Balch v. Leader Federal Bank for Savings

In 1970, the owner of four parcels of land in Arkansas signed a ground lease with a lessee who planned to build a hotel on those parcels. The lessee planned to use four neighboring parcels that the lessee owned as hotel parking. The lessee borrowed money from Liberty National Life Insurance Company (Liberty National) to help finance the hotel’s construction. Both the lessee and the owner signed a mortgage on the hotel to secure repayment of the loan to Liberty National. The owner then conveyed the parcels to Memory B. Balch and Beverly Balch Price (plaintiffs), and the lessee conveyed its interest in the ground lease and its ownership of the neighboring parcels to the Crestwood Company (Crestwood). The Balches and Crestwood agreed that the ground lease remained binding and that the Liberty National mortgage continued to encumber the hotel property. In 1987, Crestwood defaulted on the Liberty National loan and obtained a new loan from Leader Federal Bank for Savings (Leader Federal) (defendant) in the amount of approximately $1.924 million to pay off Liberty National and satisfy the mortgage. Crestwood signed the note and mortgage with Leader Federal, and the Balches were asked to sign only a certificate acknowledging facts and consenting to the Leader Federal loan covering the hotel parcels. Crestwood defaulted on its mortgage with Leader Federal. Leader Federal sued to foreclose on the hotel and adjacent parcels, arguing that the certificate created a lien on the Balches’ fee-simple absolute interest in the hotel parcels. The Balches claimed the certificate only subordinated the Balches’ interest in the ground lease to Leader Federal’s mortgage and that because the Balches did not sign the mortgage with Leader Federal, the Balches’ fee-simple absolute interest in the hotel parcels was not subordinated to Leader Federal’s mortgage with Crestwood. The trial court agreed with Leader Federal, ruling that Leader Federal could foreclose the Balches’ fee-simple interest under the mortgage. The Balches appealed.