DSDK Preserves Important Mortgage Rights in Decision by Kansas Court of Appeals

The Kansas Court of Appeals eliminated uncertainty for lenders by refusing to uphold a trial court ruling that a senior lender’s priority mortgage merged with the title to real estate taken as part of a deed-in lieu of foreclosure agreement allowing a junior creditor to leapfrog the senior creditor. The Court of Appeals in CML-KS Blue Valley, LLC v. MJH Venture, LLC, et al, refused to foster the unworkable ruling handed down by the trial court. The Court of Appeals remanded the case directing the trial court to enter judgment on behalf of Duggan Shadwick Doerr & Kurlbaum LLC’s lender client, MJH Venture, LLC (“MJH”). John Duggan argued the case for MJH.

Most lenders in troubled loan workouts accept title to property and desire to preserve their mortgage foreclosure rights to wipe out junior liens if necessary. The trial court’s ruling placed in doubt the future use of this pragmatic solution by ruling that the contract language needed to preserve mortgage foreclosure rights must be formulaic and include unprecedented magic phrases despite the contract’s other objective language showing intent to preserve foreclosure rights. The Court of Appeals rejected such an idiosyncratic approach, and ruled the language used, and practical realities faced by lenders, showed MJH intended no merger.

The Court of Appeals’ opinion analyzed the specific contract language employed under the deed-in-lieu of foreclosure agreement. Here junior lienholder CML-KS Blue Valley, LLC (“CML”), claimed its unsecured judgment lien leapfrogged MJH’s priority mortgage because MJH’s lien merged with MJH’s title it received under the deed by failing to include the idiosyncratic language the trial court deemed necessary to preserve foreclosure rights.

The Kansas Court of Appeals, at the urging of Mr. Duggan, reiterated that in Kansas a party need not recite specific non-merger language to preserve the property’s senior mortgage from merger if it otherwise expresses non-merger intent. Although MJH did not use explicit “shall not merge” language, its clear intent expressed in its deed-in-lieu agreement, stipulation for dismissal of the lawsuit, and elsewhere preserved MJH’s senior mortgage after securing title to the property.

Moreover, the Court upheld a presumption against merger when merger catapults a junior lien over a senior lien. Courts presume that the senior lender’s intent aligns with its best interest. The Court therefore presumed that MJH intended no merger because allowing CML’s junior lien to leapfrog MJH’s first priority lien is “inherently disadvantageous” to MJH. The Court declared MJH’s mortgage to be the priority lien.

DSDK clients, however, are encouraged in their deed-in-lieu of foreclosure agreements to express objective non-merger language showing intent to preserve foreclosure rights and not rely on any presumptions. Fortunately for Kansas lenders, now that objectively expressed intent will not require an idiosyncratic verbal formula.