BRADFORD, Judge.
In 2006, MCSS Merrillville, L.L.C. ("Borrower"), executed a promissory note ("the Note") and leasehold mortgage ("the Mortgage") as security for the note in favor of Amcore Bank, N.A.; the debt and mortgage were later assigned to Appellant-Plaintiff-Counterclaim Defendant BMO Harris Bank, N.A., ("BMO Harris"). Borrower had entered into a lease ("the Lease") for real property in Century Plaza in Merrillville ("the Parcel"), on which it operated a Golden Corral restaurant. The Lease required Borrower to refrain from assigning the Lease or subletting the Parcel. Since 2007, however, Appellee-Intervenor GC 2548, Inc. ("GC 2548"), has actually operated the Golden Corral, although it has never been made party to the Lease and there was no assignment of rights under the Lease from Borrower to GC 2548.
In 2013, BMO Harris sued Borrower and various guarantors of Borrower's debt for breach of contract, foreclosure, and appointment of a receiver. Eventually, BMO Harris moved for default judgment against Borrower and all but one of the guarantors and for an order of possession of the leasehold interest. In August of 2014, the trial court entered default judgment against Borrower and all but one of the guarantors and ruled that any right to possession by those parties was barred. At a hearing, GC 2548 argued that Borrower had abandoned the Parcel and that GC 2548 was an equitable assignee of the Lease. The trial court rejected this argument and ruled that: (1) BMO Harris's default judgment against Borrower entitled it to foreclose on its interest in the Parcel; (2) Article 9.1 of the Indiana Uniform Commercial Code ("UCC") dictated the result of this case, rather than Indiana Code provisions governing mortgage foreclosure actions; and (3) GC 2548 was bound by the default judgment against the defendants and was given thirty days to vacate the Parcel.
On appeal, GC 2548 contends that (1) the trial court erred in concluding that
At some point in 2005, Borrower entered into the Lease with Century Plaza, LLC ("Landlord"), for the Parcel, located in Century Plaza, with a term of fifteen years and on which Borrower was operating a Golden Corral restaurant. Inter alia, the Lease required Borrower to "refrain from assigning, selling, or in any manner transferring this Lease or any interest therein, by operation of law or otherwise; to refrain from subletting this Leased Premises or any portion or portions thereof; to refrain from permitting the occupancy by anyone with, through or under it." Defendant's Ex. 2. P. 22. On September 22, 2006, Borrower executed the Note in the principal sum of $1,520,000.00, payable to Lender.
Since August of 2007, William Niemet has operated the Golden Corral Restaurant at 8215 Broadway on behalf of GC 2548. Borrower transferred the franchise agreement for the Golden Corral to GC 2548, and ever since, GC 2548 has operated pursuant to the terms of the Lease, making payments directly to Landlord while also paying property taxes and improving the real estate. GC 2548, however, is not associated with Borrower, has never been made a party to the Lease, and has not been assigned any of Borrower's rights pursuant to the Lease. Moreover, GC 2548 has made no payments to BMO Harris on the Note.
On January 23, 2013, BMO Harris filed a complaint for breach of contract, foreclosure of the Mortgage, and appointment of a receiver. BMO Harris named Borrower as principal defendant and also named, as guarantors of Borrower's debt, MCSS Illinois, L.L.C.; Kipling Homes,
On April 18, 2013, the trial court granted BMO Harris's request for the appointment of a receiver. On May 29, 2013, GC 2548 moved to intervene, which motion the trial court granted on June 18, 2013. On June 20 and October 29, 2013, the receiver filed reports, neither of which was objected to by GC 2548. On December 20, 2013, the receiver filed a third report, to which GC 2548 objected on unspecified grounds.
On June 24, 2014, BMO Harris moved for entry of default, judgment, and order of possession of the Parcel. On July 11, 2014, GC 2548 filed a counter/third-party claim. On July 14, 2014, the trial court held a hearing on BMO Harris's motion for entry of default, judgment, and order of possession. On August 5, 2014, the trial court entered default judgment against all defendants except Cinquegrani and ruled that none of the defendants had any right of possession of the Parcel.
On August 20, 2014, the trial court held a contested hearing on the issue of possession of the Parcel, at which GC 2548 presented evidence concerning its claim that Borrower had abandoned the Parcel and that GC 2548 was an equitable assignee of the Lease. On September 19, 2014, the trial court issued its order on BMO Harris's motion for possession. The trial court's order provides as follows:
The Court orders as follows:
Appellant's App. pp. 26-30.
GC 2548 contends that (1) the trial court erred in concluding that Article 9.1 applied; (2) GC 2548 is an equitable assignee of Borrower's Lease; (3) the equitable assignment of the Lease terminated BMO Harris's security interest; and (4) that even if BMO Harris's security interest is still valid, BMO Harris is not entitled to immediate possession of the Parcel. BMO Harris counters that (1) GC 2548 waived certain arguments, (2) GC 2548 was bound by the default judgment against defendants, (3) Article 9.1 of the UCC applies, (4) GC 2548 is not entitled to equitable relief, and (5) the trial court correctly entered its order of possession in favor of BMO Harris.
Where, as here, the trial court has issued written findings and conclusions, our standard of review is well-settled:
Balicki v. Balicki, 837 N.E.2d 532, 535-36 (Ind.Ct.App.2005) (citing Carmichael v. Siegel, 754 N.E.2d 619, 625 (Ind.Ct.App. 2001)), trans. denied.
BMO Harris argues that GC 2548 has waived certain arguments for appellate review. Specifically, BMO Harris contends that GC 2548 failed to make any argument in the trial court regarding the equitable assignment of Borrower's Lease and may not now raise it for the first time on appeal.
GKC Indiana Theatres, Inc. v. Elk Retail Investors, LLC., 764 N.E.2d 647, 651 (Ind. Ct.App.2002).
BMO Harris points to the fact that GC 2548 did not specifically argue equitable assignment at the default judgment or possession hearings on July 14 and August 20, 2014, respectively. While essentially conceding that this is true, GC 2548 contends that the equitable assignment issue was adequately before the trial court because it was raised in its counter/third-party claim, filed on July 11, 2014. In support of its position, GC 2548 includes passages from the counter/third-party claim in its reply brief. This, along with the fact that GC 2548 presented evidence at the August 20, 2014, hearing relating to the issue, is adequate to preserve the issue for appellate review.
While there does not seem to be any reason to doubt the accuracy of the quoted passages from the counter/third-party claim, and BMO Harris does not contest their authenticity or accuracy, the fact is that GC 2548's counter/third-party claim does not appear in the record on appeal: it was not included in BMO Harris's Appellant's Appendix and GC 2548 did not file an appendix. As a general rule, this court may not consider material that is not properly part of the record on appeal. See King v. State, 877 N.E.2d 518, 522 n. 2 (Ind.Ct.App.2007) ("[W]e may not and should not consider material that is not part of the record.").
Under the circumstances of this case, however, we conclude that application of waiver would be inappropriate. First, in our view it was BMO Harris's responsibility to point out that GC 2548's counter/third-party claim was not part of the record on appeal, and it did not. BMO Harris could have filed a motion to strike that portion of GC 2548's reply brief but did not. Second, it seems a near certainty that the result of a motion to strike portions of GC 2548's reply brief would have been a request to file a belated appendix, a request that likely would have been granted in the interest of deciding issues on the merits. Third, GC 2548 did, in fact, present evidence related to the equitable assignment issue at the hearing on August 20, 2014. We conclude that application of the waiver rule would be inappropriate in this case, allowing this court to reach the merits of all of GC 2548's arguments.
GC 2548 argues that despite never having been made a party to the Lease, it was nonetheless equitably assigned the Lease by Borrower and that the trial court erroneously failed to so conclude. GC 2548 follows this argument by claiming that the alleged equitable assignment of the Lease extinguished BMO Harris's security interest. It is worth noting that GC 2548 is appealing from a negative judgment on this claim, making its task difficult on appeal:
Smith v. Dermatology Associates of Fort Wayne, P.C., 977 N.E.2d 1, 4 (Ind.Ct.App. 2012).
Although the trial court did not issue any conclusions of law regarding GC 2548's equitable assignment claim, GC 2548 contends that certain uncontested findings of fact necessarily support such a conclusion. BMO Harris argues that the cases regarding the equitable assignment of leases relied upon by GC 2548 are distinguishable and that the facts and evidence do not otherwise support an equitable assignment. We agree with BMO Harris that the trial court's conclusion on this point is not contrary to law.
GC 2548 relies on the Indiana Supreme Court's decision in Indianapolis Manufacturing and Carpenters Union v. Cleveland, C., C., and I. Railway Company, 45 Ind. 281 (1873), and our decision in Collins v. McKinney, 871 N.E.2d 363 (Ind. Ct.App.2007). In Indianapolis Manufacturing and Carpenters Union, the Cleveland, C., C., and I. ("Lessor") leased a parcel to a man named Tate ("Lessee"), who operated a lumber yard thereon, with the proviso that he could not assign or sublet any portion of the premises without Lessor's written consent. Indpls. Mfg. and Carpenters Union, 45 Ind. at 285. Lessee occupied the parcel until he sold his business to the Indianapolis Manufacturing and Carpenters Union ("the Union"), at which point Lessee notified Lessor's agent of the sale, continued to pay his rent to Lessor pursuant to the lease, and received an equal amount from the Union each month. Id. at 285-86. As it happens, Lessor objected to the Union's occupation of the parcel and sued to recover possession soon after learning of it. Id. at 290. The Indiana Supreme Court ruled that even in the absence of a written assignment, the arrangement between Lessee and the Union amounted to an equitable assignment, something the lease did not allow. Id. Consequently, the Indiana Supreme Court affirmed the trial court's ruling that Lessor was entitled to recover possession of the property in question. Id.
In Collins, McKinney leased two parcels of land from Collins, which it promptly assigned (with Collins's consent) to Tomkinson Chrysler Jeep, Inc. Collins, 871 N.E.2d at 367. As in Indianapolis Manufacturing and Carpenters Union, the lease contained a no-assignment/sublet-without-consent provision. Id. at 366. Tomkinson subsequently sold its Chrysler Jeep dealership to Glenbrook Dodge, Inc., without Collins's consent. Id. at 367. The trial court granted McKinney's motion for directed verdict, concluding that Collins had produced insufficient evidence of a breach of contract. Id. at 369. We reversed on this point, reasoning as follows:
Id. at 373.
Keeping in mind that we are evaluating a claim rooted in equity, we conclude that the authority relied upon by GC 2548 does not help its cause. "[T]he very first maxim with which we meet in equity is that it will regard that as done which in good conscience ought to be done."
Even beyond the purely equitable concerns, this case is also distinguishable from Indianapolis Manufacturers and Carpenters Union and Collins on the facts more specifically relating to the alleged assignment. GC 2548 points to some of the trial court's findings to support its argument that the trial court was essentially compelled to conclude that an equitable assignment of the Lease occurred, namely, findings that GC 2548 had operated the Golden Corral since 2007 and that it made improvements to the Parcel. These findings do not necessarily support a conclusion that GC 2548 had completely taken over the Parcel, especially when one considers that there is no evidence that GC 2548 ever made a single payment on the Note. GC 2548 also points to evidence in the record that it purchased the franchise rights for the restaurant from Borrower, that it dealt directly with Landlord, that BMO Harris was aware as far back as 2007 that it was in possession of the Parcel, and that all concerned were aware that it GC 2548 was not affiliated with Borrower. The trial court, however, made no findings regarding this evidence and was not required to credit it. Finally, there does not seem to be any evidence that Landlord had any issue with GC 2548's occupancy of the Parcel, despite the fact that the Lease included the standard non-assignment/sublet language. In other words, it may be inferred that the Landlord seems to have viewed GC 2548's occupancy of the Parcel as something like a management agreement. When viewed in light of the stringent standard of review
GC 2548 argues that the trial court erred in applying Article 9.1 of the Indiana UCC, which governs secured transactions, because the interest at issue in this case is a leasehold, allegedly an interest in real property. BMO Harris argues that the trial court properly ruled that Article 9.1 (codified at Indiana Code chapter 26-1-9.1) applies in this case, arguing that GC 2548 has failed to establish that a leasehold mortgage is an interest in or lien against real property. This question is key because if the provisions of the Indiana Code governing "normal" real estate mortgage foreclosures apply, BMO Harris's remedy in the event of foreclosure would be a sheriff's sale of Borrower's interest in the Parcel. On the other hand, if the provisions of the UCC apply, BMO Harris would have the ability to immediately take possession of the Parcel.
We agree with GC 2548. Broadly, under the provisions of the UCC dealing with security interests in personal property, "[e]xcept as otherwise provided in subsections (c) and (d), IC 26-1-9.1 applies to... a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract[.]" Ind. Code § 26-1-9.1-109(a). This provision does not include leaseholds on real property, and we have little hesitation in concluding that leaseholds on real property are neither personal property nor fixtures. Additionally, subsection (d) of the same statute specifically provides that, inter alia, "IC 26-1-9.1 does not apply to ... the creation or transfer of an interest in or lien on real property, including a lease or rents thereunder[.]" Ind.Code § 26-1-9.1-109(d) (emphasis added). The plain language of the Indiana UCC indicates that its provisions do not apply to leasehold mortgages.
Our resolution of this issue is consistent with the weight of authority nationwide, which holds that a leasehold mortgage is a security interest in real estate and that law pertaining to security interests in personal property does not apply to them. See, e.g., In re Bristol Associates, Inc., 505 F.2d 1056, 1061 (3d Cir.1974) ("Our conclusion, that lenders need not conform to the requirements of Article 9 in order to retain their security interest in a real estate lease assigned to them as collateral, is supported, apparently unanimously, by authorities who have considered this problem."); In re Le Sueur's Fiesta Store, Inc., 40 B.R. 160, 162 (Bankr. D.Ariz.1984) ("Accordingly, as an `instrument affecting real property' a security interest in an Arizona lease is valid against the Trustee or subsequent purchasers or creditors without notice only if recorded in the County Recorder's office rather than with the Secretary of State.'").
In summary, GC 2548 is correct that a leasehold mortgage foreclosure is governed by Indiana statutory law regarding real estate mortgages, and that the same foreclosure procedures need to be used. Therefore, Indiana Code chapter 32-30-10, which details the process of mortgage foreclosure, applies.
Finally, GC 2548 argues that nothing in either Indiana Code chapter 32-30-10 or the Mortgage allows BMO Harris to take immediate possession of the Parcel. BMO Harris responds to this contention by arguing that GC 2548 must present a defense in order to defeat BMO Harris's claim of immediate possession, a defense that GC 2548 lacks the standing to assert. We agree with GC 2548 that BMO Harris has no right to immediate possession of the Parcel. GC 2548 is correct that Indiana Code chapter 32-30-10 contains no provisions for repossession by a mortgagee prior to a sheriff's sale. The Mortgage is likewise silent on the topic. As this court has explained,
Oldham v. Noble, 117 Ind.App. 68, 75-76, 66 N.E.2d 614, 617 (1946).
To summarize, the default situation in Indiana is that a mortgagee has a lien on, but no right to possession of, the mortgaged premises, and the facts of this case fit the default pattern. Because BMO Harris has no right to immediate possession of the Parcel, GC 2548 need not present a defense. Whatever rights BMO Harris may have to possess the Parcel will have to be purchased at the sheriff's sale conducted pursuant to Indiana Code sections 32-30-10-5, -8, and -9. We reverse the trial court's order giving immediate possession to BMO Harris.
We conclude that GC 2548 preserved its equitable assignment claim for
The judgment of the trial court is affirmed in part and reversed in part, and we remand with instructions.
KIRSCH, J., concurs.
VAIDIK, C.J., concurs in part and dissents in part with opinion.
VAIDIK, Chief Judge, concurring in part, dissenting in part.
I concur in full with the majority's treatment of the waiver, equitable assignment, and UCC issues in this case. I respectfully dissent with respect to the final issue — whether BMO Harris is entitled to possession of the Parcel.
The majority concludes that BMO Harris must purchase its right of possession at a sheriff's sale because "the default situation in Indiana is that a mortgagee has a lien on, but no right to possession of, the mortgaged premises, and the facts of this case fit the default pattern." Op. at 394. I agree with this statement of the law. But here, GC 2548 is, at best, a month-to-month tenant, not a lessee or mortgagor. See Ind.Code § 32-31-1-2. As such, GC 2548 lacks any interest in the Parcel that certain mortgage-foreclosure procedures — particularly sheriff sales — are designed to protect.
By ordering a sheriff's sale, I believe the majority confers greater protection upon GC 2548 than it deserves, given that it is merely a month-to-month tenant with no interest in the Parcel. I would affirm the trial court's order giving BMO Harris the right to take possession of the Parcel in thirty days' time.
