## Facts

- On December 10, 1979, Old Stone Capital Corporation (Old Stone) agreed to loan John Hoene Implement Corporation (JHIC) $250,000 for operating capital in connection with commercial property JHIC leased from Philomena C. Davis, the fee owner.
- To secure the loan, JHIC executed a leasehold deed of trust in favor of Old Stone covering JHIC’s leasehold estate, along with an assignment of rents and a security agreement covering personal property.
- On the same date, Davis and JHIC entered into a new (amended) lease for a 10-year term intended to run for the same period as the Old Stone loan.
- Davis also executed a subordination agreement with Old Stone and signed an estoppel certificate in connection with the financing.
- JHIC later defaulted on the loan.
- Old Stone took possession of the premises and filed a foreclosure action, asserting that the documents gave it rights sufficient to foreclose against the real property.
- Davis opposed foreclosure and asserted, including by counterclaim, that Old Stone lacked any enforceable interest in her property; she contended Old Stone at most held a claimed interest in the tenant’s leasehold and that the documents did not bind or encumber her fee title as Old Stone asserted.
- The parties filed competing motions for partial summary judgment; the reported decision resolves Davis’s motion.

## Issues

1. Whether the leasehold deed of trust, together with the subordination agreement and estoppel certificate, gave Old Stone an enforceable interest in Davis’s real property that supported foreclosure as against Davis.
2. Whether Davis was entitled to summary judgment declaring that Old Stone had no enforceable interest in the property as asserted against her.

## Decision

- The court granted Davis’s motion for summary judgment on her counterclaim.
- The court rejected Old Stone’s attempt to treat the transaction documents as giving it rights equivalent to a mortgage or deed of trust on Davis’s fee simple interest.
- The court concluded Old Stone did not have an enforceable real-property interest against Davis based on the leasehold deed of trust and the accompanying subordination and estoppel documents.
- As a result, Old Stone could not proceed on its asserted theory of foreclosure against Davis’s ownership interest.

## Legal Principles

- A leasehold deed of trust reaches only the borrower-tenant’s leasehold estate; it does not, by itself, encumber the landlord’s fee simple interest.
- A subordination agreement generally adjusts priority among stated interests; absent clear language creating a lien or conveyance by the fee owner, it does not operate as a deed of trust or mortgage on the fee.
- A lender seeking foreclosure rights against the fee must obtain an express security instrument from the fee owner; financing documents signed in connection with a tenant’s loan are not treated as a fee encumbrance without clear granting language.
- On summary judgment, when the controlling documents and undisputed facts show no enforceable property interest as a matter of law, judgment may be entered without trial.

## Conclusion

Old Stone’s collateral documents did not give it an enforceable lien or ownership interest in Davis’s fee title, and the court granted Davis summary judgment declaring Old Stone had no enforceable real-property interest against her that would support foreclosure on the property.


Old Stone Capital Corp. v. John Hoene Implement Corp., 647 F. Supp. 916 (1986)