at Section 113), we can understand why the General Assembly chose, pursuant to R.C. 5301.232, to adopt the majority rule.
Since R.C. 5301.232 allows intervening liens like those held by the subcontractors to gain priority over open-end mortgage advances only if the mortgagee has notice of the lien and if he is not obligated to pay the advance, we must determine whether Colonial had notice before it made its thirteenth advance and also whether Colonial was obligated to make that thirteenth advance.
Neither court below addressed the second question. Indeed, the trial court appears to have assumed the advance to be obligatory when it adopted the following reasoning in its opinion:
"It is the opinion of this court that all obligatory disbursements made by a future advance mortgagee pursuant to an open-end mortgage take priority over an intervening lien to the extent that such disbursements are made prior to the time when the future advance mortgagee acquires actual knowledge of a default by the future advance mortgagor and actual knowledge of the work or labor performed or to be performed, or of the machinery, materials, or fuel furnished or to be furnished for the construction of the project contemplated in their open-end mortgage, the same as in the case when the future advance mortgagee receives the written notice required in O.R.C. Sec. 5301.232(B)."
R.C. 5301.232(E)(4) defines an obligation to make an advance in the following manner:
"A holder of a mortgage is `obligated' to make an advance if such holder or the person to whom the payment of such advance is owed has a contractual commitment to do so, even though the making of such advance may be conditioned upon the occurrence or existence, or the failure to occur or exist, of any event or fact * * *."
The terms governing Colonial's payment of advances to the Southards are contained in a building loan agreement entered into by the mortgagee and mortgagors. That agreement contains certain conditions precedent to paying advances (Section 7). However, it also calls for mandatory advances — ones which "shall be made" (Section 6) — to be paid in installments of not more than once monthly during the construction period; and it provides for termination of those advances only on default of the mortgagor (Section 11) or payment of the $2,000,000 ceiling on the loan (Sections 1 and 6).
Under the building loan agreement governing the payment of advances from Colonial to the Southards, Colonial was contractually committed to make that thirteenth advance. In Wayne Bldg. Loan Co. v. Yarborough (1967), 11 Ohio St.2d 195, 220, this court found advances under a mortgage not to be obligatory because the mortgagee was not obligated to "advance a certain and definite sum in a particular manner." Colonial was so obligated. Under its building loan agreement, it was required to advance a maximum of $2,000,000 in installments of not more than one a month during the period of construction. Moreover, the only events under the agreement which would render Colonial's payment of the thirteenth advance non-obligatory would be the Southards' default or Colonial's having advanced the total $2,000,000. At the time the thirteenth advanced was made, neither of these events had occurred. We find, therefore, that Colonial was obliged to make the thirteenth advance. Because Colonial was so obligated, advance 13 does not fall within that portion of R.C. 5301.232(B) subordinating advances made with notice and without obligation. The trial court erred in granting the subcontractors priority in the foreclosure action. The Court of Appeals' affirmance of the trial court's grant of priority is, accordingly, reversed.
The fact that the agreement contained conditions precedent to payments of a given advance does not affect the obligatory nature of those advances. R.C. 5301.232(E)(4).
Having determined that Colonial's thirteenth advance was obligatory, it is not necessary for us to address the issue discussed by the courts below, of whether actual knowledge of the subcontractors' work constitutes notice under R.C. 5301.232(B).
Judgment reversed.
P. BROWN, Acting C.J., HERBERT, HOLMES, SWEENEY and LOCHER, JJ., concur.
CELEBREZZE, J., dissents.
HOLMES, J., of the Tenth Appellate District, sitting for LEACH, C.J.