UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DEBTOR CASE NO. 92-20122
This matter has been brought before the Court by the law firm of Smith, Wolnitzek, Schachter & Rowekamp, P.S.C. ("SWSR"), in its Memorandum of Support of Distribution of Proceeds from Sale of 1992 Coachtrial Drive, filed herein on July 6, 1992. The subject property had been ordered sold by Order of this Court entered on May 20, 1992. TransOhio Savings Bank ("TransOhio") filed a Reply to SWSR's Memorandum on July 31, 1992. SWSR filed a Response to TransOhio's Reply on August 20, 1992.
The Order of May 20, 1992, provides at& 4 that TransOhio should be paid the amount due on its first mortgage from the proceeds of the sale of the property. That amount was $288,530.00 as of April 30, 1992, with interest and advances thereafter until closing without inclusion of any claimed cross-collateralization amount. The Order further provides that any amount remaining after this payment was to be placed in escrow, and all valid liens, claims, encumbrances, and security interests against the property would attach to the proceeds of the sale. SWSR's Memorandum states that it holds a mortgage against the property that is second only in priority to TransOhio's first mortgage. TransOhio's Reply contends that its mortgage provides for cross-collateralization of all other debts owed to it by the debtor. SWSR's position is that TransOhio's mortgage does not fulfill the requirement of KRS 382.520 that a mortgage state any maximum additional indebtedness that the mortgagee claims.
The subsection in question, KRS 382.520(2), states as follows:
The mortgage referred to in subsection (1) of this section may secure any additional indebtedness, whether direct, indirect, existing, contingent or otherwise, to the extent expressly authorized by the mortgage, if the mortgage by its terms stipulates the maximum additional indebtedness which may be secured thereby.
SWSR and TransOhio place different meanings upon this subsection. SWSR interprets "maximum additional indebtedness" to mean a specifically stated cap. TransOhio contends that the subsection does not apply to cross-collateralization clauses, but that in any event it is "unlimited", and by the terms of TransOhio's mortgage the "maximum additional indebtedness" is "any and all other indebtedness".
TransOhio cites Bank of Maysville v. Brock, Ky. App., 375 S.W.2d 814 (1964), and states that KRS 382.520(2) applied therein because the additional indebtedness was a future advance and not a cross-collateralization. This Court does not believe that it is necessary to engage in a discussion of whether TransOhio's mortgage contains a future advance clause or a cross-collateralization clause or both. TransOhio's security instrument is a mortgage containing a provision which purports to secure additional indebtedness, and as such it must conform to the requirements of KRS 382.520(2). The court in Bank of Maysville stated as follows:
The matter is thus stated in Jones on Mortgages, Vol. 1, sec. 450 (8th ed.): 'Future liabilities intended to be secured should be described with reasonable certainty. If the nature and amount of the encumbrance is so described that it may be ascertained by the exercise of ordinary discretion and diligence, that is all that is required.'
At page 816.
The reference to "future" liabilities may be fairly attributed to the language of the statute as it existed at that time. However, as regards the question of whether the extent of additional indebtedness must be set out specifically, the court is fairly clear in stating the requirement that the "nature and amount of the encumbrance" be able to be "ascertained by the exercise of ordinary discretion and diligence".
In the case of TransOhio's mortgage the nature and amount of the encumbrance may be ascertained from the face of the mortgage which sets out the principal amount, and specifically by reference to& 17 which states that the mortgage is security for "any and all other indebtedness...up to the principal sum secured hereby." The principal sum secured by TransOhio's mortgage is $240,000.00.
As set out above, this Court ordered that TransOhio be paid the amount due on its mortgage from the proceeds of the sale of the subject property, or $288,530.00 as of April 30, 1992, with interest and advances thereafter until closing without inclusion of any cross-collateralization amount. TransOhio's lien on the property has been satisfied in that it has been paid the amount of its mortgage debt against the property, the "maximum additional indebtedness" being limited to the principal amount of the mortgage note plus accrued interest since no higher amount is stated in the instrument. Since the lien of TransOhio has been satisfied, the mortgage of SWSR stands next and should receive distribution from the remaining proceeds. An order in conformity with this opinion will be entered separately.
By the Court -
Leonard G. Rowecamp, Esq.
Michael Debbeler, Esq.