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A Better Partnership
February 10, 2010

COA Opinion: No future advance mortgage is created where the recorded instrument does not explicitly include the necessary language

On February 9, 2010, the Court of Appeals published its opinion in Citizens State Bank v. Nakash, No. 286990.' Here, a property owner owed a lender $250,000 pursuant to a promissory note secured by a mortgage on' real property.' Ultimately, the property owner defaulted on the mortgage and the property was placed' into foreclosure.' At the time of the Sheriff's Sale, the amount' due under the mortgage, along with subsequent loans, interest and costs was approximately $474,000.' The lender was the only bidder, and bid that exact amount.' A subsequent mortgage' lender argued that' initial lender's mortgage lien was limited to $250,000, and the $474,000 bid created a surplus that they were entitled to as a junior lien holder on the property.' The initial lien holder countered, arguing that its initial mortgage was a future advance mortgage, and thus the bid did not create a surplus.' The initial mortgage itself did not contain any future advance language, but the initial lender argued that it incorporated the underlying promissory note that did use such language.' The Court of Appeals affirmed the trial court's ruling that the initial mortgage was not a future advance mortgage, and the secondary lender was entitled to the surplus from the foreclosure bid.' The Court of Appeals' relied on' the statutory requirement that the instrument creating a future advance mortgage must be recorded.' Here, although the mortgage was recorded, it did not contain any of the necessary language.' All that language was in the underlying note, which was not recorded.' Thus, a future advance mortgage was not properly created, and the junior lien holder was entitled to the surplus from the bid on the foreclosed property.

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