Summary
In Ciejek, the court held "[w]hen a creditor takes title to the property which secures his debt, merger is not automatic, but depends upon the intention of the parties."
Summary of this case from Crossroads of Hillsville v. PayneOpinion
46051 Record No. 871167
June 9, 1989
Present: All the Justices
Since there were unresolved questions of fact and of the intentions of the parties involving an ambiguous lease, it was error for the trial court to grant summary judgment to one party.
Creditors' Rights — Secured Interests — Liens — Chapter 11 — Real Property Leases — Ambiguity — Intention of Parties — Merger Rule — Practice and Procedure — Summary Judgment
Landowners leased a tract of land to a nursery business which built greenhouses and other facilities thereon. The plaintiff lent business capital secured by a security agreement giving him a lien on the greenhouses of the business. He perfected his security interest by filing a financing statement with the county and with the state. The business defaulted on the loan and other obligations and filed a Chapter 11 bankruptcy petition. Pursuant to a bankruptcy court order, the tenant vacated the land, leaving behind the property covered by plaintiff's security interest. Some time later the plaintiff obtained a release from the bankruptcy stay and the debtor entered into a written agreement with him, transferring to him title to the property covered by the security interest. The plaintiff did not release his security agreement or financing statements and he made a demand on the landlord for the greenhouses and other items left on the site by the debtor, citing language in the lease which provided that improvements on the land made during the lease were to remain the property of the tenant. Citing other lease language, the landlord refused to surrender the property. The trial court granted the landlord's motion for summary judgment, which contended that the plaintiff's security interest had merged into his ownership of the land, that the plaintiff's security interest had been lost when it executed an agreement accepting certain items in satisfaction of the outstanding loans, and that all property left on the land after termination of the lease by the action of the bankruptcy court had passed to the landlord by the terms of the lease. The creditor appeals.
1. Merger of interest is a technical rule and even though two rights become united in one person, a court of equity will keep them separated if that is required by the outstanding claim of a third party. If there is any reason for keeping an interest alive, such as the existence of another encumbrance, equity will not destroy it.
2. When a creditor takes title to the property which secures his debt, merger is not automatic, but depends upon the intention of the parties.
3. The acceptance of title in satisfaction of a preexisting security interest is presumed, in the absence of evidence of a contrary intention, to constitute a merger of the original secured interest into the legal title acquired. The intention of the parties is controlling, creating an issue of fact.
4. Summary judgment is available in equity as at law, but it is not to be entered if any material fact is genuinely in dispute. Rule 2:21.
5. The language of the agreement between parties may only be fairly construed as a waiver of lien claims by the parties to the agreement inter se, not as a waiver in favor of non-parties and the landlord was not a party to the agreement here.
6. The provisions of the lease are ambiguous and thus parole evidence may be admissible to resolve the ambiguity.
Appeal from a judgment of the Circuit Court of Hanover County. Hon. Richard H. C. Taylor, judge presiding.
Reversed and remanded.
John N. (Clifford and Duke, P.C., on briefs), for appellant.
David W. Drash (Beale, Wright, Denton, Balfour Davidson, P.C., on brief), for appellee.
A debtor conveyed to his creditor personal property upon which the creditor had perfected a security interest. We must determine whether that conveyance, by operation of law, destroyed the creditor's lien position, leaving the property vulnerable to the claims of other creditors.
The facts are stipulated. David E. Laird, Jr., and his wife (collectively, Laird) owned a tract of unimproved land in Hanover County. On October 1, 1981, they entered into a written commercial lease, demising the land to Pocono Nurseries, Inc. (Pocono). Pocono occupied the land and conducted a nursery business thereon, erecting greenhouses and other facilities. Edward M. Ciejek (Ciejek) lent business capital to Pocono, secured by a security agreement dated August 1, 1982, which gave Ciejek a lien upon the greenhouses and other property which Pocono had at the nursery. In 1983, Ciejek perfected his security interest by filing a financing statement with the Clerk of the State Corporation Commission and with the Clerk of the Circuit Court of Hanover County.
Pocono suffered financial reverses, defaulted on Ciejek's loan and other obligations, and filed a Chapter 11 bankruptcy petition in 1984. On December 11, 1984, the bankruptcy court entered an order rejecting the lease between Pocono and Laird as an asset of the bankrupt's estate. The order directed Pocono to surrender possession of the land to Laird. Pocono complied, vacating the land but leaving behind the greenhouses and other property covered by Ciejek's security interest. At the time, the statutory bankruptcy stay prevented Ciejek from enforcing his security interest upon Pocono's assets remaining on Laird's land.
In 1986, Ciejek obtained a release of the bankruptcy stay. On August 26, 1986, Pocono entered into a written agreement with three of its secured creditors, one of whom was Ciejek, transferring to each creditor title to the property covered by that creditor's respective security interest, "to avoid foreclosure or similar proceedings to enforce said liens." The creditors agreed to "accept said items to be applied to the satisfaction of the outstanding loans to Pocono." Pocono agreed that the transfers were not given as preferences, but were given only to avoid foreclosure. Pocono also agreed that in the event the proceeds of sale of the property should exceed the amount of the liens thereon, the surplus would be paid to Pocono's trustee in bankruptcy. The agreement also contains the following paragraph:
8. All parties hereto do waive any and all claims relating to the aforesaid liens and security agreements which they may have against any other party.
Ciejek did not release his security agreement or financing statements. He made demand upon Laird for the greenhouses and other items left on the site by Pocono, referring to language in Pocono's lease which provided that any improvements installed on the land during the term of the lease would remain Pocono's property and that Pocono might remove the same "at any time." Laird, citing other lease language which provided that Pocono "shall not charge Landlord for any . . . property left by Tenant on the property upon termination of this lease," refused to surrender the property.
Ciejek filed a bill of complaint in 1987, praying for a mandatory injunction to permit his entry onto the land to remove the property, or alternatively, damages for the property's value and rental value during the time of its detention. Laird filed a motion for summary judgment, contending that the agreement of August 26, 1986, had caused Ciejek's security interest to merge into his ownership, that Ciejek's lien position was thus lost, that Pocono had relinquished its interest in the property by executing the agreement, that the lease had been effectively terminated by the action of the bankruptcy court, and that all property left on the land after termination passed to Laird by the terms of the lease.
No evidence was taken. The court granted Laird's motion for summary judgment by order entered July 20, 1987, and we granted Ciejek an appeal. The dispositive question is whether Ciejek's security interest merged into his title, vitiating his lien position vis-a-vis Laird.
Professor Glenn, discussing the doctrine of merger in equity, wrote:
[M]erger of interest, in a technical sense, has a very narrow place here. The point is that merger is a technical rule at best, and so, even though two rights become united in one person, a court of equity will keep them separated if that is required by the outstanding claim of a third party or is necessary in view of the proprietor's own situation. This is often described as a matter of intention, but in reality it is a "rule of law," that is, it is a principle that guides our courts of equity when the facts are clear. Perhaps Sir George Jessel put it as well as can be when he said "If there is no reason for keeping it [the outstanding interest, now acquired], then equity will, in the absence of any declaration of his intention, destroy it; but if there is any reason for keeping it alive, such as the existence of another encumbrance, equity will not destroy it."
1 G. Glenn, Mortgages, Deeds of Trust, and Other Security Devices As To Land Sec. 45.2 (1943) (footnotes omitted).
Our decisions are to similar effect. When a creditor takes title to the property which secures his debt, merger is not automatic, but depends upon the intention of the parties. In Joyner v. Graybeal, 204 Va. 543, 545, 132 S.E.2d 467, 469 (1963), we said: "When one acquires absolute title to property which secures his debt, in the absence of evidence showing a contrary intention it is presumed that he intended to merge his secured interest into the legal title acquired" (emphasis added). In that case, we held that a merger had occurred, eliminating the creditor's security position because the creditor had shown a clear intention to extinguish his lien by making a written notation, after the transfer of title to him, that the property was subject to no liens. Id. at 545-46, 132 S.E.2d at 469. We based our ruling on the factual finding that there was "no evidence to rebut the presumption [of merger]." Id. at 546, 132 S.E.2d at 469.
More recently, in Fox v. Templeton, 229 Va. 380, 385, 329 S.E.2d 6, 9 (1985), we held, citing Joyner: "The acceptance of title in satisfaction of a preexisting security interest is presumed, in the absence of evidence of a contrary intention, to constitute a merger of the original secured interest into the legal title acquired." (Emphasis added.) Thus, the intention of the parties is controlling, creating an issue of fact.
[4-5] Summary judgment has been available in equity since 1983, but in equity as at law, it is not to be entered if "any material fact is genuinely in dispute." Rule 2:21. The factual dispute with respect to the intention of the parties to the August 26, 1986 agreement is not resolved by the language of paragraph 8, quoted above. In that paragraph, the parties to the agreement expressly waive any security interests "which they may have against any other party." (Emphasis added.) In our view, that language may only be fairly construed as a waiver of lien claims by the parties to the agreement inter se, not as a waiver in favor of non-parties. Laird was, of course, not a party. The debtor and the three lien creditors who were parties to the agreement were attempting to make an arrangement for their mutual benefit, not for the benefit of those who might have adverse interests.
In addition to the question of the intention of the parties to the August 26, 1986 agreement, with respect to merger, other issues of material fact remain in dispute. The provisions of the lease between Laird and Pocono are ambiguous susceptible of two or more interpretations concerning the landlord's right to acquire trade fixtures remaining on the land at the termination of the lease. Parol evidence, if available, may be admissible to resolve the ambiguity. The question whether the property was voluntarily abandoned is also an issue of fact. Accordingly, we conclude that the court erred in entering summary judgment.
We will reverse the judgment and remand the case for further proceedings consistent with this opinion.
Reversed and remanded.