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Criss Cross Confusion
by Ron Davis

A commercial bank has failed in its efforts to force an Indiana shopping center owner to accept the financial obligations of a related shopping center property.

The two shopping centers are located in separate counties north of Indianapolis. But for purposes of securing mortgage loans, the owners acted in concert with lenders.

The mortgage loan for one of the shopping centers, located in Madison County, was $16.8 million. For the other shopping center, located in Tippecanoe County, the loan amounted to $15.2 million. Security for the loans was the individual properties.

In 2008, the owners of the Tippecanoe shopping center fell behind in making its mortgage-loan payments. At that time, however, the Madison shopping center was current with its payments. With a maturity date approaching, the lender gave the Madison shopping center owners a payoff quote. That quote made no mention of any guarantee of an obligation for the Tippecanoe shopping center.

The lender later rescinded that payoff quote, claiming that the two loans to the shopping centers were “cross-guaranteed” and “cross-collateralized.” In other words, the lender was saying that the debts of either of the two shopping centers were the responsibility of the other. If that were the case, the loan of the Madison shopping center would not be released until the Tippecanoe shopping center repaid its loan.

When the owners of the Madison shopping center challenged the lender to produce documents that validated such an agreement, there was no response. The Madison center owners later demanded that the lender admit that no cross-guarantee existed. Those owners also insisted that the lender release their mortgage upon payment of the debt.

In reviewing the legal documents involved, an Indiana court questioned the legality of the documents involved. The judge noted that the Madison center mortgage refers to a cross-guarantee agreement. But the draft of that agreement, added the judge, could simply refer to negotiations over terms that the two parties never actually agreed to.

Also, the mortgage refers to an agreement “of even date,” but the cross-guarantee is undated. There is disagreement within the loan documents about the title of the cross-guarantee, though that reference is undated.

In response to those questions, the lender seemed to argue that the mortgage itself is the cross-guarantee. But an Indiana appellate court disagreed, explaining, “We reject [the lender’s] apparent argument…, inasmuch as the mortgage is missing multiple key terms and conditions, including a payment trigger, payment terms, the amount to be paid, and the method for crediting payments.” (Wells Fargo Bank, N.A. v. Tippecanoe Associates, LLC, 2010 WL 811307 [Ind.App.])

Decision: March 2010
Published: April 2010



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