Huntington Natl. Bank v. R Kids Count Learning Ctr., L.L.C.
2017 Ohio 7837
| Ohio Ct. App. | 2017Background
- MedVest leased 0.6 acres of a 1.5-acre parcel in 1978 under a long ground lease; tenant built a daycare. The lease restricted subletting and provided improvements revert to fee owner.
- R Kids acquired the leasehold in 2007; Huntington loaned R Kids money secured by a mortgage on the leasehold. The mortgage was recorded in the name of the lessee (outside the fee chain of title). A subordination/consent agreement from the prior fee owner was not recorded.
- MedVest later conveyed the full 1.5-acre fee to Karl Road Medical (2008), which conveyed to Sehgal Family (2009). Sehgal Family did not have recorded constructive notice of Huntington’s mortgage in the fee chain.
- R Kids purportedly sublet without landlord consent in 2013, then defaulted on Huntington’s loan. Huntington sued in foreclosure; Sehgal Family counterclaimed and sought termination of the lease based on R Kids’ defaults; R Kids failed to appear.
- Trial court: granted default judgment terminating the lease as between Sehgal and R Kids; but held Huntington’s mortgage survived termination via lis pendens and preserved Huntington’s right to foreclose the leasehold despite recording being outside the fee chain.
- This appeal: Huntington challenges the default termination; Sehgal Family challenges the trial court’s decision that Huntington’s mortgage survived termination and that Sehgal had constructive notice.
Issues
| Issue | Plaintiff's Argument (Huntington) | Defendant's Argument (Sehgal) | Held |
|---|---|---|---|
| Whether default judgment terminating the lease against R Kids was improper | Huntington argued default was improper and lis pendens precluded termination while foreclosure pending | Sehgal argued R Kids failed to defend; landlord may exercise contractual termination rights acquired before foreclosure | Court: Default judgment appropriate; Sehgal could terminate lease despite foreclosure pendency (Huntington’s cross-assignment overruled) |
| Whether lis pendens prevented Sehgal from terminating lease or barred enforcement of landlord rights | Lis pendens should protect plaintiff’s (Huntington’s) interests and preclude third-party actions that impair the mortgaged leasehold | Sehgal argued it acquired fee and lease rights before suit; exercise of pre-existing contractual rights is not an ‘‘acquisition’’ under lis pendens | Court: Lis pendens does not apply to bar Sehgal’s exercise of pre-existing contractual termination rights (no acquisition during pendency) |
| Whether Sehgal had constructive or actual notice of Huntington’s mortgage at purchase | Huntington argued Sehgal had constructive notice because the lease was in the chain and the mortgage concerned the lease (common-grantor theory); alternatively actual knowledge of lease implied notice of mortgage | Sehgal argued mortgage was recorded outside fee chain and subordination was unrecorded; no duty to search outside fee chain; no evidence of actual notice of mortgage | Court: Sehgal did not have constructive or actual notice; recording outside the chain does not charge a subsequent purchaser with constructive notice; common-grantor theory rejected |
| Whether Huntington’s leasehold mortgage survived lease termination and could be foreclosed | Huntington argued equitable principles / prior cases permit mortgagee to preserve mortgage rights despite lease termination | Sehgal argued mortgage encumbered only the leasehold, which was extinguished on lawful termination, so mortgage no longer attached to fee | Court: Mortgage extinguished with lease termination; Huntington cannot foreclose on an extinguished leasehold; summary judgment for Sehgal on that issue |
Key Cases Cited
- Ohio Valley Radiology Assocs., Inc. v. Ohio Valley Hosps. Assn., 28 Ohio St.3d 118 (1986) (default judgment admits uncontroverted factual allegations and is reviewed for abuse of discretion)
- Abraham v. Fioramonte, 158 Ohio St. 213 (1952) (leasehold mortgage encumbers only lessee’s leasehold rights)
- Emrick v. Multicon Builders, Inc., 57 Ohio St.3d 107 (1991) (an instrument recorded outside the purchaser’s chain of title does not give constructive notice)
- Spring Lakes, Ltd. v. O.F.M. Co., 12 Ohio St.3d 333 (1984) (rejects common-grantor theory; purchasers are not required to search records outside their chain of title)
- Baker v. Koch, 114 Ohio App. 519 (1962) (tracing chain of title requires inspection only of the chain under which purchaser claims title)