This follows up last week’s post regarding Weinreb v. Fannie Mae, 993 N.E.2d 223 (Ind. Ct. App. 2013). This week, I delve into what Weinreb tells us about naming guarantors in foreclosure suits and pursuing defenses that don’t work.
Procedural history. Weinreb involved the personal liability of a defendant guarantor for a deficiency judgment. In a prior lawsuit, the lender obtained a $7.8MM judgment on a promissory note and a decree of foreclosure on a mortgage, which proceedings resulted in a sheriff’s sale of the mortgaged property for $6.6MM and a deficiency of $1.8MM. The guarantor was not a party to those proceedings. Months later, the lender filed a complaint against the guarantor to collect the deficiency.
Res judicata/collateral estoppel. The guarantor disputed the deficiency. The lender responded by asserting that the guarantor could not contest the elements of, or his liability for, the deficiency because those matters had been determined in the prior foreclosure. Indeed the doctrine of res judicata “bars the litigation of a claim after final judgment has been rendered in a prior action involving the same claim between the same parties for their privies.” The guarantor’s retort was that, since he was not a party to the foreclosure proceedings, he was not precluded from challenging the elements of the deficiency judgment. The Court agreed: “[the guarantor] did not have a full and fair opportunity to litigate the enforceability of the Note or his Guaranty.” Weinreb highlights the question of whether to name guarantors as defendants in the initial foreclosure lawsuit. You don’t have to, but in doing so, you avoid litigating two lawsuits. (There are reasons why a lender may not want to name a guarantor in the foreclosure case. For example, the lender could reach a sheriff’s sale more quickly without resistance from a defendant guarantor.) The main point here is that the Court of Appeals, in the post-foreclosure action, gave the guarantor an opportunity to contest the enforceability of the loan documents and the amount of the deficiency. Although the opinion leaves room for argument depending upon the facts of a particular case, the foreclosure action in Weinreb did not set the deficiency in stone.
Alleged ambiguity. Despite winning the res judicata battle, the guarantor in Weinreb ultimately lost the deficiency war. His two arguments against the enforceability of the guaranty failed. The first was that summary judgment in favor of the lender was inappropriate because the loan documents were “extrinsically ambiguous.” The guarantor’s theory was similar to the “confusion defense” articulated in my 1/14/13 post. After addressing Indiana law related to alleged ambiguities in contracts, the Court concluded that “parties are obligated to know the terms of the agreement they are signing, and cannot avoid their obligations under the agreement due to a failure to read it.” The guarantor’s alleged failure to read did not equate to an ambiguity, and the Court affirmed the trial court’s summary judgment for the lender.
Unconscionability. The guarantor’s second contention was that summary judgment should not have been granted due to factual questions surrounding whether the lender “used superior bargaining power to cause hardship to him.” This triggered a discussion by the Court of the doctrine of unconscionability. The rule in Indiana is that “a contract will be deemed unconscionable [and thus unenforceable] when a great disparity in bargaining power exists which leads the weaker party to sign a contract unwillingly or without being aware of its terms.” This is always a steep hill to climb in Indiana, and Weinreb was no different. The evidence was undisputed that the guarantor was not in a position of weakness or unequal bargaining power. The Court held that the loan documents, including the guaranty, were not unconscionable.
The Court enforced the deficiency arising out of the prior foreclosure judgment. For more on the liability of, and defenses surrounding, guarantors, please click on the Guarantors category on the right side of my home page.