CCMS 2005 CD1 LLC v. LLC (2012)

MEMORANDUM OF DECISION

Introduction

This is an action in three counts.   The First Count seeks foreclosure of a mortgage.   The Second Count seeks enforcement of the note secured by the mortgage.   The Third Count seeks enforcement of a guaranty.   By decision dated August 25, 2011, the court, Sheldon, J., entered partial summary judgment as to the issue of liability on the claim for foreclosure.   The court found “that the plaintiff is the owner of the note and mortgage, and that all conditions precedent to foreclosure, as mandated by the mortgage, have been satisfied ․ The plaintiff has thus established, as a matter of law, its prima facie case for foreclosure of the mortgage.”  (Citations omitted.)

On September 13, 2011, the court, Satter, J., heard testimony on the issues of the value of the property, the amount of the debt, the setting of a law day and the issue of recourse liability under the note and liability under the guarantee.   Subsequently, in light of Judge Satter's retirement, the parties requested the appointment of another judge to decide the matter pursuant to General Statutes § 51–183f.¹  On December 12, 2011 this matter was assigned to the undersigned.   The court reviewed the transcript of the hearing before Judge Satter and heard further argument from the parties on January 30, 2012.²  The plaintiff filed an additional brief on February 13, 2012.

A Joint Stipulation of Undisputed Facts dated September 6, 2011 reveals the following facts:

Defendant, Northland Goodwin, LLC (“Northland”), is a limited liability company formed under the laws of the State of Delaware, having an address do Northland Investment Corporation, 2150 Washington Street, Newton, MA 02462, and is the owner of the Property (as defined in the Complaint) ․ Defendant Northland Fund II, L.P. (“Guarantor”), is a limited partnership formed under the laws of the State of Delaware ․ On September 8, 2005, Northland executed a promissory note in favor of Deutsche Banc Mortgage Capital, L.L.C. (“Original Lender”) in the original principal amount of $33,000,000.00 (as amended from time to time, the “Note”), payable to the order of Original Lender as provided therein ․ As security for the loan (the “Loan”) evidenced by the Note, Northland delivered to Original Lender, inter alia, that certain Open–End Mortgage and Security Agreement, dated September 8, 2005 ․ The Note is further secured by, inter alia, a security interest in certain personal property created under the Mortgage and perfected by that certain (i) UCC Financing Statement (the “Fixture Filing”) and (ii) that certain UCC Financing Statement (the “SOS Filing” and together with the Fixture Filing, the “UCCs”) ․ As further security for the Note, Guarantor executed that certain Guaranty and Indemnity, dated September 8, 2005 (the “Guaranty”) ․ As further security for the Note, Northland and Northland Investment Corporation, a Massachusetts corporation, as manager, entered into that certain Manager's Consent and Subordination of Management Agreement, dated as of September 8, 2005 (the “Subordination of Management Agreement”) ․ By their terms, the loan documents are governed by the laws of the State of Connecticut ․ Pursuant to that certain Lease dated as of September 8, 2005 (the “Hotel Lease”), Northland leased a portion of the Property (the “Hotel Leased Premises”) to its affiliate, Northland Goodwin Hotel LLC (the “Hotel Tenant”), for a term through and including January 15, 2081 ․ Northland terminated the Hotel Lease on December 31, 2008 pursuant to that certain Lease Termination Agreement by and between Northland and Hotel Tenant dated as of December 31, 2008 (“Lease Termination”) ․ Northland received that certain Guaranty dated as of September 8, 2005 (“Hotel Guaranty”) ․ The Hotel Leased Premises exceeded ten percent of the Property and the term significantly exceeded ten years ․ Northland received rents and other revenues from the Property, and since September 8, 2010, rents and other revenues have been distributed pursuant to an agreement with the Plaintiff ․ Northland received the April 1, 2010 correspondence from Plaintiff that accelerated the Loan and demanded payment ․ Guarantor received the April 1, 2010 correspondence from Plaintiff ․ Northland is the record holder of the Property and remains in possession thereof.

Additional findings of fact as made by the court, based on the evidence presented, are discussed herein.

Discussion

First Count—Foreclosure

Based on the evidence presented, the court finds that the debt is $39,001,354.85 as of September 1, 2011.   The appraisal fee is $14,500.00.   The fair market value of the mortgaged property is $21,800,000.00.   The defendants do not dispute the entry of a judgment of strict foreclosure as opposed to a judgment of foreclosure by sale.   A judgment of strict foreclosure shall enter and law days are set for July 23, 2012 for Northland Goodwin, LLC and July 24, 2012 for Northland Fund II, L.P.

Second Count—Enforcement of the Note

The plaintiff claims that the borrower, Northland Goodwin, is liable under the note because it terminated the hotel lease which was part of the security for the note.   As Judge Sheldon found, the non-payment of the January 1, 2010 mortgage payment or any payments thereafter, was an event of default.   The stipulation of the parties state that Northland Goodwin terminated the hotel lease on December 31, 2008.   Thus the hotel lease was terminated prior to the default in payments under the mortgage and note.

The plaintiff claims that although the note is generally a non-recourse note, there are specific provisions which, if satisfied, impose recourse liability on the borrower, Northland Goodwin.  “[I]t is not unusual for the parties to the mortgage to agree that there shall be no personal liability for the performance, or that personal liability is to be limited.   This is often termed a ‘nonrecourse’ or ‘limited recourse’ mortgage.   If personal liability is entirely excluded by the parties' agreement, the effect is to restrict the mortgagee's remedy for nonperformance to foreclosure of the mortgage.   Such a restriction or exclusion of personal liability does not impair the enforceability of the mortgage by means of foreclosure, but it does limit or bar the mortgagee's access to both a personal judgment prior to foreclosure and a deficiency judgment following foreclosure.   Terms that limit or eliminate the mortgagor's personal liability may be found in either the note or the mortgage.   No special formula need be employed, and any words reasonably expressing an intent to limit or eliminate the mortgagor's liability will have the effect of doing so.”   Restatement 3d, Property:  Mortgages § 1.1.

The note here states in Section 6(b) that:

in the event of a Foreclosure ․ no judgment for any deficiency upon the indebtedness evidenced hereby shall be sought or obtained by Payee against Maker (except as specified below), provided however, that, notwithstanding the foregoing provisions of this Section, Maker shall be fully and personally liable and subject to legal action ․ (iii) for rents, issues, profits, revenues of all or any portion of the Security Property and tenant security deposits paid to or held by or on behalf of Maker relating to the Security Property received or applicable to a period during the continuance of an Event of Default or any event which, with notice or the passage of time, or both, would constitute an Event of Default, hereunder or under the Loan Documents which are not either applied to the ordinary and necessary expenses of owning and operating the Security Property or paid to Payee ․ (vi) for waste committed on the Security Property by, or damage to the Security Property as a result of the intentional misconduct or gross negligence of, Maker or any of its principals, officers (if applicable), general partners (if applicable) or members, any guarantor, any indemnitor, or any agent or employee of such persons, or any removal of the Security Property in violation of the terms of the Loan Documents, to the full extent of the losses or damages incurred by Payee on account of such occurrence.

(Exhibit 2, p. 4.)

The Security Property is defined in the mortgage to include “[a]ll leases ․ (including without limitation any and all interest Mortgagor has in that certain Ground Lease dated the date hereof by and between Mortgagor, as landlord, and Northland Goodwin Hotel LLC ․ as tenant (the ‘Ground Lease,’ and for purposes of this Mortgage the term ‘Leases' shall include the Ground Lease) ․” (Exhibit 3, p. 3.) Therefore the hotel lease was part of the Security Property.

“Construction of a mortgage deed is governed by the same rules of interpretation that apply to written instruments or contracts generally, and to deeds particularly.   The primary rule of construction is to ascertain the intention of the parties.   This is done not only from the face of the instrument, but also from the situation of the parties and the nature and object of their transactions ․ A promissory note and a mortgage deed are deemed parts of one transaction and must be construed together as such ․ Although ordinarily the question of contract interpretation, being a question of the parties' intent, is a question of fact ․ [w]here there is definitive contract language, the determination of what the parties intended by their contractual commitments is a question of law ․ If a contract is unambiguous within its four corners, intent of the parties is a question of law requiring plenary review ․ [When] the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms ․ [T]he individual clauses of a contract ․ cannot be construed by taking them out of context and giving them an interpretation apart from the contract of which they are a part ․ A contract should be construed so as to give full meaning and effect to all of its provisions ․” (Citations and internal quotation marks omitted.)  Jancewicz v. 1721, LLC, 134 Conn.App. 394, 397–8 (2012).

“A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity ․ [C]ourts do not unmake bargains unwisely made.   Absent other infirmities, bargains moved on calculated considerations, and whether provident or improvident, are entitled nevertheless to sanctions of the law ․ Although parties might prefer to have the court decide the plain effect of their contract contrary to the agreement, it is not within its power to make a new and different agreement ․ As stated by our Supreme Court, a presumption that the language used is definitive arises when ․ the contract at issue is between sophisticated parties and is commercial in nature.”   (Citations and internal quotation marks omitted.)  Neubig v. Luanci Construction, 124 Conn.App. 425, 432–3 (2010).

The plaintiff alleges that the defendant borrower is liable for the rents it would have received under the hotel lease if it had not been terminated.   The plaintiff relies on the language of the note cited above that the borrower is liable “for rents ․ of all or any portion of the Security Property ․ paid to or held by or on behalf of Maker relating to the Security Property received or applicable to a period during the continuance of an Event of Default ․ which are not either applied to the ordinary and necessary expenses of owning and operating the Security Property or paid to Payee.”   A clear reading of this language does not support the plaintiff's claim.   Although the court agrees that the lease is within the definition of “Security Property” set forth in the note, the court does not agree, based on the evidence presented, that this language provides that the borrower will be liable for all the rents due over the remaining 73–year term of the lease.   It is undisputed that the lease termination was effective to terminate the tenant's obligation to pay rent under the lease.   Because of the lease termination, there were no rents “received” or “applicable” to the period of time since the time of default whether calculated from the date of termination of the lease or the date of default in mortgage payments.   At the time the lease was terminated, no payments were due pursuant to the lease, and, at the time of the default in mortgage payments, there was no lease pursuant to which rents were due.   Therefore this provision does not impose recourse liability on the borrower.

The plaintiff also claims recourse liability against the borrower based on the provisions of the note which provide for recourse liability “for waste committed on the Security Property by, or damage to the Security Property as a result of the intentional misconduct or gross negligence of, Maker ․ or any removal of the Security Property in violation of the terms of the Loan Documents ․ to the full extent of the losses or damages incurred by Payee on account of such occurrence.”   The plaintiff claims that the termination of the hotel lease by agreement between the borrower and its affiliate constituted damage to or removal of Security Property.   The plaintiff claims that by terminating the hotel lease the lease was rendered worthless.   Damage to the security property, as does the concept of waste, implies a diminution in the value of the security.³  Here the evidence established that the hotel lease was a proposition that was losing millions of dollars and the borrower was unsuccessful in trying to find another operator for the hotel.   Thus the hotel lease had no real value and its loss did not diminish the value of the secured property, contrary to the plaintiff's claim.   Even if there was a diminution in the value of the secured property, the measure of damages would not be based in any way on the amount due under the lease as if it was fully performed for its original term or the liquidated damage provisions of the lease, but on the amount of the diminution in value of the security.⁴  The note itself limits the borrower's liability to the “full extent of the losses or damages incurred by Payee on account of” the removal of the Security Property.   No evidence was submitted as to any diminution in the value of the Security Property because of the termination of the lease.

The defendants cite the decision in J.E. Robert Company v. Signature Properties, LLC, Superior Court Judicial District of Hartford, Complex Litigation Docket at Hartford Docket No. HHD CV X04 07 5026084 S (Shapiro, J., Feb. 3, 2010), as dispositive.   There the court found that the note was non-recourse as to the defendant, limiting the lender's remedy in the event of default to the security interests granted by the defendant, with certain exceptions.   The note stated that the non-recourse provision would be null and void and completely inapplicable, and there would be full recourse on the note against the defendant, if it transferred any of the property mortgaged without the consent of the lender.   The defendant subsequently terminated, without the consent of the lender, a parking lot license agreement which was part of the property mortgaged as defined in the mortgage.   Thus the court in J.E. Robert Company held that the termination of the parking lot agreement constituted a transfer of a part of the property mortgaged without the lender's consent, and therefore negated the non-recourse provisions of the mortgage note.

The parties agree that the termination of the hotel lease here without the consent of the lender was a default under the mortgage.   The mortgage provides that the lease could not be terminated by the mortgagor without the consent of the mortgagee.   The defendants argue that if the parties intended that a termination of the hotel lease would negate the non-recourse provisions of the note, the parties could have clearly provided for such, as did the parties in J.E. Robert Company, but they did not.   The court agrees.   As noted above the language of the note does not provide that the termination of the hotel lease negates the non-recourse provisions here, unlike the specific language in the note in J.E. Robert Company.   In addition, the mortgage provides that consent to modification of the lease by the mortgagee “shall not be unreasonably withheld, delayed or conditioned” (Exhibit 3, p. 28) which indicates that the parties did not contemplate that the lease could, in no event, be terminated.

As the defendants claim, the plaintiff is attempting to make the non-recourse note here a full recourse note, which the court agrees is not supported by the loan documents.

Therefore judgment shall enter for the defendant, Northland Goodwin, LLC, on the Second Count of the Complaint.

Third Count—Enforcement of the Guaranty

The plaintiff claims that the guarantor, Northland Fund, is liable on its guaranty because it uses the same recourse language as the note.   Northland Fund disagrees.

The guaranty provides for liability on the part of Northland Fund as a result of “Indemnified Matters.”  (Exhibit 4, p. 1.) The plaintiff references two such matters:  “(c) Rents, issues, profits, revenues of the Property and tenant security deposits relating to the Property received or applicable to a period during the occurrence of an Event of Default, which are not applied to the ordinary and necessary expenses of owning and operating the Property or paid to Lender ․ (f) waste committed on the Property by, or damage to the Property as a result of the intentional misconduct or gross negligence of, Borrower or any of its principals, officers (if applicable), general partners (if applicable) or members or any agent or employee of such persons, or any removal of the Property in violation of the terms of the Loan Documents, to the full extent of the losses or damages incurred by Lender on account of such occurrence.”   (Exhibit 4, pp. 1–2.)

As to the guarantor's liability under subsection (c), “the phrase ‘rents, issues and profits' has a well understood meaning and refers to rents collected by the party in possession, and/or the profits accruing to him from said property, and not to the rental value or the value of use and occupation.”   (Citations omitted.)   Bre, Inc. v. Superior Block & Supply, Co., Superior Court, Judicial District of Waterbury Complex Litigation Docket, Docket No. X01 CV950147185 (Hodgson, J., Nov. 30, 1998).   The plaintiff has not demonstrated that rents relating to the property were received or applicable to a period after the date of default, January 1, 2010, which were not applied to the ordinary and necessary expenses of owning and operating the property or paid to lender.   No such rents were received in light of the lease termination nor were any applicable to that time period.   Contrary to the plaintiff's claims, the guarantor did not guarantee the performance of the lease for the full 80 years of its term by the language of subsection (c), but clearly only guaranteed that any rents paid to the borrower pursuant to the lease during a time in which the borrower was in default under the mortgage would be used to pay for the expenses of the property or to the lender.

As to the guarantor's liability under subsection (f), Northland Fund notes that the language of the guaranty references the “Property” whereas the note references the “Security Property,” which included the lease.   The guarantee defines the “Property” as the “real property in the County of Hartford, State of Connecticut, as more particularly described in Exhibit A hereto, and the improvements now or hereafter located thereon (collectively, the ‘Property’ ).”  (Exhibit 4, p. 1.) Therefore the court agrees that the “property” referenced in the guaranty is the real property only and does not include the lease.  “The interpretation of a contract must be made in accordance with the terms employed in the instrument and a court cannot by that means disregard the words used by the parties or revise, add to, or create a new agreement.”  Collins v. Sears, Roebuck Co., 164 Conn. 369, 374 (1973).   No evidence was presented that there had been any waste or damage related to the real property.

Therefore judgment shall enter for the defendant, Northland Fund II, L.P., on the Third Count of the Complaint.

Conclusion

As to the First Count of the Complaint, judgment of strict foreclosure shall enter in favor of the plaintiff and law days are set for July 23, 2012 for Northland Goodwin, LLC and July 24, 2012 for Northland Fund II, L.P. As to the Second Count of the Complaint, judgment shall enter for the defendant, Northland Goodwin, LLC. As to the Third Count of the Complaint judgment shall enter for the defendant, Northland Fund II, L.P.

Jane S. Scholl, J.

FOOTNOTES

FN1. That statute provides:  “If the term of office of any judge of the Superior Court expires during the pendency of any proceeding before him, or if any judge of the Superior Court is retired because of a disability, dies or resigns during the pendency of any proceeding before him, any other judge of that court, upon application, shall have power to proceed therewith as if the subject matter had been originally brought before him.”.  FN1. That statute provides:  “If the term of office of any judge of the Superior Court expires during the pendency of any proceeding before him, or if any judge of the Superior Court is retired because of a disability, dies or resigns during the pendency of any proceeding before him, any other judge of that court, upon application, shall have power to proceed therewith as if the subject matter had been originally brought before him.”

FN2. Part of the evidence before Judge Satter was a copy of the transcript of the deposition testimony of Steven P. Rosenthal.   The defendants had certain objections to the admissibility of certain parts of that transcript.   The plaintiff agreed to several of the objections but it was left to the court to determine the objections to page 51 line 11 through page 52 line 14 and page 55 line 2 through page 58 line 15.   After review, the court sustains the defendants' objection to these portions of the transcript as they are irrelevant to the issues before the court..  FN2. Part of the evidence before Judge Satter was a copy of the transcript of the deposition testimony of Steven P. Rosenthal.   The defendants had certain objections to the admissibility of certain parts of that transcript.   The plaintiff agreed to several of the objections but it was left to the court to determine the objections to page 51 line 11 through page 52 line 14 and page 55 line 2 through page 58 line 15.   After review, the court sustains the defendants' objection to these portions of the transcript as they are irrelevant to the issues before the court.

FN3. The Restatement 3d, Property:  Mortgages § 4.6 provides that;  “(a) Waste occurs when, without the mortgagee's consent, the mortgagor:  (1) physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value;  (2) fails to maintain and repair the real estate in a reasonable manner, except for repair of casualty damage or acts of third parties not the fault of the mortgagor;  (3) fails to pay before delinquency property taxes or governmental assessments secured by a lien having priority over the mortgage;  (4) materially fails to comply with covenants in the mortgage respecting the physical care, maintenance, construction, demolition, or insurance against casualty of the real estate or improvements on it;  or (5) retains possession of rents to which the mortgagee has the right of possession under § 4.2.(b) The following remedies for waste by the mortgagor are available to the mortgagee as necessary to give complete redress:  (1) foreclosure or the exercise of other remedies available under the mortgage for default on the secured obligation, if the waste has impaired the mortgagee's security;  (2) an injunction prohibiting future waste or requiring correction of waste already committed, but only to the extent that the waste has impaired or threatens to impair the mortgagee's security;  and (3) recovery of damages, limited by the amount of the waste, to the extent that the waste has impaired the mortgagee's security. (c) If the mortgage relationship has ended at the time the mortgagee claims waste, an impairment of security exists if the value of the real estate is less than the sum of the mortgage obligation and the obligations secured by any liens senior to the mortgage.   If the mortgage relationship continues to exist at the time the mortgagee claims waste, an impairment of security exists if the ratio of the mortgage obligation to the real estate's value is above its scheduled level.   In such cases, the mortgagee may restore the ratio of the mortgage obligation to the real estate's value to its scheduled level by obtaining an order compelling correction of the waste or by recovery of damages, limited by the amount of the waste. (d) Waste occurs when a person other than the mortgagor physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value.   Such a person may be held liable for damages and may be subjected to an injunction prohibiting future waste or requiring correction of waste already committed.   If the waste was committed with the mortgagor's consent, liability exists only if the person committing it had actual knowledge of the existence of the mortgage.”.  FN3. The Restatement 3d, Property:  Mortgages § 4.6 provides that;  “(a) Waste occurs when, without the mortgagee's consent, the mortgagor:  (1) physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value;  (2) fails to maintain and repair the real estate in a reasonable manner, except for repair of casualty damage or acts of third parties not the fault of the mortgagor;  (3) fails to pay before delinquency property taxes or governmental assessments secured by a lien having priority over the mortgage;  (4) materially fails to comply with covenants in the mortgage respecting the physical care, maintenance, construction, demolition, or insurance against casualty of the real estate or improvements on it;  or (5) retains possession of rents to which the mortgagee has the right of possession under § 4.2.(b) The following remedies for waste by the mortgagor are available to the mortgagee as necessary to give complete redress:  (1) foreclosure or the exercise of other remedies available under the mortgage for default on the secured obligation, if the waste has impaired the mortgagee's security;  (2) an injunction prohibiting future waste or requiring correction of waste already committed, but only to the extent that the waste has impaired or threatens to impair the mortgagee's security;  and (3) recovery of damages, limited by the amount of the waste, to the extent that the waste has impaired the mortgagee's security. (c) If the mortgage relationship has ended at the time the mortgagee claims waste, an impairment of security exists if the value of the real estate is less than the sum of the mortgage obligation and the obligations secured by any liens senior to the mortgage.   If the mortgage relationship continues to exist at the time the mortgagee claims waste, an impairment of security exists if the ratio of the mortgage obligation to the real estate's value is above its scheduled level.   In such cases, the mortgagee may restore the ratio of the mortgage obligation to the real estate's value to its scheduled level by obtaining an order compelling correction of the waste or by recovery of damages, limited by the amount of the waste. (d) Waste occurs when a person other than the mortgagor physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value.   Such a person may be held liable for damages and may be subjected to an injunction prohibiting future waste or requiring correction of waste already committed.   If the waste was committed with the mortgagor's consent, liability exists only if the person committing it had actual knowledge of the existence of the mortgage.”

FN4. The comments to The Restatement 3d, Property:  Mortgages § 4.6 notes that:  “The determination of damages resulting from acts of waste is governed by general principles of damages measurement and depends on the circumstances of the case.   The diminution of value of the real estate is usually the appropriate formula, but a court may also consider the cost of repairing the property or replacing items damaged, removed, or destroyed.   Any damages recovered by the mortgagee must be applied toward the balance owing on the secured obligation.   That balance comprises a ceiling on damage recovery, for the mortgagee can never recover more than is owed on the mortgage debt, including appropriate interest, attorneys fees, and other costs as provided in the mortgage itself and recognized by local law.   There is a further limitation:  the mortgagee may recover only so much of the damages as are necessary to correct the impairment of security, with the amount of the waste itself forming a ceiling on the recovery.   Under § 4.6(c), whether there has been an impairment of security depends on whether the mortgage relationship is continuing or has ended.   The reason for the different treatment of these two situations is that, if the mortgage relationship will extend into the future, the mortgagee is entitled to have continuing protection of its margin of security.   If the relationship has ended (typically because the mortgage has been foreclosed or the mortgagee has accepted a deed in lieu of foreclosure) the mortgagee has no more need for a margin of security.   The effect of a foreclosure and its associated proceedings is to fix the amount (if any) of the deficiency owed to the mortgagee, and this amount becomes a ceiling on the mortgagee's post-foreclosure recovery of waste.   On the other hand, if the mortgage relationship is continuing the mortgagee may recover damages if the waste has deprived the mortgagee of the margin of security for which it bargained when the mortgage was given.   Under § 4.6(c), this determination is based on a simple formula:  Security is impaired if the loan-to-value ratio has risen above its scheduled value, that is, the ratio that would have prevailed if the real estate's value had remained constant and all scheduled payments on the mortgage obligation had been timely made ․ This measure of impairment of security, like the others mentioned above, requires an appraisal of the property after the waste has occurred.   It also requires knowledge of value at the time the mortgage was created.   The latter requirement will rarely impose any additional burden, since virtually all institutional lenders routinely obtain appraisals when making mortgage loans and retain those appraisal reports in their loan files.”.  FN4. The comments to The Restatement 3d, Property:  Mortgages § 4.6 notes that:  “The determination of damages resulting from acts of waste is governed by general principles of damages measurement and depends on the circumstances of the case.   The diminution of value of the real estate is usually the appropriate formula, but a court may also consider the cost of repairing the property or replacing items damaged, removed, or destroyed.   Any damages recovered by the mortgagee must be applied toward the balance owing on the secured obligation.   That balance comprises a ceiling on damage recovery, for the mortgagee can never recover more than is owed on the mortgage debt, including appropriate interest, attorneys fees, and other costs as provided in the mortgage itself and recognized by local law.   There is a further limitation:  the mortgagee may recover only so much of the damages as are necessary to correct the impairment of security, with the amount of the waste itself forming a ceiling on the recovery.   Under § 4.6(c), whether there has been an impairment of security depends on whether the mortgage relationship is continuing or has ended.   The reason for the different treatment of these two situations is that, if the mortgage relationship will extend into the future, the mortgagee is entitled to have continuing protection of its margin of security.   If the relationship has ended (typically because the mortgage has been foreclosed or the mortgagee has accepted a deed in lieu of foreclosure) the mortgagee has no more need for a margin of security.   The effect of a foreclosure and its associated proceedings is to fix the amount (if any) of the deficiency owed to the mortgagee, and this amount becomes a ceiling on the mortgagee's post-foreclosure recovery of waste.   On the other hand, if the mortgage relationship is continuing the mortgagee may recover damages if the waste has deprived the mortgagee of the margin of security for which it bargained when the mortgage was given.   Under § 4.6(c), this determination is based on a simple formula:  Security is impaired if the loan-to-value ratio has risen above its scheduled value, that is, the ratio that would have prevailed if the real estate's value had remained constant and all scheduled payments on the mortgage obligation had been timely made ․ This measure of impairment of security, like the others mentioned above, requires an appraisal of the property after the waste has occurred.   It also requires knowledge of value at the time the mortgage was created.   The latter requirement will rarely impose any additional burden, since virtually all institutional lenders routinely obtain appraisals when making mortgage loans and retain those appraisal reports in their loan files.”

Scholl, Jane S., J.