Opinion
CASE NO. 99-01432-AJM-11, ADVERSARY PROCEEDING NO: 99-086
February 11, 1999
FINDINGS OF FACT AND CONCLUSIONS OF LAW WITH RESPECT TO FIRST FARMERS BANK TRUST'S MOTION FOR SUMMARY JUDGMENT
This matter came on for hearing before the Court upon the Motion First Farmers Bank Trust's ("First Farmers") for Summary Judgment filed on May 12, 2000 (the "Motion"), Indiana Family Farms Pork Marketing Cooperative's ("IFF") opposition thereto filed on August 14, 2000 (the "IFF Opposition"), National City Bank's ("National City") opposition thereto filed on August 14, 2000 (the "National City Opposition"), and First Farmers' reply filed on October 27, 2000. A hearing on First Farmers' Motion was held on November 3, 2000 wherein First Farmers appeared by counsel, Mark Wenzel and Jay Jaffe, and IFF appeared by counsel, Michael W. Hile. IFF's creditors' committee appeared by counsel, James Rossow. National City appeared by counsel, Mark Galliher.
The Court heard argument at the November 3, 2000 hearing. The Court, having heard the oral arguments and commentary of counsel, together with its review of the parties' briefs and other pleadings, and the evidence submitted in affidavit form, now makes the following findings of fact and conclusions of law pursuant to Rules 9014 and 7052 of the Federal Rules of Bankruptcy Procedure (the "Rules").
FINDINGS OF FACT
1. Pursuant to 28 U.S.C. § 1334 and 157(a) and the standing order of referral of cases to the Bankruptcy Judge entered by the United States District Court for the Southern District of Indiana, this Bankruptcy Court has jurisdiction to hear and determine the matters set forth in First Farmers' Motion and all matters related thereto.
2. First Farmers' Motion is a core proceeding as that term is defined in 28 U.S.C. § 157(b), and therefore the Bankruptcy Court is empowered to enter appropriate Orders with respect to First Farmers' Motion and all other matters considered at the November 3, 2000 hearing.
3. On February 11, 1999 (the "Petition Date"), IFF filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
4. IFF is continuing in possession of its property and is operating and managing its business, as debtor in possession, pursuant to sections 1107 and 1108 of the Bankruptcy Code.
5. On August 25, 1998, IFF filed its Verified Complaint (the "Complaint") in Madison County Circuit Court asserting lender liability claims against First Farmers.
6. On October 19, 1998, First Farmers filed its Response to the Complaint denying it breached its lending agreement with IFF. First Farmers also filed a Counterclaim against IFF to collect the debts purportedly owed by IFF to First Farmers and to foreclose liens held by First Farmers on IFF's property.
7. On February 26, 1999, First Farmers filed its Notice of Removal to the United States Bankruptcy Court.
8. This matter came before the Court upon the Motion of First Farmers requesting this Court to enter summary judgment in its favor on: (1) the claims asserted by IFF in its Verified Complaint (the "Complaint") against First Farmers; (2) Counts I, II, and III of its Counterclaim against IFF; and (3) Count III of First Farmers' Third Party Complaint against the City of Anderson ("Anderson") and National City.
9. On September 21, 2000, the Court approved IFF and First Farmers' Joint Motion for Approval of Settlement Agreement (the "Settlement Agreement") in which IFF and First Farmers settled the lender liability claims IFF had asserted against First Farmers.
10. Pursuant to the Stipulated Fourth Amended Pre-trial Order, IFF, First Farmers, National City and the Creditors' Committee agreed that the only issue remaining to be determined on summary judgment would be the validity and priority of First Farmers' lien in IFF's facility located in Anderson, Indiana (the "Property").
11. The facts that follow are those relevant to the issue remaining for determination on summary judgment.
12. First Farmers is a financial institution organized under the laws of the State of Indiana.
13. National City is a financial institution organized under the laws of the State of Indiana.
14. On November 22, 1995, IFF filed its Articles of Incorporation pursuant to the provisions of the Indiana Agricultural Cooperative Act.
15. IFF was organized to operate a stockyard, hog slaughtering and processing facility, and to produce pork products from swine produced by Members of IFF.
16. IFF refurbished and reactivated a pork processing plant in Anderson, Indiana, its principal place of business.
17. Also on December 9, 1996, IFF executed a Mortgage on the Property in favor of National City (the "National City Mortgage").
18. On or about October 17, 1997, National City executed a Subordination of Mortgage (the "National City Subordination").
19. The National City Subordination states as follows:
For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagee hereby agrees that the lien of its mortgage on the Real Estate is subordinate to the following described mortgage lien on the Real Estate:
A. Certain mortgage to be executed by Mortgagor in favor of FIRST FARMERS BANK TRUST in the amount of 1,100,000.00, dated ___, 19 ___, and recorded 10-21, 1997, in the Office of the Recorder of County, Indiana, as Instrument No. 9723595.
20. The National City Subordination was recorded in the Office of the Recorder of Madison County, Indiana on October 21, 1997 as instrument number 9723597.
21. On October 17, 1997, Anderson executed a Subordination of Mortgage (the "Anderson Subordination") under which its interests in the Property was subordinated to the interest of First Farmers. The Subordination of Mortgage was recorded in the Office of the Recorder of Madison County, Indiana on October 21, 1997 as instrument number 9723596.
22. On or about October 17, 1997, First Farmers loaned IFF funds pursuant to a note in the original amount of $700,000 ("Original Note No. 1").
23. The loan made by First Farmers to IFF pursuant to Original Note No. 1 was later evidenced by a renewal of the Original Note No. 1 dated May 26, 1998, in the principal amount of $653,162.82 ("Renewal Note No. 1") (Original Note No. 1 and Renewal Note No. 1 are referred to collectively as "Note No. 1").
24. On October 17, 1997, IFF delivered to First Farmers a mortgage (the "Mortgage") on the Property, together with the improvements thereon.
25. IFF and First Farmers intended the Mortgage to secure the indebtedness identified in the Original Note No. 1, any renewals thereof and any future advances.
26. The Mortgage states that it is:
A. To secure the payment, when the same shall become due, of all the indebtedness evidenced by the promissory note which is attached hereto, marked Exhibit "B" and made a part hereof, all without relief from valuation and appraisement laws, and with attorney's fees;
B. Also securing any renewal or extension of such indebtedness;
C. Also securing all future advances which specifically refer to this mortgage;
D. Also securing all indebtedness or liability incurred by the holder hereof for the protection of this security or for the collection of this mortgage.
Mortgage, p. 1.
27. The Mortgage, as executed and as recorded, has no "Exhibit `B'" attached to it.
28. The Mortgage was recorded in the Office of the Recorder of Madison County, Indiana on October 21, 1997 as document number 9723595.
29. The Mortgage does not describe the debt that it secures or state the maximum amount of debt that it may secure.
30. The Mortgage does not identify the maker, the execution date, the due date, or any information that would allow one to determine what debt is secured.
31. Indiana Code § 32-1-2-15 provides:
Any mortgage of lands worded in substance as follows: "A.B. mortgages and warrants to C.D." (here describe the premises) "to secure the repayment of" (here recite the sum for which the mortgage is granted, or the notes or other evidences of debt, or a description thereof, sought to be secured, also the date of the repayment,) the said mortgage being dated and duly signed, sealed, and acknowledged by the grantor, shall be deemed and held to be a good and sufficient mortgage to the grantee, his heirs, assigns, executors and administrators, with warranty from the grantor and his legal representatives, of perfect title in the grantor, and against all previous encumbrances. And if, in the above form the words "and warrant" be omitted, the mortgage shall be good, but without warranty.
(Emphasis added).
32. On May 26, 1998, IFF executed a $1 million note dated May 26, 1998 ("Note No. 2") in favor of First Farmers pursuant to a lending agreement dated May 26, 1998 (the "Lending Agreement"), a lockbox operating agreement dated May 26, 1998 (the "Lockbox Agreement"), and an agreement for the collection of origination fees dated May 5, 1998 (the "Origination Fees Agreement") (all collectively referred to as the "Working Capital Loan").
CONCLUSIONS OF LAW IFF, as a Hypothetical Bona Fide Purchaser, May Avoid the Mortgage Because it Does Not Identify or Describe the Debt Purportedly Secured.1. Where necessary, any of the foregoing findings of fact shall be deemed a conclusion of law, and any of the following conclusions of law shall be deemed a finding of fact.
2. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b) and 1334(a).
3. Under 11 U.S.C. § 544(a)(3), IFF, as a debtor-in-possession, has the rights and powers of, and may avoid any transfer of property of IFF that is avoidable by a bona fide purchaser ("BFP") against whom applicable law permits such transfer to be perfected. 11 U.S.C. § 544(a)(3).
4. In Indiana, a BFP may avoid any mortgage transfer of which he does not have actual or constructive notice. See Ind. Code § 32-1-2-16 ("Every conveyance or mortgage of lands or of any interest therein . . . shall be recorded in the recorder's office of the county where such lands shall be situated and every conveyance, mortgage or lease shall be fraudulent and void as against any subsequent purchaser, lessee or mortgagee in good faith and for valuable consideration, having his deed, mortgage or lease first recorded." (emphasis added)).
5. For the purposes of 11 U.S.C. § 544, IFF is deemed to have no actual knowledge of the transfer. 11 U.S.C. § 544(a)(3)("without regard to any knowledge . . ." (emphasis added)); Sandy Ridge Oil v. Halliburton Services, 807 F.2d 1332, 1336 (7th Cir. 1986) ("We conclude that Congress did not intend [the debtor-in-possession's] knowledge of the mortgage to prevent it from asserting the strong arm clause, because actual knowledge is irrelevant under § 544(a)." (citations omitted) (emphasis added)).
6. The state law of constructive notice remains applicable in the context of § 544(a)(3). Id. at 1336 (citing McCannon v. Marston, 679 F.2d 13, 17 (3rd Cir. 1982)).
7. Because the Mortgage does not comply with statutory requirements regarding identification of debt, such information is not of record and the Mortgage does not provide constructive notice. Bowen v. Ratcliff, 39 N.E. 860, 862 (Ind. 1895) ("An examination of the clause of the mortgage describing the indebtedness secured leads to the conclusion that the description of the indebtedness is not complete; that something is omitted. The clause is: `And to secure any notes that may be given for renewal of said notes, or any part thereof, or for any interest thereon.' etc. The notes referred to by the words `said notes' are not described in the mortgage, and are therefore not secured thereby.").
8. A mortgage that does not comply with Ind. Code § 32-1-2-15 will not provide constructive notice of its contents. See In re Baldin, 135 B.R. 586, 595 (Bankr.N.D.Ind. 1991) ("Compliance with [the recording] statute is effective to give constructive notice of prior conveyances and mortgages, assuming the documents themselves are in compliance with statutory requirements.").
9. Like Bowen, the Mortgage here is deficient on its face because it does not include any information regarding the debt purportedly secured.
10. The debt that is secured is not of record and IFF is not on notice of it. See Altman v. Circle City Glass, 484 N.E.2d 1296, 1298 (Ind.Ct.App. 1985), trans. denied.
11. First Farmers, however, asserts that the Court should look at whether the debt description is adequate to put would-be creditors on notice and whether fraud or deception has occurred." (IFF Reply Brief at 5.)
12. It is true that Indiana case law has determined that under certain circumstances a less than perfect debt description in a mortgage may suffice. E.g., Plummer Co. v. National Oil Gas, 642 N.E.2d 291, 292 (citing Pioneer Lumber Supply v. First-Merchants Nat'l Bank of Mich. City, 349 N.E.2d 219, 222 (Ind.Ct.App. 1976), trans. denied.)("The description of a debt in a mortgage does not have to be literally accurate but `must be correct so far as it goes, and full enough to direct attention to the sources of correct information in regard to it, and be such as not to mislead or deceive, as to nature or amount of it, by language used.' [citation omitted] A reasonably certain description of the debt is required so as to preclude the parties from substituting debts other than those described for the mere purpose of defrauding creditors." (emphasis added)). See Gallagher v. Central Indiana Bank, N.A., 448 N.E.2d 304, 307 (Ind.Ct.App. 1983). All these cases are inapplicable in this case, where there is no debt description whatsoever. Moreover, the only case on point has held that where the debt is not described, as here, there is no mortgage. Bowen, 39 N.E. at 862.
Three recent Indiana Court of Appeals' decisions have considered the effect of Ind. Code § 32-1-2-15 on mortgages with less than perfect descriptions of the debt secured. In Plummer, the Court of Appeals determined that a mortgage that incorrectly identified the maker nevertheless sufficiently described the debt secured to meet the requirements of Ind. Code § 32-1-2-15. Plummer, 642 N.E.2d at 292. The Court found, however, that the "mortgage accurately set forth the amount, execution date, maturity date, and the payee." Id. at 292. The Mortgage in this case neither identifies nor even remotely describes any of the information the Plummer court found critical to its conclusion.
Likewise, in Pioneer Lumber, the Court of Appeals found that an incorrect description of the maker of the debt secured did not make an otherwise detailed description of the debt secured inadequate for purposes of the statute. The mortgage in the Pioneer case described the debt "in minute detail as to amount, date of execution, maturity date, and payee." Pioneer Lumber, 349 N.E.2d at 223. The Court ultimately concluded that "the description of the debt in the mortgage was sufficiently precise to preclude the substitution of any debt other than the note executed on December 18, 1970, in the amount of $20,000.00, due June 18, 1971." Id. Unlike the mortgages in Pioneer and Plummer, the Mortgage contains no description whatsoever of the debt purportedly secured.
Finally, in Gallagher v. Central Indiana Bank, 448 N.E.2d 304, 307 (Ind.Ct.App. 1983), the Indiana Court of Appeals determined that a recitation of debt otherwise adequate would not be void because of a mischaracterization of the borrower when all parties to the matter knew of the mortgage and were not misled because of their actual notice. Once again, here, all relevant information respecting the debt was omitted from the Mortgage. Again, here, the Debtor is deemed to have no actual notice and as a hypothetical BFP may have been misled. Here, clearly the Mortgage was inadequate to place a bona fide purchaser on constructive notice of the Mortgage.
13. First Farmers asserts that the Debtor as hypothetical BFP could have inquired of the Debtor and/or First Farmers as to which debt is secured by the mortgage, and as such, should be on constructive notice of the facts to be ascertained. First Farmers asserts that inquiry notice is constructive notice with which the Debtor should be charged.
14. A judicial exception that relies on a subsequent transferee's inquiry notice respecting the mortgage debt cannot salvage the Mortgage here. In Indiana, inquiry notice generally is a form of actual notice with which the Debtor, under § 544(a)(3), may not be charged. See Keybank Nat. Ass'n v. NBD Bank, 699 N.E.2d 322, 327 (Ind.Ct.App. 1998) ("[A]ctual notice may be implied or inferred from the fact that the person charged had means of obtaining knowledge which he did not use. [citation omitted] Whatever fairly puts a reasonable, prudent person on inquiry notice is sufficient notice to cause that person to be charged with actual notice. . . ." (citations omitted) (emphasis added)).
15. Indiana courts have held, however, that "constructive notice" under the recording statutes may exist if the record "conclusively create[s] notice . . . . If the information which it conveys, or the inquiry it suggests, will, if pursued, unmistakably lead to a discovery of the truth, then there is constructive notice of the title or encumbrance; otherwise, there is no such notice." Johnson v. Hess, 126 Ind. 298, 25 N.E. 445, 449 (1890) (emphasis added). Under that test, the cases with partial descriptions of debt were permitted because the record of such partially described debt would lead to the discovery of the debt and verification from independent sources.
However, at least a partial description of the debt is needed to even put a BFP on "constructive notice" because it is that information — albeit partial — that leads the BFP to an inquiry which eventually and unmistakedly leads it to the discovery of the truth, i.e., the amount of the debt secured by a mortgage. Here, the Mortgage does not contain a partial description of the debt to even trigger further inquiry. Instead, the "promissory note" referred to in the Mortgage is not identified in any way that would allow an individual to discern which note constitutes the underlying debt, i.e., there is no date of execution mentioned, no document number, nor the amount of the loan pursuant to the note. Without the referenced promissory note being attached, a subsequent lender could not tell how much debt or what promissory note the Mortgage was securing.
16. In fact, a BFP reviewing the Mortgage here could determine only that First Farmers was the mortgagee and the Debtor was the Mortgagor. If that were enough to put a bona fide purchaser on notice of the debts purportedly secured by the Mortgage, then the discussions of the adequacy of the description of the debt secured in Bowen (discussed supra), Plummer, Pioneer Lumber, Gallagher and other similar Indiana cases would be meaningless and parts of Ind. Code § 32-1-2-15 would be superfluous. However, this Court's reading of Bowen and similar cases would seem to suggest that a BFP should be able to discern how much debt a mortgage secures simply by reading the mortgage itself or gleaning from the mortgage itself that information which leads it to further inquiry. Contrary to the arguments of First Farmers, the mortgage in Bowen described the notes it purportedly secured as "said notes", but without more, the Court found there was no description of the debt secured by the mortgage.
Nor does this Court read Bowen or similar cases to stand for the proposition that a BFP can "bootstrap" information from other sources in order to determine the amount of the debt if the mortgage itself contains no description of the debt. First Farmers argues that such information may be gleaned from the National City Subordination and the Anderson Subordination executed contemporaneous to the execution of Original Note No. 1. However, the Mortgage's description of the debt, and hence, its ultimate validity, must be established through the Mortgage and not by extraneous documents. If the "bootstrapping" of other documents were allowed to establish the validity of the Mortgage, and, the Mortgage is valid only because of the existence of the subordination agreements, then it follows that the Mortgage would be invalid if such agreements had not been filed. In such case, there would be a real question about what note and what debt was secured by the Mortgage. If the subordination agreements did not exist, any BFP wanting to discover how much debt encumbers the subject property would be forced to rely on the lender or the borrower to learn what debt a mortgage secured. If this position is correct, then one merely needs to file a mortgage setting forth the borrower and the lender to be valid. This is not what the Indiana legislature intended when it enacted § 32-1-2-15. That statute clearly states that there must be a description of the debt which would relieve a BFP from doing extensive investigation — an investigation which most likely relies upon the information from the lender and the borrower — to discern what debt is secured by the mortgage. The Indiana legislature determined that the debt must be described in a mortgage so that the Mortgagor and Mortgagee cannot defraud others by switching and adding debt. Under First Farmers' argument, the very two parties the legislature thought might be engaged in hanky-panky are the two parties from whom the BFP are to inquire and be on constructive notice. Any interpretation of § 32-1-2-15 other than requiring a mortgage on its face to provide a level of description which provides some certainty as to the amount of the debt secured would wholly defeat the purpose of the statute. This also may be the reason that in 1990 the Indiana legislature enacted § 32-8-11-9 which requires mortgages to state the maximum amount regarding any future advances that the mortgage would secure. See, paragraph 30, infra.
17. Statutes should not be construed or applied by courts to make parts of statutes superfluous, but rather to give meaning to all parts of the statute. See In re Merchants Grain, 93 F.3d 1347, 1353-54 (7th Cir. 1996), cert. denied, 519 U.S. 1111 (1997) ("We examine the statute according to the conventional rules of statutory construction: absent statutory definitions, we accord words and phrases their ordinary and natural meaning and avoid rendering them meaningless, redundant, or superfluous; we view words not in isolation but in the context of the terms that surround them; we likewise construe statutes in the contest of the entire statutory scheme and avoid rendering statutory provision ambiguous, extraneous, or redundant. . . .").
18. Under First Farmers' argument, as long as the mortgagor and mortgagee are identified in the recorded mortgage, bona fide purchasers will be deemed to be on constructive notice of the debts purportedly secured by the mortgage. The Indiana Supreme Court has determined, however, that this is not the rule, but rather "the character of the debt and the extent of the incumbrance 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." Bowen, 39 N.E. at 862 (citation omitted). Moreover, such a holding would eviscerate I.C. § 32-1-2-15, which this Court should not do in construing two statutes. See Northern Indiana Bank and Trust Co. v. State Bd. of Finance, 457 N.E.2d 527, 532 (Ind. 1983) ("It is a rule of statutory interpretation that courts will not presume the legislature intended . . . to enact a statute that is a nullity.").
19. Consequently, the Indiana legislature has determined that inquiry of the Mortgagor and Mortgagee will not "unmistakably" lead to the discovery of the facts and as such, it cannot be constructive notice. Johnson v. Hess, 25 N.E. at 450.
20. Finally, it was the duty of First Farmers to make sure its mortgage was properly drafted and recorded. Had it done so, the questions here would not have arisen. Johnson v. Hess, 25 N.E. at 450. Thus, as between First Farmers and the Debtor, as BFP without actual notice, the Debtor should prevail.
21. The Mortgage does not describe any debt and, therefore, cannot be deemed to place a bona fide purchaser on constructive notice of the debt it secures. Therefore, the Debtor may avoid the Mortgage under § 544(a)(3) of the Bankruptcy Code.
22. Because a copy of the Original Note No. 1 was not attached to the Mortgage, the reference in the Mortgage to renewals of such indebtedness also is inadequate to place a bona fide purchaser on notice that the Mortgage secured Renewal Note No. 1. See Bowen, 39 N.E. at 862. ("The notes referred to by the words "said notes" are not described in the mortgage, and therefore not secured thereby. That being the case, no notes given in renewal thereof would be secured by the mortgage. . . . (emphasis supplied)). In short, by virtue of the fact that First Farmers failed to attach to the Mortgage the Exhibit B, the note purportedly secured by the mortgage, there is no description of the debt contained within the Mortgage. A mortgage that simply says it secures "a Note" does not give — in this Court's estimation — any description of the underlying debt secured by the mortgage. Clearly, First Farmers understood that a description of this debt was required to make the mortgage valid, otherwise First Farmers would not have intended to attach this note to the mortgage as Exhibit B.
23. Like Bowen, without an attached exhibit, the Mortgage makes no reference whatsoever to what debt the Mortgage purportedly secures.
24. Renewal Note No. 1 also is not secured by the Mortgage. See id.
25. The Mortgage cannot place a bona fide purchaser on constructive notice that the Mortgage secures Renewal Note No. 1.
IFF May Avoid the Mortgage as to Note No. 2 Because the Mortgage Does Not Secure Future Advances.
26. First Farmers alleges that Note No. 2 is secured by the Mortgage. The Mortgage was executed on October 17, 1997. Note No. 2 was executed on May 26, 1998. Note No. 2 is not a renewal of any previous note. Therefore, Note No. 2 is a future advance.
27. Indiana Code § 32-8-11-9 governs a mortgage that seeks to secure future advances. Specifically, Ind. Code § 32-8-11-9 states:
(a) In addition to any other obligation secured by a mortgage, a mortgage may also secure:
(1) future obligations and advances up to the maximum amount stated in the mortgage (whether made as an obligation, made at the option of the lender, made after a reduction to a zero (0) or other balance, or made otherwise) to the same extent as if the future obligations and advances were made on the date of execution of the mortgage; and
(2) future modifications, extensions, and renewals of any indebtedness or obligations secured by the mortgage if and to the extent that the mortgage states that the mortgage secures those future advances, modifications, extensions, and renewals.
(b) The lien of a mortgage with respect to future advances, modifications, extensions, and renewals referred to in subsection (a) shall have the priority to which the mortgage otherwise would be entitled under IC 32-1-2-16 without regard to the fact that the future advance, modification, extension, or renewal may occur after the mortgage is executed. Ind. Code § 32-8-11-9.
28. There are no Indiana cases interpreting this statutory provision which became law in 1990.
29. In Commercial Bank v. Rockovits, 499 N.E.2d 765 (Ind.Ct.App. 1987), the Court of Appeals held that an open-ended mortgage that stated it was to secure future advances was valid and secured future advances, even though there was no maximum dollar limitation stated in the mortgage. Id. at 767-68.
30. Rockovits was decided on the basis that the applicable statute in effect at the time — I.C. 32-1-2-15 — did not require a mortgage to refer to a specific amount of debt. However, reliance on the holding in Rockovits to this case may be misplaced, because shortly, after Rockovits was decided, the Indiana Legislature enacted Ind. Code § 32-8-11-9(a)(1), which changed existing law and created a statute that did require mortgages to state the maximum amount of future advances that could be secured by the mortgage.
31. IFF argues that the plain meaning of Subsection 9(a)(1) requires a stated cap in order to make valid a lien in future advances.
32. First Farmers argues that Subsection 9(a)(1) addresses only the priority of a lien securing future advances, not the validity of such a lien.
33. In order to adopt First Farmers' argument, this Court would have to ignore the plain meaning of Subsection 9(a)(1). In addition, the Court would, by its interpretation, render parts of Subsection 9(b) superfluous.
34. A court in construing a statute is required to give the statute its plain meaning. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253 (1992) ("`[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there.'").
35. A Court in construing a statute should not construe the statute in such a way as to make part of the statute superfluous. United States v. Campos-Serrano, 404 U.S. 293, 301 n. 14 (1971) ("`(A) statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.'") (citation omitted).
36. In determining whether Subsection 9(a)(1) addresses the priority or validity of a lien in future advances, this Court must read Subsection 9(a)(1) in context of the entire Section 9. See Mastro Plastics Corp. v. Nat'l Labor Relations, 350 U.S. 270, 286 (1956) (A court "must not be guided by a single sentence . . . but look to the provisions of the whole law, and its object and policy.").
37. Subsection 9(a)(1) clearly states "future obligations and advances up to the maximum amount stated in the mortgage . . . ." Thus, Subsection 9(a)(1) clearly defines the type of future advance that may be secured by a previously-executed mortgage — i.e., those future advances "up to the maximum amount stated in the mortgage."
38. Subsection 9(a)(2), which First Farmers acknowledges addresses issues of validity states:
future modifications, extensions, and renewals of any indebtedness or obligations secured by the mortgage if and to the extent that the mortgage states that the mortgage secures those future advances, modifications, extensions, and renewals.
Ind. Code § 32-8-11-9(a)(2) (emphasis added). The first line of this subsection refers to "future modifications, extension and renewals . . ." Importantly, this introductory phrase to this subsection does not include a reference to future advances. This is because the identity of future advances that will be valid already has been addressed in Subsection 9(a)(1). The language of Subsection 9(a)(2) goes on to state that "those future advances, modifications, extensions and renewals" are valid. Given future advances are not mentioned in the introductory phrase of Subsection 9(a)(2), the reference to "those future advances" must be to the future advances that meet the requirements of Subsection 9(a)(1). Any interpretation other than this, would render the legislature's use of the word "those" in Subsection 9(a)(2) meaningless and, further, this Court would have to assume that the legislature inadvertently did not refer to future advances in the introductory phrase of Subsection 9(a)(2).
39. Finally, Subsection 9(b) clearly and undisputedly addresses when a future advance is entitled to priority under Ind. Code § 32-1-2-16. Therefore, if, as First Farmers argues, Subsection 9(a)(1) addresses priority and not validity, the inclusion of future advances in Subsection 9(b), which clearly addresses priority issues, would be superfluous.
40. Under Indiana law, in order for future advances to be secured by a previously executed mortgage, the mortgage must state a maximum amount of debt that can be secured by the mortgage. Ind. Code § 32-8-11-9(a)(1).
41. Since the Mortgage does not state any dollar amount, the Mortgage is not valid respecting Note No. 2. See Ind. Code § 32-8-11-9(a)(1).
42. The Mortgage fails to secure Note No. 2 because there is no stated maximum in the Mortgage. Just as Ind. Code § 32-1-2-15 requires this mortgage to describe the debt secured by the mortgage, Ind. Code § 32-8-11-9 requires the mortgage to set forth the maximum amount of future advances that can be secured by the mortgage. Both of these statutes are logical if the intent of a mortgage is to alert future lenders or purchasers as to the extent of a lien on property without having to inquire of the mortgagor and the mortgagee. If no maximum amount of future advances was required to be stated in the mortgage, subsequent lenders could be trumped by future advances made by an existing lender which are purportedly secured by the same property that the subsequent lender depended upon for its security when its loan was made.
43. A BFP of the Property would not take subject to the Mortgage as to Note No. 2, because the Mortgage cannot validly secure future advances under Indiana law. Therefore, under § 544(a)(3) of the Bankruptcy Code, the Debtor may avoid the Mortgage as to Note No. 2.
The National City Note is Subordinate to First Farmers' Note No. 1
44. National City argues that its Subordination is not enforceable by First Farmers against National City, because it makes reference to a mortgage in the amount of $1,100,000, but First Farmers advanced only $700,000 under the Original Mortgage Note, and therefore the terms of the agreement between National City and First Farmers were not "clear and definite."
It is clear from the Affidavits of Craig Langley and Mark Jones, submitted by First Farmers and National City respectively in support of their positions on the Motion, that detailed information regarding the proposed mortgage loan from First Farmers to the Debtor was communicated to National City prior to the execution and recordation of the Mortgage and Subordination. Specifically, National City concedes that it received information from First Farmers that the Mortgage secured payment of a loan, and $400,000 of LOCs issued by First Farmers for the account of the Debtor, for a total aggregate anticipated credit accommodation of $1,100,000. This is the amount of debt to which National City agreed to subordinate its mortgage in the Subordination. National City now claims that because only the advance under the Original Mortgage Note was made, and the LOCs, though issued, were never drawn against, the resulting debt of only $700,000 secured by the Mortgage somehow leads to a lack of clarity which serves to invalidate the Subordination. This position of National City is illogical and makes little sense.
45. This Court might have been more sympathetic with National City's position if National City had agreed to subordinate to $700,000 of debt, but the Subordination was attempted to be enforced as to $1,100,000 of debt. In such a circumstance, National City would appear to suffer a detriment. Here, however, National City openly, willingly, and voluntarily agreed to subordinate its mortgage lien to total debt of $1,100,000, of which only $700,000 was advanced. It is impossible to conceive how National City has possibly suffered harm under these circumstances. Moreover, the Court does not believe that there was any lack of clarity with respect to the understanding between National City and First Farmers. As of the date of the execution of the Mortgage and the Subordination, First Farmers made a loan advance of $700,000 and had issued (or was contemplating issuing) approximately $400,000 of LOCs. If the LOCs were fully drawn, First Farmers would have been out of pocket an additional $400,000. It is perfectly understandable why First Farmers sought subordination of the National City lien to what First Farmers could foresee in October, 1997 as its maximum possible exposure under the credit accommodations made to and on behalf of the Debtor. From the Affidavits of Craig Langley and Mark Jones, it appears that these facts, concerns, and rationale were fully communicated. National City with full and adequate knowledge subordinated its mortgage to these initial financial accommodations extended by First Farmers to the Debtor, and cannot now deny the validity, enforceability or effectiveness of its Subordination.
46. IFF argues that, since the National City Subordination was to the extent of $1,100,000, National City's mortgage should be subordinate to First Farmers (and therefore, IFF, since the First Farmers mortgage has been determined to be invalid) to the extent of $1,100,000. However, the Court concludes that the National City Subordination was an agreement to subordinate National City's pre-existing mortgage to First Farmer's mortgage which was recorded on October 21, 1997. The amount of First Farmer's mortgage turned out to be $700,000. There was no subsequent separate subordination agreement whereby National City agreed to subordinate its mortgage to future advances, and the National City Subordination is clear that the intent was to subordinate that which was secured by the mortgage recorded on October 21, 1997. Furthermore, the Court has already found that any future advances would not be secured by the Mortgage since it failed to set out a maximum amount for future advances as required by statute. Since Note No. 2 was not secured by the Mortgage, any agreement by National City to subordinate its mortgage to the Mortgage would not cover Note No. 2. Consequently, the Court concludes that the National City Subordination clearly sets forth National City's intent to subordinate its lien interest to the Mortgage, and the Mortgage, which secured Note No. 1, has been avoided under § 544 and preserved for the benefit of the estate under § 551. By operation of § 551, IFF steps into the shoes of First Farmers, and has the same rights, but no greater, than First Farmers would have had under the Mortgage. Section 551 as a whole "prevents junior lienors from improving their position at the expense of the estate when a senior lien is avoided". HR Rep No. 595, 95th Cong., 1st Sess 376(1977); S Rep No. 989, 95th Cong, 2nd Sess 91 (1978). Therefore, the National City Subordination applies only to Note No. 1 which secures debt of $700,000, and not the $1,000,000 which would necessarily include amounts loaned under Note No. 2.
47. Accordingly, the Court concludes that the respective interests of the parties and their priorities in the Property are as follows:
a. First, IFF, to the extent of $700,000;
b. Next, National City, to the extent of its mortgage;
c. Next, IFF to the extent of Note No. 2; and
d. Next, the City of Anderson.
48. The appropriate judgment entry follows.