Indiana Commercial Foreclosure Law

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.      

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.

Indiana Legislation, 2012: Part 2 Of 3 – Obscure Redemption Language Remains

The second noteworthy issue arising out of the General Assembly’s 2012 session surrounds Senate Bill 298, which amends Indiana Code § 32-29-8 “Parties to Foreclosure Suit; Redemption,” including Section 3. This post revisits CitiMortgage v. Barabas, including the mystery that is I.C. § 32-29-8-3, about which I wrote last year: Post 1, Post 2 and Post 3. Unfortunately, even though the legislature amended Section 3, the 2012 session didn’t directly tackle Section 3’s obscure redemption provision. Questions arising out of CitiMorgage linger.

New Section 3. Here is Section 3 of I.C. § 32-29-8, as amended by the italicized language, effective July 1, 2012:

A person who:

(1) purchases a mortgaged premises or any part of a mortgaged premises under the court’s judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and

(2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
(A) an assignment that is not of record; or
(B) the transfer of a note, the holder of which is not a party to the action;

holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court’s decree in the action.

Redemption/strict foreclosure tweak. The underlined portion above is the source of some uncertainty and was not modified by the General Assembly this year. The critical purpose of the amendment to I.C. § 32-29-8 surrounds section 4 and what amounts to a brand new statutory strict foreclosure action. I.C. § 32-29-7-13 has been amended to state “there may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter and in IC 32-29-8.” The new “and in IC 32-29-8” language refers to Section 4, which is momentous legislation related to Indiana mortgage foreclosure law that I will discuss in my next post.

Status. One interpretation of Section 3 and CitiMortgage, which dealt with a rare set of facts, is that a buyer at a sheriff’s sale could acquire the property, only to learn within a year after the sale that a senior mortgagee, by virtue of a previously-unrecorded assignment, could surface and assert an interest in the property. I do not believe that the 2012 statutory amendments directly impact, or help clarify, the CitiMortgage holding. Even with the new Section 4, I.C. § 32-29-8, Section 3, needs a little more attention from the General Assembly. I’m afraid Section 3 unwittingly opens the door to litigation concerning post-sale rights of redemption in Indiana.  (Note:  On 4-10-12, the Supreme Court granted transfer in CitiMortgage.)

Borrowers unaffected. The General Assembly’s amendments do not (should not) affect a mortgagor’s (owner’s) right of redemption. Such parties still need to redeem before the sheriff’s sale. If not, Indiana law provides that a mortgagor’s right to or interest in the subject real estate will be fully and finally terminated – even though, interestingly, there is no specific statute stating as much. The rule is inferred from the totality of I.C. § 32-29-7 and confirmed by case law.

Indiana Legislation, 2012: Part 1 Of 3 – Abandonment Of Mortgaged Property

The Indiana General Assembly’s 2012 session addressed three noteworthy issues related to Indiana Commercial Foreclosure Law. Today’s post is about House Bill 1238 and its amendment to Indiana Code § 32-29-7-3.

Three-month waiting period. Indiana has a post-complaint, three-month waiting period before sheriff’s sales can be requested. My July 30, 2010 post noted the exception to the three-month rule, which exception did not at the time apply to commercial properties – only residential.

The new I.C. § 32-29-7-3(a)(2). The amended statute, which becomes effective July 1, 2012, revises the exception to the three-month rule to read: “If the Court finds under I.C. 32-30-10.6 that the mortgaged real estate has been abandoned, a judgment or decree of sale may be executed on the date the judgment of foreclosure or decree of sale is entered, regardless of the date the mortgage is executed.” The new statute deletes the “residential” qualification and thus applies to commercial foreclosures now too. Moreover, the statute incorporates a brand new statute – I.C. § 32-30-10.6 – that creates a test and a procedure to determine whether the real estate has been abandoned.

I.C. § 32-30-10.6. This brand new statute is entitled “Determination of Abandonment for Property Subject to a Mortgage Foreclosure Action” and is quite lengthy. If foreclosing lenders or their counsel believe the subject real estate may be abandoned, then this new statute should be studied and followed, assuming there is interest in rushing to a sheriff’s sale. My partner Tom Dinwiddie, who helped draft the legislation, pointed out to me that, in practice, a Section 10.6 motion should be filed with the Complaint or, at the latest, with the Motion for Default Judgment in order to take advantage of the exception to the three-month rule.

Commercial application. As noted by one of my 2006 posts, Indiana’s judicial foreclosure process takes time. In my experience, the three-month waiting period rarely comes into play in commercial actions. Nevertheless, in instances where the commercial property is abandoned, this new legislation establishes a process that, in theory, permits lenders to get the property to a sheriff’s sale faster.

 

FORBES Columnist Critical Of Indiana Tax Sale/Redemption Scheme

On October 19th, Forbes contributor Peter J. Reilly wrote a column about the potential hardships on Indiana property owners under the State's delinquent real estate tax redemption scheme.  He titled his piece How To Sell Your Home To A Stranger For A Fraction Of Its Value.  The September 28th Indiana Court of Appeals opinion in M Jewell, LLC v. Powell formed the basis of Mr. Reilly's column.  Here is his conclusion:   

I find that when I talk to a lot of people about different issues, many of them will reflexively indicate that either government or greedy business is the problem, depending on their ideological perspective.  Other times people will trumpet the virtues of public/private partnerships.  The collection of real estate taxes by auctioning off liens and tax deeds appears to have the potential of being a toxic mixture of the worst aspects of government and business. Clearly it helps local governments keep overhead down, which is a good thing, but at least in Indiana, it appears that there needs to be some greater protection for hapless homeowners.

Jewell is an interesting and educational case for mortgagees, mortgagors, tax sale purchasers and real estate lawyers.  For more background on the law and related issues regarding Indiana tax sales, and how they affect secured lenders, please review my two posts on the subject from last November. 

USA Today Addresses Short Sales

USA Today has a telling piece regarding short sales on line:  Short sales, long waits:  Buyers and sellers find process frustrating.  The article focuses on the residential side, but does provide some insight into the process as it might apply to commercial transactions.  The main difference I see is the role that mortgage insurance evidently plays in a consumer short sale. 

I'll be speaking briefly about short sales at an Indianapolis continuing legal education seminar on October 10, 2011.  Here's a link to the program.  I touched upon short sales, in the UCC context, on December 7, 2010.

Indiana Toll Road-Related Foreclosure?

A July 7th article from Bloomberg Businessweek concluded that the Indiana Toll Road, which had been "held up as an example of public-private partnerships, shows no signs of breaking even for its conglomerate."  LINK.  Given the political backrop, it's hard to imagine  that it would ever come to this - but the article suggests the possibility of a foreclosure  action involving the project:

The private investors haven’t made out so well. Had the road been profitable, they stood to make millions per year over the life of the 75-year project. As it is, they have not been able to get past the debt they incurred winning the bid. They have met their annual debt payments only by borrowing money and may default before loans mature in 2015, according to disclosure documents from Macquarie Atlas Roads, one of the investors. The project’s 2010 prospectus said that revenue from the highway is “expected to remain insufficient to cover debt service obligations over the medium term.” The document cautions that “any default under the loan documents may lead to lender actions which may include foreclosure of the project assets or bankruptcy.”

The "project assets" upon which the lenders would foreclose are not detailed in the article.  From what little I know about the deal, the lenders would not be able to repossess (own, via a sheriff's sale) the interstate itself because the State of Indiana maintains ownership of the roadway.  The investors' (borrowers') rights to the Toll Road arise out of a long-term lease arrangement. 

If and when additional details unfold about the project's problems and/or the lenders' remedies upon default, I'll post the information here.  It could be a very interesting and unique case, particularly from a secured lender's perspective, if the matter were ever litigated.   

 

 

 

Foreclosure News Sites

I was on vacation last week and have been catching up this week.  I hope that next week I'm able to post about the Indiana Supreme Court's recent opinion in Gibraltar Financial, which opinion reversed the Court of Appeals decision about which I discussed this past February. 

Meanwhile, I thought I'd provide links to two pretty good websites that regularly supply foreclosure news.  Most foreclosure news relates directly to residential issues, but both of these sites deal at times (and in places) with commercial matters:

Topix.com

Foreclosurewarehouse.com

The Topix site is what regularly feeds the news on the right side of my home page. 

IBJ.com's Cory Schouten writes real estate blog Property Lines, which is a cool little site that provides local news and insight into the Indianapolis real estate market, with an emphasis on commercial matters.  Shouten's blog also is permanently linked along the right side of my home page.

Thanks for reading, and please never hesitate to email me or post comments about Indiana commercial foreclosure issues.  I love this stuff. 

 

2011 Indiana Enactments

Following-up my April 26th post regarding pending Indiana legislation, here is a listing of banking/foreclosure-related laws that were enacted in the 2011 session of the General Assembly:

• SB582 - Settlement conferences in residential foreclosures:  Digest and Enrolled Act
• SB155 - Tax liens:  Digest and Enrolled Act
• SB59 - Credit agreements:  Digest and Enrolled Act
• HB1321 - Secured transactions:  Digest and Enrolled Act

HB1244 (Payment plan to remove property from tax sale) and HB1024 (Notice of foreclosure to property insurers) were not enacted.

IBJ.com's Tom Harton wrote a piece entitled "New laws affect commercial property owners" on May 17th, and here's a link to that article:  IBJ.com.

It does not appear that anything terribly significant occurred in this year's session.  If you feel differently, please post a comment or send me an email.

 

Assistant Commerce Chief Involved In Indiana-Related Commercial Foreclosure

Today's Indianapolis Star reports on a  $13.3MM commercial foreclosure action filed by PNC in which Assistant Commerce Secretary John R. Fernandez is a defendant.  Click here for the story.

Catching Up With Indiana Legislation

The Indiana General Assembly is in session, and there are a handful of bills related to foreclosures and real estate.  The links below provide some of the details:

Tom Harton, of IBJ.com, has an informative piece today entitled Real estate-related bills still alive in Legislature.

As always, the Indiana Bankers Association provides great links/summaries of various banking-related bills through capwiz.com.  There appear to be six bills that could have varying degrees of impact on the Indiana foreclosure and loan enforcement process.  The links below not only summarize the bills but also take you to the actual, proposed legislative changes:

• SB582 Settlement conferences in residential foreclosures.
• SB155 Tax liens.
• SB59 Credit agreements.
• HB1321 Secured transactions.
• HB1244 Payment plan to remove property from tax sale.
• HB1024 Notice of foreclosure to property insurers.

My TTD (things to do) list includes a follow-up post about which bills passed this year.  More to come....   

__________

5-19-11:  The bill links no longer work.  See my May 19th post for updated links and what was enacted.

Indiana-Based Home Builder, Estridge Group, To Face Foreclosure Action(s)?

Estridge Group has fallen victim to the real estate-centered recession.  Here are links to recent stories in the Indianapolis Business Journal and The Indianapolis Star:

As Estridge shuts sales operations, homeowners ask, 'What now?'

Estridge: We need cash to survive

My experience in representing the largest secured creditor in the Hansen & Horn situation suggests to me that one or more foreclosure cases may be right around the corner.  But, I could be wrong.  I don’t have any first-hand knowledge of the nature and extent of Estridge’s loans or collateral.

From a commercial foreclosure/creditor’s rights perspective, I thought this quote by Mr. Estridge was particularly interesting:

'I continued making interest payments on all the land we owned at a level of $400,000 a month for three or four years,'Estridge said. 'That depleted all of our capital. I should have just given the land back to the bank. As I look back, there’s the tactical versus the moral and the ethical.'

Again, I'm not familiar with the case, but in basic terms the quote implies the possibility that Mr. Estridge may have been presented with the choice between a deed-in-lieu of foreclosure and a loan extension/modification.  Experience has taught me that some borrowers simply don’t want to give up (or settle) when perhaps they should…. 

IndyStar: Indiana To Join Multistate Foreclosure Probe

As mentioned in my September 30 post, there is a residential/consumer foreclosure process-related controversy developing that has caught fire with politicians and the media.  The Indianapolis Star reports today that the State of Indiana will be looking into the issues.  Here's the story. 

While the problems with affidavit preparation, if true, certainly do not reflect well on the residential mortgage industry, in the end one of the key issues will be whether the facts in those affidavits were true and accurate.  I could be wrong, but none of the media reports (that I've seen, at least) claim that the court-filed affidavits were false.  In other words, the underlying documents and facts still may have supported the loan default and/or the damages claimed.  We'll have to see how that matter unfolds in these governmental probes.    

With Affidavits Of Debt, Remain Mindful Of The Evidentiary Requirements

Yesterday's MarketWatch.com had an article concerning "the growing controversy about so-called 'robo-signers' in the foreclosure process, during which staffers sign thousands of mortgage-related documents a month."  Here's a link to the story:   "Robo-signer" controversy spreads . 

One lesson here for secured lenders and their lawyers is to follow the rules of procedure and ensure, among other things, that those who sign affidavits in support of motions for summary judgment have the requisite personal knowledge of the facts and/or that they have reviewed and, as needed, attached records of regularly-conducted business activities in support of the facts.  See, Indiana Rules of Evidence 602 and 803(6).

WSJ.Com: Banks Keep Failing, No End In Sight

From yesterday's online Wall Street Journal:  Since WaMu fell, 279 lenders have collapsed; lost jobs, curtailed lending and the big get bigger.

IndyStar: Indy Housing Developers Hit A Financial Wall

From today's Indianapolis Star, an article about how tight the lending environment still is:

Developers buying and rehabbing properties with those federal dollars, called the Neighborhood Stabilization Program, face the same conundrum in dozens of projects across Indianapolis. They're struggling to secure the funds to supplement NSP, which typically covers the price of buying a property and a sliver of its renovations.

Click here for the entire story.

Definitive Commercial Real Estate Appraisals A Challenge Of Late

Last November, I wrote that, in Indiana, appraisals are important, but not required, in foreclosures.  At the end of my post, I kidded that, knowing the present value of loan collateral, particularly real estate, may not be possible given current market conditions.  In today's IBJ.com, Tom Harton has a nice article entitled "Appraisers Have Little To Go On In Tough Deal Market," which supports the notion that there may be an absence of reliable data that, in turn, can make an appraiser's job difficult these days.  Secured lenders should remain mindful of this problem as they decide what to do with their distressed loans collateralized by commercial real estate.    

IndyStar: Central Indiana Hotel Foreclosures

The Indianapolis Star has an article today entitled "Area Hotels Facing Foreclosure Hit By Downturn, Bad Reviews": 

The economic downturn of the past three years has dealt harshly with many hotels, lowering their occupancies, forcing constant cost-cutting, and making foreclosures and bank takeovers common.

Not surprisingly, hotels are yet another industry that has been hit with commercial foreclosure actions of late. 

2010 Indiana State Foreclosure-Related Legislation: HB 1122

Unlike last year, Indiana's General Assembly was relatively inactive with regard to debating and enacting mortgage foreclosure-related laws.  It's my understanding that the only bill with any real significance that passed was HB 1122 - Abatement of Vacant or Abandoned Structures.  Here's a .pdf of the House Enrolled Act, signed by Governor Daniels on 3-17-10, that will be effective 7-1-10:  House Enrolled Act No. 1122. 

The legislation, which amends Ind. Code Sections 24-5.5-1-1, 32-29-7-3 and 36-7-9-12, deals mainly with residential/consumer matters.  For more detail, the Indiana Bankers Association provides a nice Bill Summary for your review.  The one development that appears to have some potential impact on commercial matters involves a governmental enforcement authority's ability to praecipe for a sheriff's sale if a judgment creditor has not done so for 180 days after the entry of judgment.  In such a case, the sheriff must then conduct a foreclosure sale within 120 days of the date of the praecipe. 

The primary purpose of this legislation was to combat problems associated with vacant or abandoned houses.  Although technically the rules appear to apply to non-residential cases, given the law's design, coupled with a commercial lender's inherent desire to push foreclosures to sale, as a practical matter the legislation should rarely if ever impact commercial foreclosures.  Please email or post a comment if you have a different take on the new law, thanks. 

WSJ: Foreclosures Hit Rich And Famous

Here's an article of some interest from today's on-line Wall Street Journal:  some Friday reading .  My follow-up post on the Wells Fargo case should be up early next week.

Washington Post: More Evidence That Commercial Real Estate Headed For Foreclosure Crisis

Today's Washington Post discusses the potential for more commercial foreclosures in 2010:  click here.  Although the article mainly is about D.C., the overall story is a national one:   

Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date. "Do the math on this," Warren said. "This is a significant problem."

AP/MSNBC: Desolate Malls, Empty Offices May Come Soon

Here is a recent news article regarding defaults on commercial real estate loans and their possible role in a looming economic crisis:  click here for the 2-11-10 story. 

IndyStar - On the block: Mortgage for Keystone Towers

Today's Indianapolis Star has a story about how the mortgagee for the local Keystone Towers complex is auctioning off its defaulted-upon loan as opposed to pursuing a foreclosure suit.  Click here for the article.  A lender's sale of a distressed loan (the assignment of the loan documents for a price) is not unusual, but doing so via an on-line auction is.  If you have experience or insight into this process, please email me or post a comment.  I'd like to learn a little more about the transaction, thanks.

AP: FDIC Guides On Commercial Real Estate Loan Modifications

From usatoday.com:

WASHINGTON (AP) — Banks must accurately identify their potential losses when modifying troubled commercial real estate loans under federal guidelines issued Friday.

 

Click here for the rest of the story.

Time: REITs and Commercial Real Estate's Victims

Time.com has this article that begins as follows:

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."

IBJ: Opportunists Hunt Deals In Commercial Real Estate

The Indianapolis Business Journal has a piece from Friday dealing with the current commercial real estate/foreclosure environment.  Click here for the article. 

MSNBC: "Double Bubble" Means More Real Estate Trouble

A thorough report from today's msnbc.com explores the status of the commercial real estate development market and its impact on lenders.  Click on the story:  Developers face huge crunch as downturn hits office buildings, malls, hotels.

MSNBC - FDIC's Bair: Commercial Real Estate A Challenge

An AP-MSNBC story from yesterday suggests that "the most prominent area of risk for banks" is commercial real estate.  Click here for the article. 

IndyStar: Salin Bank Suing Former Owner Of Davis Homes

Today's Indianapolis Star is reporting:

Salin Bank charges that the owners of the former Davis Homes committed fraud by taking money and other assets from their Indianapolis homebuilding company after it sank into insolvency last year.

Click here for the story.  I haven't read the Complaint, but this appears to be a fraudulent transfer case.  I have four prior posts, which touch upon these issues, if you're interested in learning a little more about the legal issues. 

WSJ: Commercial Real Estate Lurks As Next Potential Mortgage Crisis

From yesterday's Wall Street Journal: 

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.  Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

Click here for the rest of the article.

USA Today: Commercial Real Estate Gets Worse

According to today's story, the commercial real estate downturn is deepening and may severely affect some smaller banks.  For the entire piece, click here.

White Goes On Trial In Fraud Case

It's been over a year since I posted about the demise of local real estate developer Chris White.  Since then, Mr. White has filed a Chapter 7 bankrupcty case, and this week he's on trial for check kiting.  The alleged victim is locally-owned National Bank of Indianapolis.  Click here for a link to today's story in The Indianapolis Star, and click here for the article from the IBJ.

Guilty:  Star - IBJ.

Washington Post: (Residential) Foreclosures May Be In Lender's Best Interests

The Washington Post has an article today debunking the notion that it's better for lenders to modify distressed loans than to foreclose:  Numbers Work Against Governmental Efforts To Help Homeowners.  I'm not sure I agree, but the detailed story provides some interesting insights.  Even though the article focuses on residential/consumer cases, the principles and analysis have at least some application to the commercial arena.  

MSNBC/AP: Defaults On Commercial Real Estate Accelerate

"Owners of shopping malls, hotels and offices are defaulting on their loans at an alarming rate, and the commercial real estate market is not expected to hit bottom for three more years, industry experts warned Thursday."  Click here for the rest of the article dated July 9.

2009 Indiana State Legislation - One Foreclosure Bill

The June edition of Hoosier Banker, published by the Indiana Bankers Association, has a really good article entitled "Wrap-up of 2009 Legislative Session" written by Amber Van Til, VP-Governmental Relations, and Dax Denton, AVP-Governmental Relations.  In the article, they address the Indiana General Assembly's 2009 banking-related bills, and Indiana's passage of three bills dealing with depositories.  Despite all the recent negative publicity involving lenders and several legislators' efforts to pass multiple mortgage and foreclosure-related bills in 2009 (click for example), only one bill passed that directly affects mortgage foreclosures, Senate Bill 492:  click here for a digest of the bill and click here for a .pdf of the enacted statutory changes.   

SB 492 will be effective June 30, 2009.  The legislation is not unlike the mediation-related procedural rules recently adopted by the Marion County (Indianapolis) court system, about which I wrote on March 15, 2009.  SB 492 creates the opportunity for non-binding settlement conferences between lenders and borrowers, and various notices must be sent and filed before the lender can proceed with the foreclosure suit.  Significant to the primary readers of this site, lenders/plaintiffs are not required to send the notices mandated by the bill if "the loan is secured by a dwelling that is not the debtor's primary residence...."  In other words, like the Marion County scheme, commercial foreclosures are excluded from the new statute.  

Candidly, I'm not entirely clear at this time the full extent of the similarities and differences between the new Marion County procedural rules and the state-wide legislation.  For now, lawyers and parties involved in Marion County residential foreclosures, filed after June 30th, should study and remain mindful of the new rules/laws from both governing bodies.  If anyone reading this can shed light on the matter for us, please comment here or email me, thanks.    

Homeowner's Associations, Like Lenders, Can Foreclose Too

I was out last week with the family and will post on a recent Indiana commercial foreclosure case shortly.  In the meantime, though a bit off topic, I thought my readers might find this story from MSNBC interesting:  Strapped Owners Behind On Association Dues Face Losing Their Homes.  Incidentally, it's my understanding that, in Indiana, a lien generated out of delinquent HOA dues generally will be subordinate to a mortgage lien.  

As Predicted, Cleveland Suit Over Foreclosures Dismissed

On January 11, 2008, I wrote about the City of Cleveland's lawsuit against several residential lenders, and I suggested that the case would not survive a pre-trial motion to dismiss.  It appears from this media report that the "public nuisance" civil case was dismissed on Friday, although the City is appealing the trial court's decision. 

IBJ: Industry Bracing For Commercial Foreclosures

Here's a link to Chip Cutter's piece from today's IBJ Real Estate Weekly:  May 12th. 

CMBS Defaults In The News

Today, The Wall Street Journal reports on General Growth Properties Inc.'s Chapter 11 filing and how default rates on commercial mortgage-backed securities may be rising substantially over the next two to three years:  Small Creditors Hurt Mall Owner.

Indy Star: Subdivision Foreclosures

The Indianapolis Star has a couple stories today that touch upon commercial foreclosure issues arising out of the demise of residential builders and developers.  These cases do not involve loan defaults by homeowners.  Rather, they deal with loans to the subdivision developers and the builders secured by the real estate they develop.  Here are the links:

Vacant lots fill subdivisions as builders go bust

Subdivision is stopped short

As noted, these cases are challenging for all involved and affect many parties and entities.  The second link deals with a Gunstra condo development.  I know from experience - serving as counsel for a receiver in a similar case - that the developer's default triggers a variety of problems for, not only the developers and the lenders, but the homeowners and even the municipalities.

One of the many difficulties in getting these cases worked out is the considerable lack of demand for new houses or condos, as well as the inability to determine the value (if any) of the ground - the loan collateral.  From what I'm hearing, nobody really knows what these subdivisions are worth in today's market, and nobody really knows when the market will turn around.  Traditional lenders can't wait indefinitely, and they ultimately must foreclose in order to collect something on their loans.   

Time and WSJ - "Commercial Real Estate: The Banks' Next Big Problem"

Here's a link to a story on Time magazine's on line site from yesterday:  Commercial Real Estate: The Banks' Next Big Problem.  Not long ago, most commercial lenders were telling me that default rates were under 1%.  As many of you know, things have changed dramatically, and quickly.  

3-27-09 Update - Here's a similar report from The Wall Street Journal:  Commercial Property Faces Crisis.

MSNBC: Potential Foreclosure Tactic

MSNBC picked up an AP story on February 17th - New Foreclosure Defense:  Prove I Owe You, which is similar my 2007 post From The New York Times: "Foreclosures Hit A Snag For Lenders".  The issue surrounds borrowers' challenges to the evidence, or lack thereof, submitted by lenders in support of their residential foreclosure cases. 

In commercial suits, the documentation hurdle addressed in the MSNBC article should rarely be an issue, but there can be lessons learned from the story.  As mentioned in my post The Commercial Lender's 8-Item Care Package For Its Foreclosure Attorney, all loan documents must be provided to counsel for submission to court:

   Loan documents.  Each and every piece of paper documenting the loan needs to be forwarded.  This would include all promissory notes, mortgages, security agreements, amendments, modifications, assignments, etc.  Not only will the law firm need these materials to analyze the case, but Indiana Trial Rule 9.2(A) requires written instruments, upon which a cause of action is based, to be filed as exhibits to the Complaint.

The MSNBC story seems to suggest that plaintiff/lenders need the original loan documents to proceed with foreclosure.  That's not my experience, but the MSNBC piece doesn't dig too deep into the legal technicalities or provide examples of the court filings being utilized by borrowers in these cases.  It's my understanding that true and accurate copies of loan documents will suffice.  See, Indiana Evidence Rule 1003, which generally permits duplicate documents in lieu of originals.  Also, Trial Rule 9.2(A), noted above, points out when copies are allowed. 

If you're familiar with the details of the strategies identified in the MSNBC article, please give me a call or email.  I'd be interested in learning about the techniques.  If I'm able to uncover more about the issue, I'll supplement this post.  Thanks to my colleague Jamie Young for steering me to the story.

IBJ: Indiana Foreclosure Bill "Stirring Controversy"

Chip Cutter of IBJ's "Real Estate Weekly" writes today:

Real estate industry interests are concerned about a bill making its way through the Indiana General Assembly that would give tenants of residential and commercial property the right to terminate their leases without penalty if a property goes into foreclosure.

The two bills referenced in the IBJ article Foreclosure Bill Stirring Controversy are Senate Bill 225, the source of much consternation for lenders and commercial real estate developers, and House Bill 1081, which may have less of an impact on the industry.  We'll see what happens....    

AP And NYT: Tough Times For Commercial Real Estate Lending

Associated Press:  Commercial real estate in for tough 2009.

New York Times:  As vacant office space grows, so does lenders' crisis.

Next Up For A Bailout - Real Estate Developers?

The Wall Street Journal and Reuters, among others, are reporting today that the commercial real estate industry is angling for governmental assistance.  Here are the links:

WSJ:  Developers Ask U.S. for Bailout as Massive Debt Looms

Reuters:  Commercial property industry seeks bailout aid 

Certain sources forecast the potential for a high volume of foreclosures over the next couple years as commercial real estate loans mature.  But, is a bailout warranted ... or even workable?  I'm scratching my head. 

I'll keep an eye out for further news stories and commentary on this developing situation.  

AP: New Crisis In Commercial Real Estate Looms

This article from Friday the 28th confirms what I've been hearing:  Malls, hotels may foreclose and banks can’t renegotiate loan terms. 

The Wall Street Journal On Premier/Chris White and Mezzanine Lending

Over the course of this year, I've been posting about the demise of Premier Properties and its owner Christopher White.  Click here for post and links to all the prior media reports.

Today, The Indianapolis Star, courtesy of a report by The Wall Street Journal, has an insightful article entitled "Premier's Collapse Ruffles Lender."  The piece focuses on the Premier/White saga from the perspective of mezzanine lender Dominion Capital. 

As some of you know, borrowers such as White's real estate development company use mezzanine loans to secure supplementary financing for projects, which financing may be required by the primary construction mortgage lender.  Mezz loans often are collateralized by the stock in the development company rather than the developed property itself.  They're borderline unsecured loans and thus have high interest rates (20+%).  It's my understanding that mezz lenders like Dominion are feeling the pain from the current credit crisis.  The WSJ article supports this.     

IBJ: No Word On Payton Wells Buyer

The Indianapolis Business Journal continues to keep tabs on the status of the Payton Wells foreclosure case:  No word yet on buyer for Payton Wells property. 

I posted about this matter on January 28, 2007, Payton Wells Auto Dealerships Are The Subject Of A Commercial Foreclosure Action, and again on February 27, 2007, Payton Wells Update:  Status Quo. 

One thing secured lenders can learn from this case is how long the commercial foreclosure and liquidation process can take in Indiana.  Soon, it will be two years in the Wells matter.  

 

IBJ Article On Charter Homes-Related Mortgage Scheme

Cory Schouten's 10-18-08 in-depth account of foreclosures upon twenty Charter Homes properties is worth the read, especially if you're interested in residential mortgage-related fraud.  Here is a link to the IBJ report:  Mortgage Scheme Unravels.  A client of ours, an electrical contractor, is one of many firms that have been harmed by this case. 

Marion County (Indianapolis), Indiana Tax Sales

Today's Indianapolis Star has an interesting article about Marion County's annual tax sale, which was held yesterday:  It's A Land Rush -- In Indianapolis.  FYI - tax sales are held once a year by the County Treasurer; foreclosure sales are held once a month by the County Sheriff.  If you would like to learn more about Indiana sheriff's sales, including those in Marion County, please click on my 4-14-08 post, Indiana Sheriff's Sales - Local Rules, Customs and Practices Control.