President’s Message
A
t the half way point, I’m pleased to
report that our initiatives for the year
are proceeding well.
We recently submitted to the ABA
Commission on Multijurisdictional Practice
the College’s position statement on MJP. In
finalizing this statement we considered substantive input received from our Board of
Governors and a number of other members on
the draft distributed to all members (for whom
we have email addresses). We appreciate the
interest and support of so many of you. Mark
Mehlman, Working Group Chair, will formally present our position to the Commission
at its August 3 meeting in Chicago, with the
Commission thereafter issuing a preliminary
report to which we may respond further. I would
particularly like to commend and thank Mark
for his persistence and professionalism on this
project. I should also note that the Real Property Probate and Trust Section has expressed
“wholehearted” support for our position.
The Technology Working Group,
including leaders Dick Cantlin, Linda
Striefsky and Bob Wright, continues to work
avidly to advance the relevance and usefulness
of our website. We decided to engage an
outside provider to perfect our ability to
perform substantive searches for prior program materials, among other tasks. This
major milestone is due to be achieved by the
end of August. Thank you to the authors of
earlier program materials who have been
willing to search, scan, and otherwise make
the effort required to
furnish electronic copies,
which will make the
website search functions
IN THIS ISSUE
far more meaningful.
3
Ten Most Important Changes
That Revised Article 9 Makes...
The Member
Selection Committee’s
4
schedule will advance
Nominating Committee Report
slightly this year, following their recommendation
5
to be reconstituted this
Thinking About Some Forgotten
Terms of Land Measurement
summer, and to commence receiving nomina6
tions in the fall. This will
A Wake Up Call For
Transactional Lawyers
allow more time for both
members and the Com7
mittee to consider candiGround Lease Assignee Remains
dates for membership. In Liable to Lessor After Leasehold...
anticipation of the
16
Committee’s more formal
ACRELades
request, please begin
thinking about qualified
candidates for the College, with particular emphasis on those from
underrepresented groups or locations. Our
outside services provider also is refining the
on-line voting system, which will reduce the
continued on page 2
American College of Real Estate Lawyers
Vol. 19 No. 3 August 2001
President’s Message...
continued from page 1
enormous efforts (and hopefully the paper)
involved in the membership selection process.
Lee Sher and the Finance Committee
and associated members of the Meetings
Committee have been actively reviewing
financial and other meetings issues. To avoid
the possibility of taking the word of the few as
the conclusion of all, later this summer we
will ask for your current thinking on a variety
of meeting topics; please speak out. We have
already implemented a trial change: you
should have received a postcard indicating
that the guest registration fee for our Chicago
meeting was lowered by $100 for registration
by August 15, 2001. We hope this prompts
increased participation and look forward to
your comments on this and other measures.
You have received your Fall Chicago
meeting registration materials, and I hope that
you will join us in visiting ‘my kind of town’
(actually my former home town). As noted, a
portion of the unique Fall program will address trends in the practices of our members,
and you should have received via e-mail a
member survey being conducted for us by
Altman & Weil, the results of which will be an
integral part of the program. Please complete
the survey if you haven’t already. Obviously,
maximum input is critical in enabling the
identification of true trends in our practices. If
everyone participates, the results should be
truly revealing. Even if you do not attend the
Chicago meeting, as a participant in the
survey you will receive a summary of its
results.
The Chicago meeting is one at which
you will not want to miss the special events
and tours. In addition to participating in our
public service project described in prior
transmittals, you may be able to view an
extraordinary Gaugin/Van Gogh exhibit or
2
learn the special history of Chicago architecture on an enjoyable ‘wrong way’ river cruise.
Check our website, www.acrel.org, for details
and a Chicago dining guide.
Pursuing a great concept that John
Daniels initiated last year, Dick Cantlin as
President-Elect, Sandy Weiner as Vice President, and I conducted a face to face meeting in
June to discuss long-term issues facing the
College. We have found that many initiatives
take longer than a year to mature, and many
efforts merit continuation over the years, so it
is very helpful to have the chance to sit together for a day to coordinate our plans and
goals. We made excellent progress at our
recent meeting and it is clear that the College
is in good hands for years to come.
I wish you all the very best for
summer’s end and hope to see you in Chicago.
Caryl B. Welborn
President
STAFFBOX
The ACREL Newsletter is published by the
American College of Real Estate
Lawyers
One Central Plaza
11300 Rockville Pike, Suite 903
Rockville, MD 20852 301/816-9811
Items from this publication may be
reprinted with permission from the editor.
Editorial Committee
Harris Ominsky, Chair
James F. Morrow
Shannon J. Skinner
Editor
Jill H. Pace
Executive Director
The Ten Most Important Changes that
Revised Article 9 Makes to Real Estate
By Rod Clement, Brunini, Grantham, Grower & Hewes
Jackson, Mississipi
If you asked one hundred attorneys to
list the ten most important changes that Revised
Article 9 of the Uniform Commercial Code
makes that affect real estate, you probably
would get one hundred different lists. This is
my list, in the tradition of Letterman, in
increasing order of importance.
10. Financing statements covering
fixtures. Suppose a lender or vendor with a
security interest in goods that become fixtures
files a financing statement in the UCC records
but doesn’t file a fixture filing in the real estate
records. Revised Article 9 gives this secured
party a boost over the mortgagee or lien creditor
of the owner of the land in three ways. First, it
clarifies the rule that a financing statement filed
in the UCC records still beats a lien creditor (and
thus the bankruptcy trustee). Second, it expands
the category of equipment in which the secured
party can beat out a mortgagee to include readily
removable equipment that is not primarily used
in the operation of the real property. Third, it
extends the time period in which a purchasemoney secured party can file a financing
statement from 10 days to 20 days.
9. Bankruptcy and lapse. Under Former
Article 9, bankruptcy tolls the running of the
five-year lapse period. Under Revised Article 9
the lapse period continues to run after a
bankruptcy petition is filed, so that the secured
party has to file continuation statements to
avoid lapse.
8. Blanket descriptions. A blanket
description of collateral such as “all my
personal property” is generally considered to be
inadequate under Former Article 9. Revised
Article 9 permits the use of blanket descriptions
in the financing statement, but not in the
security agreement.
7. Sale of promissory notes secured by
mortgages. The sale of promissory notes was
outside of Former Article 9. Revised Article 9
treats the sale of a promissory note as a grant of
a security interest. The buyer/secured party’s
security interest in the note is automatically
perfected upon attachment. The buyer/secured
party’s security interest in a mortgage securing
the note also automatically is perfected.
Nothing has to be filed in the real property
records to document the sale.
6. Measure of damages for secured
party’s noncompliance. Former Article 9 did
not specify what sanctions could be imposed on
a secured party that failed to comply with the
requirements of Article 9 when foreclosing.
When a secured party fails to comply with the
requirements of Article 9 in foreclosing on
personal property, the courts have taken two
approaches. In one line of cases the courts have
held that any noncompliance results in the
secured party’s indebtedness being deemed
satisfied by the proceeds of the noncomplying
sale. The other line of cases holds that the
secured party’s failure to comply with the UCC
results in a rebuttable presumption that, if the
secured party had complied, then the proceeds
of the sale would have been equal to the amount
of the secured indebtedness. The secured party
can put on evidence to rebut this presumption
and salvage some of its deficiency.
Revised Article 9 adopts the rebuttable
presumption rule. Under some circumstances,
the debtor whose deficiency is eliminated can
continued on page 10
3
Nominating Committee Report
In accordance with Article V, Section 3 of the
Bylaws, this report constitutes formal notice of
nominations for the Board of Governors by the
Nominating Committee.
The Nominating Committee of the
American College of Real Estate Lawyers
nominates the following persons to serve as
officers and members of the Board of Governors for terms starting January 1, 2002. The
term of office for each officer is one year; the
term of office for each governor is three years
unless otherwise noted.
Richard A. Cantlin of Oregon, President-Elect, succeeds automatically to the
office of President. Caryl B. Welborn of
California automatically becomes Immediate
Past President. The following persons are
nominated as officers for the 2002 year:
Under the Bylaws, additional persons may be
nominated as officers by a writing signed by
not less than three members of the Board of
Governors entitled to vote for the election of
officers, submitted to the President not less
than thirty days prior to the meeting of the
Board of Governors at which the officers are
to be elected.
Respectfully submitted,
NOMINATING COMMITTEE
John W. Daniels, Jr., Chair
Robert M. Berger
John D. Hastie
Daniel L. Klein
Beverly J. Quail
Steven A. Waters
Gary York
President-Elect:
Sanford A. Weiner, Texas
Vice President:
Wayne S. Hyatt, Georgia
Secretary:
Philip M. Horowitz, District of Columbia
Treasurer
Portia O. Morrison, Illinois
The following persons are nominated
for the Board of Governors, with terms expiring in 2004:
Edward N. Barad, Colorado
Jay A. Epstien, District of Columbia
Betty B. Robbins, New York
Susan G. Talley, Louisiana
Robert P. Wright, Texas
4
Aloha, ACREL!
Begin planning now to attend ACREL’s
2002 Mid-Year Meeting in Maui! The
dates are March 21-24, 2002. Our
United Meeting Number is 556HU - call
the meetings desk at 1-800-521-4041 to
make your airline reservations now.
Thinking About Some Forgotten
Terms of Land Measurement
By Mark A. Senn, Senn Lewis & Visciano, P.C.
Denver, Colorado
In the modern world, we make seven basic
measurements: length; mass; time; temperature;
electric current; substance; and luminous intensity.1
The last four arise from scientific advances no older
than Galileo. The others are ancient. Time is probably the oldest and, because it is based on the constant motion of the heavens, it is the only measurement that is not arbitrary. Mass (or weight) can be
readily standardized and multiplied with a simple
balance so long as the units are not affected by climatic change (such as a sack of grain that weighs
more on a humid day); in fact, the kilogram is the
only basic unit that is defined scientifically in terms
of a material object – a platinum-iridium bar kept at
the International Bureau of Weights and Measures
since 1889. Finally, it is length (and area, its twodimensional relative) that has been measured in the
most various and arbitrary units.2
Units of length in use today have precursors in the Indo-European language that preceded
the written word. Their dispersion in England reflects the principal invasions by the Romans in 43
B.C., the Germanic tribes from Denmark and coastal
Germany beginning in 449 (the Angles from what is
modern Denmark going north of the Humber, the
Saxons to southern and western England, and the
Jutes to Kent in southeastern England), the Norsemen
from Scandinavia (beginning in 787 and confined
to an area known as the Danelaw in the northeast
third of England), and the French in 1066. As a result, many modern units of land measurement were
used in England more than a millennium ago.
Body Parts. The earliest measurements3
referred to parts of the body: the digit (the breadth
of the middle finger, 3/4 inch); the nail (variously,
the distance from the end of the thumb nail to the
base of the thumb, or the last two joints of the middle
finger, 2 1/4 inches); the finger (the length of the
middle finger, 4 1/2 inches); the thumb (its breadth,
one inch); the palm (the width of four fingers excluding the thumb, 3 inches); the hand (the width of
the palm including the thumb, 4 inches, comparable
to the palm and still used for measuring horses);
the span (a spread hand of nine inches); the foot;
the cubit (about 18 inches from the elbow to the
extended middle finger); the ell (related to the elbow [L. ulna], 45 inches); and the yard (3 feet, originally the distance from the nose to the tip of the
middle finger of Henry I (1100-1135), a standard
that would not have worked for Charles I. The
fathom is now primarily a marine measure of six
feet. It was originally the length of outstretched
arms and later that which can be embraced.4
The equivalents to a palm (3 in.) are:
4 digits (3/4 in. each)
1 1/3 nail (2 1/4 in.)
3/4 hand (4 in.)
2/3 finger (4 1/2 in.)
1/3 span (9 in.)
1/4 foot (12 in.)
1/6 cubit (18 in.)
1/12 yard (36 in.)
1/15 ell (45 in.)
The continuing importance of these natural measures is the frequency with which the multiples of
two, three and four recur. This is a meaningful difference between what became known as the imperial system and the metric system.
Quaint as they may seem today, these were
obvious, convenient and reliable sources for a person working alone, and for a group with a leader
who acted as a standard. For instance, although the
pyramids were based on cubits (perhaps with the
aid of a metal standard), the variation in the bases
of some pyramids is 1/4000th from one side to another.
Some lengths not susceptible to measurement by a body part were measured by reference to
physical activity. The labour (about one-fourth of
a section) is the most obvious. Some lengths are
human activity. The pace, variously described as
one step or two, heel-to-heel, and as a result varying from 2.5 to 5 feet, comes from the Latin word
continued on page 11
5
A Wake Up Call
For Transactional Lawyers
by Robert S. Greenbaum, Esq., Greenbaum, Rowe, Smith, Ravin, Davis & Himmel LLP
Woodbridge, NJ
I have come recently to a firm belief
that transactional lawyers too often fall short
of the standard of competence required by
reasonable expectations of their clients in the
discrete niche of attention to dispute resolution methods as a part of contract negotiations.
Yes, the general reluctance of our
litigators to embrace ADR is an accepted fact.
However, that does not mitigate any failure of
transactional lawyers to consider, accept, learn
and use the dispute resolution skills which
have come to full recognition and respect in
the world of commerce and in state and
federal courts.
The following question is addressed to
the individual members of the American
College of Real Estate Lawyers: During the
past year, how many proposed or executed
contracts, prepared or reviewed within your
responsibility while you have been acting for a
client, include a comprehensive dispute
resolution provision? I solicit and will very
much appreciate an e-mail response to this
query: [email protected].
As Chair of the ADR Committee of
ACREL, I am hypersensitive to this issue. My
own experience is that if I do not raise the
subject of dispute resolution during a contract
negotiation, it is never discussed. Yet, if I
raise the issue, it is usually accepted as valid
and the techniques of negotiation, mediation
and arbitration are tailored appropriately to the
subject matter and then incorporated into the
contract under negotiation.
At our recent meeting in Williamsburg,
during a workshop discussion concerning the
6
development process, I took note and commented that despite the obvious materiality of
the subject of dispute resolution in the context
of the discussion, there was no mention of it.
The truth is that lawyers do not, as a rule,
include or accept alternative dispute resolution
as appropriate or even as a matter for discussion between attorney and client while a
contract is in negotiations.
This should be corrected. The failure
of an attorney, a real estate transactional
lawyer of broad experience, to inform a client
of the considerations, pro and con, of noncourtroom alternatives for dispute resolution,
should be regarded as a serious deficiency;
almost as serious a deficiency as overlooking
or forgetting a clause concerning remedies in
the event of default.
Now, this may strike some readers as
an extreme position. I assure you it is not
intended as such. My purpose is to arrest the
attention of the most experienced and qualified real estate attorneys in the nation by
confronting them with their responsibility to
avoid a potential professional deficiency.
Please understand that the message
here is not that every contract must have an
alternative dispute resolution provision. The
message is, rather, that in every transaction
good practice requires that there should be a
discussion of the issue between lawyer and
client, so that both may make an informed
judgment about the appropriateness of seeking
agreement with the other contracting party
about non-courtroom dispute resolution.
The issues which arise in real estate
transactions involving improved real estate or
project construction are uniquely suited to
dispute resolution outside of the courtroom by
negotiation, or through the aid of a neutral in
mediation, or finally, if mediation does not
succeed, by arbitration, using neutrals with
experience in the subject matter in dispute.
The ADR Committee Workshop in
Chicago will address this matter to equip our
participating members with knowledge necessary for meaningful client discussion and
decision on the subject, together with model
contract provisions upon which to build for
use in specific contract settings.
Calendar
2001 Annual Meeting
October 11-14
Four Seasons/Ritz Carlton
Chicago, IL
2002 Mid-Year Meeting
March 21-24
Four Seasons Maui at Wailea
Maui, HI
2002 Annual Meeting
October 10-13
Regent Beverly Wilshire
Los Angeles, CA
Members are invited to view the Fact
Pattern now posted on the website by the
Committee. The Fact Pattern will be the basis
for the Workshop discussion.
Ground Lease Assignee Remains
Liable to Lessor After Leasehold
Mortgage Foreclosure
by John C. Murray, First American Title Insurance Company,
Chicago, IL
Introduction
Background
In what appears to be a case of first
impression, the California Appellate Court, in
Vallely Investments, L.P. v. Bancamerica
Commercial Corp., 88 Cal. App. 4th 816 (2001),
held that the assignee of a ground lessee’s
interest, who expressly assumed the lessee’s
obligations to the ground lessor in connection
with a workout/foreclosure by the assignee’s
parent entity of its leasehold mortgage with the
lessee, remained liable to the ground lessor
even after foreclosure of the ground lessee’s
position. The appellate court ruled that foreclosure of the leasehold mortgage would not affect
the obligations of the assuming leasehold
assignee to the ground lessor, whose rights
were independent of the foreclosing mortgagee.
Vallely Investments, L.P. (“Vallely”),
which owned vacant land in Newport Beach,
California, entered into a long-term ground
lease with a developer in 1978. Following a
series of subsequent assignments, Balboa
Landing, L.P. (“Balboa”) succeeded to the
lessee’s interest. In 1986, Vallely and Balboa
amended and restated the ground lease, which
amendment provided for, among other things,
an extension of the term until 2051.
The ground lease permitted the lessee to
assign the lease (or encumber it with a mortgage) without the lessor’s consent, but required
continued on page 8
7
Ground Lease Assignee....
continued from page 7
that the lessor be notified of each such assignment and that the assignee in each instance
expressly assume and agree to perform all of
the lease covenants and conditions. The lease
also stated that any leasehold mortgage would
be subordinate to the lessor’s interest, and that
the leasehold mortgagee would not be responsible for any of the lessee’s obligations unless
and until it became the owner of the leasehold
estate by foreclosure or assignment in lieu of
foreclosure; and in such event its liability
would be limited “to that arising by operation
of law or privity of estate.”
In 1986, Balboa executed a leasehold
deed of trust in favor of BA Mortgage and
International Realty Corp. (“BA Mortgage”) to
develop the property. Balboa subsequently
defaulted on the mortgage in 1988, and filed for
bankruptcy protection in 1989 in response to
BA Mortgage’s commencement of a foreclosure action.
sold its leasehold interest to Edgewater Place,
Inc. (“Edgewater”) in 1994.
In 1996, Vallely and Edgewater entered
into a lease amendment, which adjusted the
timing of the scheduled payment of rents for
1996. Edgewater failed to make timely payment of the 1996 rents, and Vallely commenced
a legal action against Edgewater. Only then,
according to the court, did Vallely learn of the
1989 assignment to BACC. In 1997, Edgewater
filed a Chapter 11 bankruptcy proceeding, and
the lease was deemed rejected by the bankruptcy court in 1998. Vallely then retook
possession of the property, and commenced a
declaratory action against BACC, asserting that
BACC was liable for the rent due for the
balance of the lease term as a matter of contract
law, notwithstanding the leasehold mortgage
foreclosure. The trial court granted summary
judgment for BACC, holding that foreclosure
of the leasehold mortgage terminated any
obligations BACC may have owed to Vallely.
The Court’s Decision
In workout discussions between Balboa
and BA Mortgage, BA Mortgage refused
Balboa’s offer of a deed in lieu of foreclosure
because it was concerned that the merger of the
leasehold estate and the mortgage would cause
intervening mechanic’s lien claims to become
senior in priority to the mortgage. The parties
agreed that Balboa would assign its leasehold
interest to BancAmerica Commercial Corporation (“BACC”), a wholly owned Bank of
America subsidiary, pending a non-judicial
foreclosure of the leasehold mortgage.
The assignment agreement entered into
by the parties in 1989 (which was recorded)
expressly provided that BACC, as assignee,
assumed all of the obligations of Balboa as
lessee under the ground lease with Vallely.
However, Vallely was never notified of this
assignment, in contravention of the terms of the
ground lease. BA Mortgage was the successful
bidder at the foreclosure sale, and subsequently
8
The appellate court first considered the
issue of BACC’s assumption of the ground
lessee’s obligations. It noted that a lease of real
property involves both a transfer of an estate or
interest in land (resulting in privity of estate)
and contractual rights and obligations arising
out of the lease document (resulting in privity
of contract). The court noted that upon an
assignment of the lessee’s interest, the assignor
is no longer in privity of estate with the lessor,
but remains liable under its lease covenants
unless it has been expressly released from its
obligations by the lessor. The court also noted
that an assignee who merely takes possession
of the property has privity of estate with the
lessor and is bound by all the lease covenants
that run with the land, and that upon a subsequent assignment the original assignee’s privity
of estate, along with all obligations to the
landlord, would cease.
continued on page 9
Ground Lease Assignee....
continued from page 9
However, according to the court, if the
assignee expressly assumes all of the lessee’s
obligations, privity of contract then exists
between the assignee and the lessor, which is
enforceable by the lessor as a third-party
beneficiary even if it is not a party to the
assignment and assumption agreement. Therefore, the court held, because BACC had expressly assumed all of the assignor’s lease
obligations to Vallely, Vallely was entitled to
enforce this agreement by BACC. The court
rejected BACC’s claim that only a sublease
(which would create neither privity of estate or
contract with the lessor) or a “temporary
leasehold assignment” was created and found
that even if a sublease had been created, the
express assumption of the lessee’s obligations
under the prime lease would result in privity of
contract with the lessor.
Turning next to the issue of whether
foreclosure of the leasehold mortgage terminated the leasehold assignee’s obligations to the
lessor, the court found that while the foreclosure terminated all subordinate interests it did
not terminate the ground lessor’s estate, which
was a reversionary interest senior to the mortgage. Therefore, the court held, the assignee’s
contractual obligations to Vallely, as a thirdparty beneficiary, survived the foreclosure. The
court further held that the foreclosure terminated the privity of estate and the privity of
contract between Balboa and BACC, but not
the privity of contract between BACC and
Vallely.
The court further held that the language
in the ground lease providing that a foreclosure
purchaser would only be liable to the extent
that there was privity of estate with the lessor
was unavailing to BACC. This was so, the
court held, because BACC was neither the
mortgagee nor the purchaser, and voluntarily
agreed to assume the rental obligations. The
court found unpersuasive BACC’s argument
that it was an agent of the mortgagee, noting
that nothing in the record evidenced such a
relationship. The court also noted that BACC
executed the assignment in its own right as
assignee and subsequently notified tenants that
it had become the owner of the property and
directed them to pay rent to its new managing
agent. The court also summarily rejected
BACC’s argument that it should prevail as a
matter of public policy, noting that Vallely
expressly bargained for the right to hold subsequent leasehold assignees responsible for the
lessee’s obligations and that BACC had elected
not to notify Vallely of assignment and assumption agreement it had executed, in direct
violation of the lease terms.
The court then addressed BACC’s
argument that it should be released from
liability under suretyship law. BACC argued
that it became a surety when Edgewater acquired the lease and that the 1995 lease amendment entered into by Vallely and Edgewater
constituted a modification without its consent
that discharged BACC’s contractual liability.
The court ruled that BACC was not relieved of
liability by the lease modification between
Vallely and Edgewater because Vallely was
unaware that BACC might be a surety when it
entered into the lease amendment with
Edgewater. The court further ruled that even
though BACC recorded the assignment between it and Balboa in 1989, this did not
constitute constructive notice to Vallely because it was not obligated to search title to its
own lease.
BACC argued that the rejection of the
lease in Edgewater’s bankruptcy proceeding
terminated the lease as to all parties under
California law and federal bankruptcy law.
The court rejected this assertion, reiterating its
finding that Vallely’s contractual rights against
BACC did not depend on the validity of the
lease. The court found that rejection of the
lease was not at issue in this case, nor was the
continued on page 14
9
The Ten Most Important....
continued from page 3
still recover damages against the secured party
for the loss of any surplus.
5. Clarifying strict foreclosure. Under
Former Article 9, the secured party’s remedy of
retaining the personal property collateral in
satisfaction of the indebtedness is of limited
usefulness, since the secured party only can
accept the personal property in satisfaction of
all the remaining debt (i.e., no deficiency).
Also, it isn’t clear under Former Article 9 that
retaining the personal property in satisfaction of
the indebtedness cuts off junior lien creditors or
that the secured party can exercise this remedy if
it does not have possession of the collateral.
Revised Article 9 makes it possible for
the secured party to retain the personal property
in satisfaction of an amount of the indebtedness
equal to the value of the property, provides that
this remedy will cut off the interests of junior
lien creditors, and further provides that the
secured party can exercise this remedy if it does
not have possession of the collateral. Revised
Article 9 also abolishes the doctrine of
involuntary strict foreclosure.
4. Loans secured by promissory notes
secured by mortgages. Revised Article 9 makes
a number of changes that enhance the rights of a
secured creditor that takes a security interest in
a promissory note secured by a mortgage.
Under Former Article 9, one could only perfect
a security interest in a note by taking possession;
under Revised Article 9, the secured party can
perfect its security interest in a note by filing.
Perfection of a security interest in the note
automatically perfects a security interest in the
mortgage securing the note.
If there was no collateral assignment of
the mortgage filed at the time the loan was
made, so that the secured party has no interest of
record, the secured party can file a copy of its
security agreement in the land records for the
purpose of facilitating a nonjudicial foreclosure
10
of the mortgage. The secured party also can
notify the obligor/mortgagor to perform its
covenants under the mortgage as well as to
make payments to the secured party.
3. No signatures. The debtor does not
have to sign a financing statement and the
secured party does not have to sign a
continuation statement, amendment, assignment or termination statement. An unauthorized termination statement is ineffective. If
you are representing a purchaser or lender, are
you going to be willing to rely on an unsigned
termination statement? A financing statement
filed in the land records not only doesn’t need a
signature, but doesn’t have to have an
acknowledgment, witnesses, attestations or any
of those other pesky conditions to recording in
the land records that states impose to give some
indicia of authorization and reliability.
2. Central Filing. All financing
statements have to be filed centrally except for
fixture filings and financing statements covering timber and minerals. So a financing
statement documenting the sale or pledge of a
note secured by a mortgage on real estate would
be filed centrally, which may mean in a different
state than the real estate. Can one searching title
to land rely on the real estate records to
determine who is the mortgagee? Revised
Article 9 does not require any filing in the real
estate records to reflect the sale of or security
interest in the mortgage.
So if you’re
representing the purchaser, or acting as the
closing agent, how can you be sure who owns
the note for payoff purposes? Article 3 protects
the obligor of a negotiable note but not nonnegotiatable notes. Good luck asking to see the
original note before payoff.
1. Change in governing law. Under
Former Article 9, the law governing perfection
of a security interest in tangible personal
property was the law of the state in which the
continued on page 11
The Ten Most Important....
Thinking About Some Forgotten....
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continued from page 5
property is located. Under Revised Article 9, the
law governing perfection is the law of the state
in which the debtor is located, which for a
business entity is the state under which the
debtor is organized. An exception exists for
timber, minerals and fixtures. This change is
important not only for purposes of perfecting
the security interest in the personal property, but
also because Revised Article 9 imposes on the
foreclosing secured party the obligation to
search the relevant records and give notice of
the sale to other creditors. So the secured party
has to be sure to search the right records. This
change has the potential to be a great revenueproducer for the State of Delaware, but not so
great for other states.
for “foot” (pes). The league is one hour’s walking
distance. Once an indefinite and poetic term, it is
now approximately three miles and used in marine
measure.
Work of Oxen. Of course, all measures of
area and lengths greater than human proportions were
unrelated to body parts, and often measured by reference to the physical effort of oxen. The furlong is
an old English measure meaning a “furrow long”:
the length plowed by two oxen before resting to turn
around. In the rein of Elizabeth I (1558-1603) the
furlong was defined as one-eighth of a statute mile.
A boustrophedon (Gk., the path that the ox makes)
is still the most efficient method to cover a flat surface. The modern computer printer travels the same
way, printing one line going forward and the next
going backward.
The length of natural objects other than the
body made up several important measures. Three
barleycorns were an inch by a royal Assize of
Weights and Measures in the thirteenth century. A
rod has been a straight bar of metal or wood of 16 1/
2 feet. A pole coming from the Latin and AngloSaxon terms for stake is equal to the rod, as is perch
which means a pole or staff for measuring. A rood
is a stick variously described as 5 1/2 to 8 yards and
is the cross on which Christ died.
In the English and the Roman empires, the
basic measures are the inch, the foot and the mile.
The inch has always been 1/12th of a foot. No longer
barleycorns, the inch is now defined by equivalence
(39.37 inches equal one meter). The ounce and the
inch were once 1/12th of a foot and a pound, respectively, from the L. uncia, a twelfth part.
As the basic natural unit of length, the foot
can be found in Sanskrit; its modern expression is
from L. pes, for foot.5 Nevertheless, it has varied
from 10 to 27 inches and in the beginning of the
twentieth century meant three different lengths in
Brooklyn alone. Its history in England since before
1000 has made it the basic modern imperial measure.
The mile has been in use since Anglo-Saxon
times as a land measure. Also known as the statute
or land mile, it was defined during the reign of Queen
Elizabeth to be 5,280 feet, based roughly upon 1,000
paces (L., mille passum) of the Roman army. 5,280
For tangible personal property, however, the law of the state in which the personal
property is located will govern the priority of the
secured party’s interest. So if I’m foreclosing
on a hotel in Mississippi owned by a Delaware
corporation, the law of Delaware will govern
the perfection of the secured party’s security
interest in the personal property, which means
that the financing statement will have to be filed
in Delaware. But the law of Mississippi will
govern the priority of the security interest
against a judgment filed in Mississippi. It
makes sense to have the same state’s law govern
priority of a lien against the real and personal
property. But am I going to be able to tell for
sure from the records of the Secretary of State of
Delaware whether the security interest has been
properly perfected under Delaware law?
Rod Clement is the co-author with Baxter
Dunaway of an article on the effect of Revised
Article 9 on real property that will be published
in the Fall 2001 issue of the ABA’s Real
Property, Probate & Trust Journal.
continued on page 12
11
Thinking About Some Forgotten....
continued from page 11
is conveniently divisible by 2, 3, 4, 5, 6, 8, 10, 11,
12 and 16, and thus also easily divisible by the foot,
yard, fathom, rod, chain, cable and furlong.
Finally, there are important artificial lengths.
A chain is 66 feet comprised of 100 links of 7.92
inches each. The chain was known as the Gunter’s
or surveyor’s chain after the British mathematician
and surveyor Edmund Gunter. A cable length is 120
fathoms and comes from an Anglo-French term for
rope or line or bundle.
Areas. There are many measures of area
in addition to those determined by squaring a linear
measure. The Sumerian ancestor of acre meant
water and by extension a watered field. In Sanskrit,
its ancestor meant an open field or hunting ground
or pasture. In Latin (ager) and Greek (agros) it
meant a fertile field giving rise to the term “agriculture.” In Old English, it meant the amount of unoccupied land that a yoke of oxen (two) could plow
from sunrise to sunset. In the Domesday Book, it
referred to a pasture, meadow or woods. Statutes
starting with Edward I standardized the definition
as an area 4 rods wide by 40 rods long, and that
remains its size today ([4 x 16.5] x [40 x 16.5] =
43,560).
The are from area for open space began in
the French Revolution and is 100 square meters. The
hectare (Gr., hekaton for a hundred) is 100 ares or
10,000 square meters beginning around 1810 in
France. The arpent measured 100 square perches
and was used in the Domesday Book with regard to
vineyards. In the southeastern United States, it survives as approximately 0.85 acres, but its size depends upon whether the original land was English
or French, and varies from one state to another. The
linear measure of an arpent is approximately 191
feet, one side of a square arpent.
The hide, from German for household, is
land sufficient to support one family depending on
the fertility of the land, but typically between 80
and 120 acres. Carucata or carucate, like a hide, is
approximately 120 acres and was found in the Danish counties comprising the Danelaw. The bovate,
1/8th of a carucate, appears in the Domesday Book.
Plowland or plowgate is also land sufficient for a
12
free family to support itself; its origins precede 1100.
The plowland compares with the knights fee which
was a larger area sufficient to support a knight’s family (perhaps to allow pasture for horses). Although
the standards were often based on the same amount
of animal labor (for example, the area plowed by
two oxen in a day), the areas differed. The discrepancies are attributable to the varying fertility of the
soil and the development of agricultural techniques
and tools that enhanced productivity.
Metric System. Some – such as Marie
Antoinette – would say that the fun stopped with the
French Revolution. This is certainly true of measurement and the meter. The meter, based upon the
Sanskrit, Greek and Latin words for measure, was
decreed by the French to be 1/10,000,000 of a length
of a meridian from the North Pole to the equator
through Paris. The French believed this precision
was necessary because their basic unit – the pied –
varied throughout the country.6 The scientific work
to make the measurement took six years.7 It was
adopted by the National Academy of France in 1796
“for all people for all time” at the request of the Academy of Science, and it was based upon a decimal
system originated in 1670 by a French clergyman
Gabriel Mouton; a decimal system uses a base of
ten that recalls finger counting. The metric system
(also known as the Systemè Internationale d’Unités
or the SI system) was not voluntarily adopted by the
French people. It became compulsory in 1840.8 So
much for “Liberté.…”
The imperial measure began with the Roman Empire and was retained by England in contrast with the metric system. The United Kingdom
uses the metric system of lengths except for miles,
yards, feet and inches, for traffic signs, and for other
measurements of speed and distance. The acre remains the English measure for land registration. The
United Kingdom has been unable to adopt the metric system for all measures because of national pride
and the popular inability to manage the arithmetic
conversion; when voluntary conversion was proposed, the merchants who priced their goods by the
square yard complained they were unable to compete with others who priced theirs on an (apparently
cheaper) square meter. The United States does not
Thinking About Some Forgotten....
continued from page 12
fully employ the metric system despite George
Washington’s plea for its adoption at the first Congress.
Measurement has gone from a flexible (perhaps, to be blunt, unreliable) standard for art, exchange and craft to a reliable scientific standard, and
has passed from the body parts of rulers to the laboratories of scientists as they explain (or describe) the
natural world. Nevertheless, the metric system and
the imperial system continue to co-exist because
neither seems to “fit” humans satisfactorily. Thousands of years after someone’s foot became a standard, it remains so, and a barleycorn is still about a
third of an inch, and people have ten fingers.
is said to be the length between the fingertips of
Charlemagne’s outstretched arms at 790 or so, just
as the fathom is said to have referred to Henry I’s
expanded arms. At its root, toise means to grasp
just as fathom does.
7
Because the calculations did not take into
account the flattening of the earth at the North Pole,
the measurement was two miles off and not corrected
even when the error was discovered.
8
The metric system became lawful in the
United Kingdom in 1864, and in the United States
in 1866.
1
Other measurements – such as wattage or voltage
– are derived from the basic measurements.
2
Young and Glover, Measure for Measure, Littleton
(1996) identifies nearly 1,000 measures worldwide.
3
There is no certainty to these lengths.
They often varied by region, by time period, by the
purpose for which they were employed, and what
was being measured.
4
The etymologies are brief and inexact.
See Zupko, A Dictionary of Weights and Measures
for the British Isles: The Middle Ages to the Twentieth Century, Philadelphia (1985), the Oxford English Dictionary, Skeat, The Concise Dictionary of
English Etymology, The Oxford Dictionary of English Etymology, and Chambers Dictionary of Etymology. For modern terminology, see ASCM/ASCE,
Definition of Surveying and Associated Terms, n.p.
(1978).
Extra copies of the 2001
ACREL Directory are
available for $20.
5
The change of the p to f is part of Grimm’s
Law discovered by Jacob Grimm of fairy tale fame.
Other consonant changes he observed are g to w, k
to h, h to g and g to k.
Call 301-816-9811
to place your order.
6
There are several remarkable correlations
to the imperial system. The toise (6 foot plus), the
pied (1/6 toise), the pouce (1/12 pied) and the ligne
(1/12 pouce) correspond – curiously – to the imperial fathom, foot, inch and line (1/12 in.). The toise
13
Ground Lease Assignee....
continued from page 9
question of what happens to a creditor’s security interest in a rejected lease at issue. The
court then cited several recent bankruptcy
decisions supporting its position that the emerging trend in bankruptcy law is that rejection of
an unexpired lease in bankruptcy does not
affect the rights of third parties with an interest
in the leasehold estate.
Finally, BACC argued that a factual
dispute existed as to whether a novation occurred when BACC assigned its leasehold
interest to Edgewater, thereby releasing BACC
from liability to the lessor. The court held that
BACC’s subjective intent was immaterial and
irrelevant as a matter of law. The court also
ruled that there was no evidence of a novation
because Vallely had never agreed to release
BACC from its written agreement to perform
the lessee’s obligations. The court rejected, as
unsupported by the evidence, BACC’s claim
that it only intended to be bound under the
lease during until foreclosure of the leasehold
mortgage was completed. The court also
dismissed BACC’s claim that it could not have
intended to assume the lease obligations because it was prohibited under federal banking
regulations from retaining a real property
interest in real property for more than five years
without regulatory approval. The court refused
to allow extrinsic evidence to vary the meaning
of the assignment and assumption agreement
executed by BACC, which the court found was
clear and unqualified.
Discussion
1. The Vallely decision is a cautionary tale
for all lenders who make leasehold
mortgages. In its zeal to craft a workout
solution that would achieve the respective goals of BA Mortgage and Balboa,
BA Mortgage shot itself in the foot. It is
hard to understand why the parties did
14
not notify Vallely of the lease assignment from Balboa to BACC as required
under the terms of the ground lease, a
fact that was clearly detrimental to
BACC’s position and particularly
irksome to the appellate court.
2. It is also puzzling why, in order to
preserve its lien priority, BA Mortgage
did not simply take a deed in lieu of
foreclosure (or, perhaps more accurately, a present assignment of the
leasehold interest and a quitclaim deed
to the improvements) in its own name
and insert “anti-merger” language in the
deed (and assignment) to preserve its
senior lien position against subsequent
mechanic’s liens. This stated intention
of the parties is enforceable in California as well as in most other states.
There is evolving case law that permits
a mortgagee who has obtained a deed
with such non-merger language to
subsequently foreclose its mortgage
(which remains of record) and eliminate
subordinate liens. To alleviate Balboa’s
concerns regarding personal liability,
BA Mortgage could have given it a
covenant not to sue in connection with
the deed-in-lieu transaction. It is also
possible that BA Mortgage could have
obtained a “non-merger” endorsement
from the title company insuring the
leasehold mortgage foreclosure.
3. Alternatively, BA Mortgage (as opposed to an affiliated entity) and Balboa
could simply have agreed to an uncontested “consensual” non-judicial foreclosure of the leasehold mortgage,
which would have wiped out the subordinate liens and provided Balboa with
immunity from personal liability.
Although this strategy would not have
achieved BA Mortgage’s additional
goal of immediate management and
continued on page 15
Ground Lease Assignee....
continued from page 14
maintenance of the property, an uncontested and expedited non-judicial
foreclosure would have enabled BA
Mortgage to take control of (and title
to) the leasehold estate within a relatively short period of time. It would
also have avoided the pitfalls of transferring Balboa’s leasehold interest to a
third party.
4. The court noted that BACC was in
possession (or at least entitled to
possession) of the property from the
time it entered into the assignment and
assumption agreement with Balboa in
1989 until it transferred its interest in
the property to Edgewater in 1994. Yet
the court stated that Vallely did not
learn of the 1989 assignment to BACC
until May, 1996, when Edgewater
failed to pay the rent due under the
ground lease. But wasn’t BACC (or its
property manager) paying rent to
Vallely for the five-year period before
it assigned its leasehold interest to
Edgewater? How could Vallely not
have known, for a period of five years
while it was receiving rent from BACC
(or its managing agent) that an assignment had not occurred? Might not this
fact, together with the fact that the
assignment from Balboa to BACC was
recorded in 1989, put Vallely on at least
constructive notice of the assignment
and bolster BACC’s surety argument,
which the court rejected?
5. The court stated that the emerging rule
in bankruptcy is that the effect of
rejection of an executory contract or
unexpired lease is limited to a breach
or abandonment by the debtor or
trustee rather than a complete termination of the lease, and that rejection
should not operate to damage the rights
of third parties with rights in the leasehold estate. However, there is case law
to the contrary, and this issue is still
unsettled in other jurisdictions.
6. The court stated that BACC could have
structured the transaction so that it
eliminated all liability with the foreclosure, by taking the assignment without
assuming the lease. However, by following this advice BACC would have
violated the provision of the ground
lease requiring that the assignee expressly accept and assume the lease. It is
difficult to understand why BACC
chose to comply with this lease covenant, but failed (or refused) to comply
with the covenant requiring it to give the
lessor notice of the assignment.
7. BA Mortgage may have been better off
creating a new single-purpose “shell”
entity to be the assignee of Balboa’s
leasehold estate, rather than having the
leasehold interest transferred to BACC
— which apparently was a fully funded
and capitalized Bank of America subsidiary already in existence. Even if the
newly created entity expressly assumed
all of the lessee’s rental and other
obligations under the ground lease, a
subsequent default in the payment of
rent could only be collected from the
entity’s assets, in effect making the
entity “judgment proof.” If Vallely then
argued that the “corporate veil” should
be pierced and that BA Mortgage should
be held liable, this would play into
BACC’s argument (which the appellate
court found unpersuasive under the
existing facts) that BACC was the
“agent” of BA Mortgage.
15
ACRELADES
The Pennsylvania Bar Institute has just
published Harris Ominsky’s new book, Real
Estate Practice: Breaking New Ground,
which contains 91 chapters, including those on
sales, leasing, mortgages and brokers. The
book covers recent legal developments and
includes more than 20 original cartoon illustrations.
Julian P. Rackow has been elected
chairman of the Central Philadelphia Development Corporation for a one-year term beginning April 1, 2001, and Robert D. Lane, Jr. is
the CPDC’s new president. CPDC is a nonprofit organization devoted to improving the
economic and social life of Center City
Philadelphia. It is the parent organization of
the Center City District which helps to maintain
the beauty and safety of Center City.
Earl L. Segal received a Burton Award for
Legal Achievement in June. The award, honoring excellence in legal writing, was presented at
Carnegie Hall in New York. The awards were
established to promote clear, congent and
effective legal writing, and recognize other
contributions and accomplishments in law.
Peter Lekisch, 60, became the oldest solo
rider to complete the 2,983-mile Race Across
America. Pedaling as many as 21 hours a day,
he made the trip from Portland to Pensacola,
Florida in 12 days, 20 hours and 48 minutes.
From the Editorial Board
We need articles! We are particularly
interested in materials not generally published
in other real estate journals. For example:
16
Issues or insights gleaned from
ACREL programs or workshops
Practical advice arising out of your
practice
Poetry or creative fiction relating to
real estate
Humor or satire (such as Norman
Geis’ articles on Roman Law)
Short profiles on ACREL members
and post-meeting observations on our
planned tours and non-real estate
activities
We prefer short articles that apply to
everyone. We would accept even materials that
have already been published in a different
format. Try taking a longer article you have
written and providing us with a shorter version.
We also need items for our
“ACRELADES” column. We are looking for
newsworthy items about our members, including significant articles, appointments, awards,
new books, and lectures.
Don’t be modest. Without responses
we will not be able to produce that column.
Send this news about yourself or other ACREL
members to Jill Pace - now.