Indiana Commercial Foreclosure Law

Criminal Bank Fraud As A Collection Tool?

Secured lenders caught up in loan defaults typically pursue the contract-based remedies of damages and foreclosure designed to make lenders whole for their actual losses (unpaid principle balance, interest and attorney fees).  In Klinker v. First Merchants Bank, 964 N.E.2d 190 (Ind. 2012), a lender sought statutory-based treble damages for alleged criminal acts of fraud by a guarantor.  It was an aggressive strategy, but was it worth it?

Default.  Klinker involved a used car dealership that borrowed money from a lender to purchase cars under a floor-plan agreement.  The terms of the loan, which the dealership’s principle guaranteed, required the borrower to pay money to the lender whenever it sold a car.  Also, the borrower could not transfer title without the lender’s consent.  When the lender audited the dealership, it learned that thirty-one cars for which the lender had loaned money were gone.  The borrower had failed to turn over any sale proceeds for the thirty-one cars.   

CVCA.  What was unique about Klinker was the lender’s claims under Ind. Code § 34-24-3-1, known as the Indiana Crime Victims’ Compensation Act (“CVCA”).  The CVCA permits one who suffers a pecuniary (monetary) loss as a result of certain property crimes to bring a civil action against the person who caused such loss.  The victim can recover up to three times its actual damages.  Although a criminal conviction is not required, the plaintiff must prove each element of the underlying crime, including criminal intent. 

Claim 1.  The lender’s CVCA action asserted two fraud claims based on I.C. §§ 35-43-5-4 and 8, which are criminal statutes.  Under the first, the lender could obtain summary judgment only if undisputed facts showed (1) the guarantor (2) concealed, encumbered or transferred property (3) with the specific intent to defraud the lender.  The guarantor transferred financed vehicles without the lender’s knowledge and thus concealed them from his creditor.  This constituted a breach of contract, but did “not lead inescapably to a finding of criminal fraud.”  This is because the lender also must demonstrate undisputed facts showing that the guarantor acted with the requisite “mens rea – the specific intent to defraud.”  There must have been undisputed facts to establish that, when the guarantor made the challenged transfers, “his conscience objective was to cause injury or loss” to the lender by deceit.

Mens rea.  When judgment creditors bring proceedings supplemental to set aside fraudulent conveyances, fraudulent intent may be inferred from the “8 badges of fraud,” about which I have written previously.  In Klinker, the lender designated evidence that established three badges of fraud, but summary judgment was inappropriate due to the absence of the mens rea element:

summary judgment is almost never appropriate where the claim requires a showing that the defendant acted with criminal intent or fraudulent intent.  . . .  This is particularly so for CVCA claims.  The CVCA provides a punitive remedy if the claimant can prove that the defendant violated a penal statute, and, as a punitive measure, it should be strictly construed and applied only where the challenged conduct is clearly proscribed.  Moreover, because CVCA claims combine criminal and civil law, they implicate the state constitutional policy favoring jury intervention in both criminal trials and civil trials.

The Court concluded that “drawing all reasonable inferences in favor of the non-moving party, it is possible that the trier of fact could find a simple breach of contract here instead of criminal fraud, regardless of how strong the badges of fraud may be.”

Claim 2.  As to the second claim, to be entitled to summary judgment the lender must show undisputed facts establishing that (1) the guarantor (2) knowingly (3) executed or attempted to execute (4) a scheme or artifice (5) to obtain the lender’s money or other property (6) by means of false or fraudulent pretenses, representations, or promises, and (7) that the lender is a state or federally chartered or federally insured financial institution.  In Indiana, “a person engages in conduct ‘knowingly’ if, when he engages in the conduct, he is aware of a high probability that he is doing so.”  I.C. § 35-41-2-2(b).  “The fraudulent-conveyance badges of fraud (circumstantial evidence) are not relevant in this context – other circumstantial evidence must be presented.”  In addition to the “knowingly” problem, the lender in Klinkler had a fatal timing issue with this particular claim.  The alleged misrepresentations occurred after the guarantor had obtained the loans.  The fraudulent activity must have been done at the time of execution.

No summary judgment.  The Indiana Supreme Court reversed the trial court’s summary judgment for the lender.  The result reveals at least one drawback of the lender’s aggressive loan enforcement approach - CVCA cases virtually guarantee a trial.  This means that the case will be lengthier and more expensive.  As illustrated by Klinker, although CVCA claims are available to lenders in Indiana, the pursuit of such claims almost certainly will slow down the collection process.

Indiana’s New Strict Foreclosure Statute: Dangling Issues

This post should be read in conjunction with my April 12th post:  Indiana Legislation, 2012:  Part III of III – Sheriff’s Sale Buyers And Omitted Junior Lienholders Impacted By Creation Of Strict Foreclosure Statute.  The good news is that the legislation resolved many important foreclosure and title-related issues that bubbled up over the last few years.  Like most legislation, however, Senate Bill 298, which amends Ind. Code § 32-29-8 by adding a new section 4, contains a handful of holes:

1. Interested persons.  Section 4’s “interested person” (the “Buyer” in my April 12th post) does not appear to include a plaintiff mechanic’s lien holder.  This suggests that the strict foreclosure remedy may not be available in the wake of a sheriff’s sale resulting from a mechanic’s lien action.  Does the Section 4 action apply only to mortgage foreclosure sales?  
 
2. Omitted parties.  Section 4’s definition of “omitted party” (the “Junior Lienor” in my prior post) appears to exclude senior mortgagees.  Thus the strict foreclosure remedy may not relate to situations in which a plaintiff junior mortgagee sues to foreclose, leading to a sheriff’s sale subject to a senior lien not included in the suit.  See my 05-07-08 post regarding sheriff’s sales subject to senior mortgage liens.  Does Section 4 impact the Indi Investments holding?

3. Forever?  The strict foreclosure action can be filed “at any time” after the entry of a foreclosure judgment.  Does this mean until the end of time, without any restrictions?  

4. No merger, ever?  Similarly, Section 4’s anti-merger language provides that “until an omitted party’s interest is terminated . . . any owner of the property as holder of a sheriff’s deed [Buyer] . . . or any person claiming by, through or under such owner is an equitable owner of the senior lien upon which the foreclosure action was based and has all rights against an omitted party as existed before the judicial sale.”  The terminology “claiming by, through or under such owner” suggests that the equitable, senior lien endlessly runs with the land or, in other words, inures to the benefit of all subsequent owners holding a link in the chain of title starting with the sheriff’s deed.  Is that the intent, with no limitations? 

5. Right of payment, generally.  The “omitted party” (Junior Lienor) is entitled to payment for any sheriff’s sale proceeds on which it lost out.  But the statue does not identify who must pay.  My 01-13-11 post notes that any post-sale surplus (a rarity) is paid to the clerk and, in turn, to the mortgagor/owner.  Is that who pays?  Good luck collecting from that party.  Does the “interested person” (Buyer) bear the loss?  Will a title policy cover the loss?

6. Right of payment, parity.  Mechanic’s lien holders can be Junior Lienors (“omitted parties”) under Section 4.  As noted in my 07-03-07 post, in certain circumstances a mechanic’s lien holder and a mortgagee will have equal priority.  Section 4 contemplates problems related to senior and junior liens but does not appear to explicitly deal with parity scenarios.  Unlike a surplus, sales where parity should have applied are more common and thus could be fertile ground for the losses identified in the statute.  Is a clearer identification in the statute of who should pay warranted? 

Finally, I’m also left to wonder how strategies of foreclosing lenders and prospective sheriff’s sale buyers, as well as title insurance coverage, might be shaped by the new protections offered by the statute.  For example, speed is always a compelling issue for plaintiff lenders.  In cases involving multiple liens and thus multiple defendants, Indiana’s judicial foreclosure process can get bogged down, to the chagrin of secured lenders seeking prompt payment or possession.  A plaintiff mortgagee theoretically could bypass such delays and foreclose only against the owner/mortgagor so as to more quickly reduce the debt to a money judgment and repossess the property.  To clear up title, a subsequent post-sale strict foreclosure action could then be instituted.  These and other new approaches could arise out of Section 4. 

"Temporary Admissions May Create Problems"

The latest issue of The Indiana Lawyer touches upon a topic about which I've written in past:  Pro Hac Vice Admission in Indiana and the Role of Local Counsel.  The paper's piece is well done and contains quotes from G. Michael Witte, executive secretary for the Indiana Supreme Court Disciplinary Commission.  The story also deals with pro hac vice admission in our federal courts - an area I didn't discuss in my prior posts.  Here is a link to The Indiana Lawyer's article:   Temporary Admissions May Create Problems.      

The "Indiana Lawyer" Writes Story on 2012 Foreclosure Legislation

I recently worked with reporter Jenny Montgomery in connection with her piece in the April 27th edition of the Indiana Lawyer.   Here is a link to the story, which quotes me:  2 Cases Prompt New Real Estate Law.  Ms. Montgomery tackled complicated topics in a relatively short space, and in my view she helped make the "big picture" understandable.

As a reminder, for a more in-depth assessment of the statutory amendments and how they might affect secured lenders and other parties involved in the foreclosure of commercial mortgage loans, please click on one or more of my four recent posts on the issues:  Abandonment, Redemption, Strict Foreclosure, Citimortgage Transfer.      

Will Mysterious Post-Sale Redemption Statute Be Clarified ... And What About The Treatment Of MERS?

I've learned that, on April 10th, the Indiana Supreme Court granted transfer in the CitiMortgage v. Barabas case about which I've written on four prior occasions, most recently on March 29th:  Indiana Legislation, 2012:  Part 2 of 3 - Obscure Redemption Language Remains.  In Indiana, a decision to grant transfer automatically vacates opinions of the Court of Appeals or, in other words, negates the prior case law.  So, perhaps later this year we'll hear from Indiana's highest court on some important foreclosure-related topics, including post-sale redemption rights and the treatment of MERS.  Interestingly, the opinion will be rendered after the 2012 legislation that amended the operative statute, Ind. Code Section 32-29-8.  It's unclear to me whether or to what extent the Court will take into account or otherwise touch upon the amended statute.  I'll be on the lookout for the Court's decision and will post about it accordingly.    

Indiana Legislation, 2012: Part 3 Of 3 – Sheriff’s Sale Buyers And Omitted Junior Lien Holders Impacted By Creation Of Strict Foreclosure Statute

Senate Bill 298, which amends Ind. Code § 32-29-8, creates a new section: 4. The legislation responds to the Indiana Supreme Court’s opinion in Citizens State Bank of New Castle v. Countrywide Home Loans, Inc. and the Court of Appeals’ holding in Deutche Bank v. Mark Dill Plumbing. The amendments hit on technical subjects related to Indiana’s strict foreclosure remedy and doctrine of merger. The practical effect is a solution to problems associated with junior liens missed during the foreclosure process.

Citizens and Deutche revised. These are dense topics tough to cover in a single post. For background, please read my 10-07-11 and 07-20-09 posts on Citizens and Deutche, respectively. In Citizens, the Supreme Court applied the doctrine of merger and permitted the omitted junior lien holder to leap frog into a senior priority position. In Deutche, the Court of Appeals concluded there was no merger (leap frog) and discussed remedies for the post-sale title defect. With the new Section 4, it appears that the Citizens merger (and leap frog) would not have occurred. The result in Deutche also would have been different because courts now have a statutory road map for dealing with the aftermath of a foreclosure suit that improperly excluded a junior lien holder.

Section 4. The new statute appears to be effective immediately and can be found at this link: Section 4. Here are the highlights as I read them:

A. Applicable parties: Section 4 applies to two groups, defined as “interested persons” and “omitted parties.” An “interested person,” which I’ll label a “Buyer,” basically includes (1) plaintiff mortgagees, (2) purchasers at a sheriff’s sale or (3) assignees of (1) or (2). An “omitted party,” which I’ll call a “Junior Lienor,” essentially is a junior lien holder improperly omitted from foreclosure proceedings .

B. New cause of action: “At any time” after the entry of a foreclosure judgment, either the Buyer or the Junior Lienor can file an action, the purposes of which are (1) to determine the extent of a Junior Lienor’s lien and (2) to terminate such lien on the mortgaged property sold at a sheriff’s sale. Generally, the action – a lawsuit – is a statutory strict foreclosure case, though the statute does not use that terminology.

C. Junior Lienor’s right to payment: If a Junior Lienor had a right to receive any proceeds from the sheriff’s sale, its lien cannot be terminated until the Junior Lienor is paid for such losses. (The statute does not spell out who must pay. For now, I’ll simply note that sheriff’s sale surpluses are incredibly rare due to the absence of equity in most foreclosed-upon real estate.)

D. Junior Lienor’s right to purchase: There are three key factors a court must consider when determining a Junior Lienor’s right of redemption in the strict foreclosure action. (The “redemption” language used in Section 4 refers to a Junior Lienor’s right to pay off the Buyer and thus acquire title to the property.) Here are the factors: (1) whether the Junior Lienor had actual knowledge of the foreclosure proceedings and an opportunity to intervene, (2) the value of any post-sale improvements made by the Buyer to the property and (3) the amount of the post-sale taxes and interest paid by the Buyer. Factor (1) seems to provide a basis for the right of redemption to be terminated outright, and factors (2) and (3) help make the Buyer whole for any ownership-related carrying costs incurred.

E. Junior lien terminated: If the court concludes the Junior Lienor was entitled to redeem, then the amount the Junior Lienor must pay for redemption cannot be less than the sheriff’s sale price plus statutory interest (8%). (The court also must consider the factors in (D) when determining the amount the Junior Lienor must pay.) The Junior Lienor has ninety days to submit the payoff. If the Junior Lienor does not submit such payment, then the Junior Lienor’s rights will be terminated without compensation, just as they would have been in the foreclosure process.

F. Anti-merger statute: Section 4 specifically provides that there is no merger of the senior lien and title to the property until a Junior Lienor’s interest is terminated. This new legislation appears to resolve many uncertainties surrounding Indiana’s common law doctrine of merger. Thus the Buyer, which presumes that it’s acquiring title free and clear, has protections it did not previously have.

G. Other Buyer safeguards: Section 4 also states that the Buyer’s senior interest in the property cannot be denied even if the Buyer had (1) had actual or constructive notice of the Junior Lienor’s interest, (2) been negligent in examining county title records, (3) been engaged in the business of lending or (4) obtained a title insurance policy commitment. This language constitutes a preemptive strike against any defenses to the strict foreclosure action, and without these carve outs Section 4 would be meaningless.

I’m planning a follow-up post to identify some holes in SB 298. For today, it’s important for secured lenders and other lien holders to know that Indiana now has a statutory method to clear up title when a buyer learns that a junior lien survived a sheriff’s sale. While Section 4 is not perfect, I agree with my partner Tom Dinwiddie that this was a necessary and fair bill that protects both buyers and junior lien holders.