The commercial real estate market seems headed for trouble, the next potential victim of the speculative frenzy that has already devastated the residential housing market. That prospect apparently hasn't scared investors. Shares of real estate investment trusts (REITs, which buy and manage buildings and mortgages) have been on a tear for the past seven months, almost doubling in value on average. REITs now trade at a double-digit premium to the value of their underlying properties.
The story ends with this quote: "The vultures are circling, waiting for commercial real estate corpses."
Secured lenders involved in litigation in Indiana may know that loan enforcement lawsuits they file never get set for a jury trial. The recent decision in Pringle v. Garcia, 2009 U.S. Dist. LEXIS 47112 (N.D. Ind. 2009) (.pdf) helps explain why.
Jury trial vs. bench trial. A “jury trial” is a “trial of matter or cause before a jury as opposed to trial before judge.” Black’s Law Dictionary. In Indiana, juries consist of six residents of a particular county who are at least 18 years of age. The right to a trial by jury is protected by the Bill of Rights and Indiana’s state constitution. According to Black’s, a “trial by jury” is “a trial in which the issues of fact are to be determined by the verdict of the jury . . ..”
On the other hand, a “court trial” a/k/a “bench trial” is simply a “trial held before [a] judge sitting without a jury; jury waived trial.” In other words, the trial court judge makes determinations of both law and fact and decides the case on his or her own. From a secured lender’s perspective, the conventional wisdom is that cases involving bench/court trials will conclude more quickly and will be resolved more inexpensively than jury trials.
Motion to strike jury demand. In Pringle, the plaintiff filed a complaint against the defendants seeking money damages (under certain loan documents), replevin, the foreclosure of a security interest and the appointment of a receiver. One of the loan documents was a Guaranty and Collateral Agreement, which included a specific provision entitled “Waiver of Jury Trial” that detailed the parties’ expressed waiver of any right to a trial by jury in legal proceedings to enforce the agreement. The defendants filed an answer to the complaint in which they requested a jury trial. The plaintiffs responded by filing a motion to strike the jury demand, claiming that the defendants waived their right to a jury trial under the Guaranty and Collateral Agreement.
Waiver. Here is what Judge Cherry said about the applicable law:
The Seventh Amendment provides a right to jury trial in any civil suit in which the amount in controversy exceeds twenty dollars. U.S. CONST., Amend. VII. However, a party may contract to waive its right to a jury trial without having to show extra negotiation or evidence of voluntariness beyond what is required to make the rest of the contract legally effective . . .. Indiana courts have, however, upheld numerous contractual provisions that, in one way or another, limit the legal avenues available to a party when such provisions are freely negotiated and not unjust or unreasonable. . . .
The Judge found that there was no indication the defendants were unsophisticated parties or that they did not have the opportunity to read the Guaranty and Collateral Agreement. The jury trial waiver provision was written such that it drew more attention to it than the rest of the contract. Moreover, the provision was mutual as to all parties, and the overall agreement itself appeared to be enforceable. As such, the Court held that the waiver of jury trial clause was valid and enforceable since “the agreement to resolve a dispute in a bench trial is no less valid than the rest of the contract in which the agreement appears . . ..” The point here is that, under Indiana law, the constitutional right to a jury trial can be waived in civil cases by a written agreement.
Equitable vs. legal remedy. Without getting too bogged down in legalese, the Pringle case also explains that certain cases by their very nature will not result in a jury trial. “The right to a jury trial embraces all suits in which legal rights are adjudicated, as opposed to actions where equitable rights alone are at issue and equitable remedies are sought.” If an equitable remedy is at issue, there can be no jury trial, regardless of whether it has been waived by agreement. One example of an equitable remedy would be the foreclosure of a real estate mortgage. In Pringle, Count III of plaintiff’s complaint requested the appointment of a receiver, which is “a remedy that is equitable in nature, and defendants have no right to a jury trial on [such] claim.” One example of a legal remedy would be the money damages sought in an action for breach of a promissory note.
Replevin carved out.Pringle had one interesting result. Count II of the plaintiff’s complaint was for replevin and dealt with the foreclosure of a chattel (non-real estate) mortgage. Click here to learn more about replevin in Indiana. The Court noted that, under Indiana law, an action for replevin was an action at law as opposed to an action in equity. Thus the right to a jury trial applied, and the Court declined to strike the jury demand as to that count. I’m frankly not sure why the waiver clause in the Guaranty and Collateral Agreement did not apply to the replevin count, but my assumption is that the Judge concluded the clause did not clearly and unambiguously apply to the replevin aspect of the case.
If lenders want a jury trial waived as to the entirety of their loan enforcement action, the loan documents should spell out very clearly that the borrowers and guarantors are waiving their right to a jury trial as to any and all loan enforcement-related legal proceedings. Such written contract provisions generally are enforceable in Indiana.
One of the common themes on this blog has been the importance of obtaining title work in connection with an Indiana commercial mortgage foreclosure case. If you’re wondering why your foreclosure counsel recommends that you incur the expense of a title commitment and later premiums for a title insurance policy, keep reading.
Procedural context. Before the filing of the foreclosure complaint, certain steps should be undertaken to analyze the loan collateral, in this case the real estate. One such step is to determine priority in title. We strongly recommend that lenders order a foreclosure (title insurance policy) commitment. (Tip: If the lender has a prior title insurance policy related to the property, such as a lender’s policy, then you can save some expense simply by placing the order from the same company. Or, a separate title insurance company may provide a cheaper commitment faster based upon a prior policy.)
ID parties/priority. The commitment should be reviewed for purposes of determining all parties with an interest in the real estate and their relative priorities. I.C. § 32-29-9-1 articulates the necessary parties to be named in the suit. The provision essentially requires that the plaintiff name such necessary parties to the suit in the same manner in which the person or entity’s lien or claim appears on the public records of the county where the suit is brought. Service of summons upon such necessary parties is sufficient to make the court’s judgment binding as to those parties. In order for there to be clear title secured at the sheriff’s sale, all parties with a recorded interest in the real estate need to be named in the lawsuit to answer as to their interests. (Tip: Also review the commitment to ensure that the legal description of the collateral in the commitment matches the legal description in the mortgage.) An early priority determination will guide decisions as to settlement or workout negotiations, or whether to proceed with the foreclosure action in the first place.
Update title work. Normally, there will be a time gap between the date of the foreclosure commitment and the date of the filing of the complaint. Conceivably, interests in the subject real estate could arise in this gap period. For example, a mechanic’s lien could be filed, or the borrower could obtain a loan secured by a junior mortgage on the property. It is thus critical to update or “date down” the title insurance policy commitment after the complaint is filed. For more on this issue, see my December 21, 2006 post and House v. First American Title Company, 858 N.E.2d 640 (Ind. Ct. App. 2006), which held that a foreclosure action’s filing date is the “only relevant date used to determine the proper parties to a mortgage foreclosure.”
Amend complaint. Again, clear title cannot be obtained upon a sheriff’s sale unless all lien holders are named as defendants in the suit so that their interests can be foreclosed. Should the updated title work disclose new lien holders, then such parties need to be added to the case by filing an amended complaint. If no new interests are uncovered, then lenders can be comfortable proceeding with the original defendants named in the suit.
No bona fide purchaser. Third-parties who secure an interest in the mortgaged property after the filing of the foreclosure complaint do not need to be named as defendants in the action. Lenders need not continuously search title during the course of litigation and worry about adding new parties to their foreclosure complaint. “The only relevant date” is the foreclosure action’s commencement date – the day the lender filed the complaint. Here’s what I wrote on December 21, 2006, which is particularly relevant in the wake of my October 4, September 25 and May 28, 2009 posts that touch upon Indiana’s bona fide purchaser doctrine:
Any party obtaining an interest in the property after the filing of the action will not be considered a bona fide purchaser without notice and thus will be bound by the foreclosure as if named as a party defendant to the foreclosure action. (Such parties, upon learning of the suit, should intervene in the action to assert their rights to the property.)
Finish the job. Arguably, the secured lender’s ultimate goal in its mortgage foreclosure action is to acquire title to (repossess) the real estate collateral free and clear of all liens. This is why the commitment is important, as is the date down. Lenders and their counsel should not forget the final step, however. Once the lender obtains the sheriff’s deed (title) to the property, lenders are advised to purchase a title insurance (owner’s) policy. Certainly the premium can be expensive, but in most commercial foreclosure cases the benefits of being insured (as free and clear title holder) far outweigh the costs. For more insight into the wisdom of ordering an owner’s policy, please see my July 20, 2009 post.
The Indiana Court of Appeals, in Weathersby v. JPMorgan Chase Bank, 2009 Ind. App. LEXIS 836 (Ind. Ct. App. 2009) (.pdf) , reminds us that actual knowledge of a prior interest in real estate is just as important as constructive knowledge in disputes over title.
Chronology of events. On July 24, 1998, the Blair Family Trust (“BFT”) deeded the subject property to Financial Help and Consulting Services (“FHCS”). That deed was not recorded until November 17, 1998, however. In the interim, BFT deeded the same property to the 5285 Adams Trust (“5285”), and the BFT/5285 deed was recorded on October 13, 1998, about a month before the recordation of the BFT/FHCS deed. The point is that, in late 1998, both FHCS and 5285 held a deed to the same property. By 2000, the 5285 chain of title led to Lewis, who granted a mortgage on the property to Chase. By 2005, the FHCS chain of title led to Weathersby, who granted a mortgage on the property to MERS. The Weathersby opinion is about which alleged owner and mortgagee should prevail.
The chain of title split. The Weathersby suit involved an analysis of the bona fide purchaser doctrine. In Indiana, in order to qualify as a “bona fide purchaser” one must  purchase in good faith,  for valuable consideration and  without notice of the outstanding rights of others.” Indiana law recognizes both “constructive” and “actual” notice. I previously addressed constructive notice on May 28 and June 4, 2009. Weathersby focused on actual notice and examined the effect of BFT’s 1998 conveyances of the property to both 5285 and FHCS. Chase’s contention was that the July 24, 1998 deed to FHCS did not provide notice to 5285 because BFT did not record the deed until November 17, 1998, a month after the BFT/5285 deed was recorded. The Court of Appeals agreed that, under I.C. § 32-21-4-1, 5285 did not have constructive notice of the deed to FHCS, but the compelling question was whether 5285 had actual notice of the deed.
Test for actual notice. Indiana law provides that, “notice is actual when notice has been directly and personally given to the person to be notified.” Actual notice may be implied or inferred:
[f]rom the fact that the person charged had means of obtaining knowledge which he did not use. Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means of knowledge are at hand and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage. Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself. Whether knowledge of an adverse interest will be imputed in any given case is a question of fact to be determined objectively from the totality of the circumstances.
Need for trial. The Court in Weathersby reversed the summary judgment granted to Chase and remanded the case for trial because there were factual issues surrounding the role of attorney Michael Delfine. Mr. Delfine’s fingerprints are all over the key transactions. Because the evidence at the summary judgment stage was not entirely clear, the Court of Appeals remanded the case for trial. Here’s how the Court articulated the unresolved issues:
This evidence demonstrates that Delfine was aware that the Property had been transferred to both FHCS and  in 1998. In June 1999, Delfine was identified as the trustee of . However, the designated evidence does not demonstrate whether Delfine was also the trustee of  in October 1998 or whether Delfine’s knowledge would be [legally] imputed to . As a result, we conclude that genuine issues of material fact exist regarding whether  had actual knowledge in October 1998 of the prior transfer from [BFT] to FHCS and, thus, whether  was a bona fide purchaser of the Property.
If 5285 was not a bona fide purchaser, then the chain of title leading to Lewis and Chase must fail, in which case Weathersby/MERS would prevail.
Weathersby demonstrates that, in the absence of constructive notice of a deed or mortgage, actual notice can be outcome determinative in title disputes. Admittedly, litigation surrounding chain of title in commercial foreclosure cases is rare. Cases like Weathersby mainly arise out of residential transactions. Further, Weathersby appears to be unique in terms of the role of Mr. Delfine, and the Court noted that he resigned from the Indiana bar in 2002. In the end, like many of these cases, the over-arching message for lenders is that it’s very important to have a closing that is covered by title insurance.