Indiana Commercial Foreclosure Law

Indiana’s Requirement For Pre-Sale Payment Of Delinquent Property Taxes

Distressed loans secured by commercial property often involve delinquent real estate taxes.  Workout professionals should remain mindful of this possibility as they analyze their collateral and make decisions concerning the enforcement of the loan.  Questions I’m frequently asked are whether the lender should pay the real estate taxes and, if so, when. 

Prior procedure.  Indiana law historically required the plaintiff/lender, assuming it was the winning bidder at the sheriff’s sale, to pay any delinquent real estate taxes immediately after the sale.  In the case of a cash bidder (third party), taxes would be paid off the top or, in other words, the county treasurer got the first cut of the sale proceeds.   

2011.  In recent years, we noticed that some county sheriff’s offices started to require the plaintiff/lender to pay delinquent real estate taxes before the sale.  This has now become a formal, statutory requirement by virtue of Ind. Code § 32-29-7-8.5 “Requirements for Payment of Property Taxes and Real Estate Costs Before Sheriff’s Sale.”  The statute states, in pertinent part, that “the party that filed the praecipe for the sheriff’s sale shall pay . . . all delinquent property taxes, special assessments, penalties, and interest that are due and owing on the property on the date of the sheriff’s sale.”  A failure to pay will result in the cancellation of the sale.

Policing the issue?  Beginning in January 2011 in Marion County (Indianapolis), the Treasurer, in conjunction with the Sheriff, requires that a Tax Clearance Form (.pdf) be (a) completed by the party requesting the sale, (b) stamped by the Treasurer’s Office and (c) then submitted to the Sheriff’s Office with the written bid.  The form must be stamped regardless of whether delinquent taxes were ever an issue.  Lender’s counsel needs to complete the information at the top of the form (the date of the sheriff’s sale, file number, owner, address and parcel number), as well as the contact information at the bottom of the form.  The Treasurer’s Office completes everything else.  Note that one form needs to be completed for each parcel number (i.e. 4 parcels, 4 forms). 

As I’ve said on this blog many times, please be sure to confer with the particular county sheriff’s office in advance because rules and procedures may vary by county.  Perhaps other counties will follow Marion County’s lead in terms of documenting the status of the real estate taxes.  For now, call ahead to see what is needed. 

Timing.  At last week’s Marion County sales, we were able to submit payment for delinquent property taxes and obtain the stamped clearance form on the same day.  The better approach would be to allow yourself and your foreclosure counsel a few days before the sale to address the matter in case there are problems or the Treasurer’s Office is congested.  Without the stamped form, the Sheriff will not hold the sale.  It is my understanding that the Treasurer may set up an e-mail address so these forms can be submitted and completed via e-mail.  I will provide more information as it becomes available. 

Build into judgment.  Since I.C. § 32-29-7-8.5 now requires real estate taxes to be satisfied before the sale, the amount of any delinquent real estate taxes that either have been or will be paid by the lender should be an item of damages identified in the judgment.  Before the statutory change, borrowers theoretically could attack that damage figure as being speculative.  Some borrowers claimed that, because the lender had not actually incurred the loss at the time of the entry of judgment, courts could not award the damages.  Hypothetically, the borrower might later pay the taxes or a third-party buyer might pay the taxes.  Now, because the foreclosing lender is compelled to advance the taxes, courts in turn should be compelled to include such losses in the calculation of damages.

Plan ahead.  In the past, delinquent real estate taxes may have popped onto the lender’s radar in the days leading up to the sheriff’s sale.  Now, that issue should be addressed at the time of the filing of a motion for default judgment, motion for summary judgment or trial.  Lenders and their foreclosure counsel should make it their routine practice, when calculating the debt, to verify with the county treasurer the status of the real estate taxes generally and the amount of any delinquent real estate taxes specifically.  (As an aside, delinquent taxes frequently are identified in a title commitment.)   

For more on this subject, please see my November 16 and November 24, 2010 posts that deal with tax sales.

Indiana Real Estate Taxes And Sheriff's Sales

Today, in the wake of new statutory language for 2011 -- Ind. Code 32-29-7-8.5 -- I revised  and re-posted three prior articles related to Indiana sheriff's sales and the role of delinquent real estate taxes in such sales.  I'll try to bring things together in a separate post next week and comment upon this week's experience with Marion County's brand-spanking-new Tax Clearance Form.  More to come.... 

Sheriff's Sale Checklist - Marion County (Indianpolis) Illustration - Revised

This follows-up my August 14, 2009 post - New Marion County (Indianapolis) Sheriff's Sale Requirements- and fulfills my promise, while presenting at last last year's foreclosure CLE/seminar, to provide a sale checklist.  The following list includes many of the key steps but is not an exhaustive list of considerations.  So, please make sure you and your counsel independently review the applicable statutes and rules as you prepare for your own sale.  Please also glance at last week's post - Indiana Sheriff's Sales: Local Rules, Customs and Practices Control - for further advice/tips. 

Upon Entry Of Judgment/Pre-Sale

1. Praecipe for sale at clerk’s office; submit first page of complaint/two copies of judgment. 
2. Obtain sale date and sale number from sheriff.
3. Submit notice of sheriff’s sale to sheriff.
4. Request bidding instructions from client.
5. Obtain sale data sheet from sheriff.
6. Prepare bid form.
7. Obtain check for sheriff’s costs/sale fees.
8. Draft sheriff’s deed and request check for recorder’s fee.
9. Draft clerk’s return.
10.  Draft sales disclosure and request check for auditor’s fee.
11.  Obtain statement for any delinquent real estate taxes from treasurer’s office.
12.  Request check from client to treasurer for any delinquent taxes. 

Day Before Sale

13.  If applicable, pay any delinquent taxes and secure receipt from treasurer; obtain stamped Tax Clearance Form from treasurer (regardless of whether there were any delinquent taxes).
14.  Submit to sheriff:
    (a) Bid form with sheriff’s fees/costs check;
    (b) Deed with recorder’s fee check;
    (c) Clerk return;
    (d) Sales disclosure form with auditor’s fee check; and
    (e) Tax Clearance Form.

Sale Day

15.  Attend auction at City/County Building. 

After Sale

16.  If client purchases, obtain all file-marked conveyance documents and clerk’s return.
17.  If third party purchases, obtain check for sale proceeds from sheriff.

(This revises/updates my 3-7-10 post.)

Statutory Disposition of Foreclosure Sale Proceeds

When foreclosing on a borrower’s loan collateral, it’s no secret that banks and commercial lending institutions ultimately are seeking money.  Normally, they hope to dispose of the collateral and, ideally, become whole from the proceeds of the sale.  A senior lien holder will obtain most, but not all, of any such proceeds.  In Indiana, statutes govern specifically who gets the cash.

Mortgages.  Ind. Code § 32-30-10 outlines the procedures for mortgage foreclosure actions.  The distribution of proceeds from a judicial sale are statutorily mandated.  First Federal Savings Bank v. Hartley, 799 N.E.2d 36, 40 (Ind. Ct. App. 2003).  According to I.C. § 32-30-10-14, which should be used as a template when preparing the section of any proposed foreclosure decree/order dealing with the disposition of sheriff’s sale proceeds, the money must be applied as follows:

1.  Sale expenses.  The first payout is to the civil sheriff for its fees and notice/advertising costs.  A sheriff’s sale in Indiana costs a few hundred dollars.  Under certain circumstances, Indiana law allows a mortgage foreclosure sale to be conducted by a private auctioneer, and the fees of the auctioneer would be a part of this payout.

2.  Senior mortgage debt.  The payment of the outstanding principal, interest and costs to the senior lien holder comes second.  This almost always will be the full, accelerated debt as articulated in the judgment.  (2010 statutory revisions did away with post-sale payment of taxes.  If the senior mortgagee prepaid any delinquent real estate taxes, its counsel should attempt to build those losses into the judgment.) 

3.  Junior liens.  Any payments of amounts owed to any junior lien holders are next, in accordance with their legal priority and as articulated in the court's decree.

4.  Surplus to mortgagor.  Lastly, if any sale proceeds remain, that "surplus must be paid to the clerk of the court to be transferred, as the court directs, to the mortgage debtor, mortgage debtor's heirs, or other persons assigned by the mortgage debtor." 

Security Interests.  The disposition of collateral under Indiana’s UCC, Article 9.1 (Secured Transactions), is slightly different and will depend upon the nature of the collateral.  Article 9.1 should be reviewed in detail for each specific case and the particular collateral in question, because there are many different rules that could apply.  With certain collateral (accounts receivable, for instance), disposition by sale normally will not occur.  On the other hand, sales of tangible personal property collateral, like inventory or equipment, are common.  I.C. § 26-1-9.1-610 speaks to disposing of collateral after default.  Unlike with mortgages, in Indiana a judicial sale of personal property collateral is not required.  Lenders may choose to conduct the sale privately, although it may make sense to group the personal property with any real estate that is being sold at a sheriff’s sale.  I.C. § 26-1-9.1-615 governs how to apply the proceeds: 

1.  Sale Expenses.  First, proceeds are applied to the reasonable expenses of retaking, holding, preparing for disposition and reasonable attorney’s fees and expenses incurred by the secured party.  This would include payment of the sheriff’s fees if the civil sheriff is conducting the sale, or to private auctioneers upon a private sale.

2.  The Debt.  Second, payment goes to the satisfaction of the obligation secured by the security interest.

3.  Junior Liens.  The third payment, if any, would be for the satisfaction of the obligation secured by any subordinate security interest.

4.  Debtor.  Finally, any remaining proceeds go to the debtor.

So, if and to the extent there are cash proceeds from an Indiana foreclosure sale of loan collateral, the debt of the plaintiff lender will not be satisfied until after the sale-related expenses are reimbursed.  Also, lenders should not receive a windfall from a sale because the borrower generally receives any surplus, but that normally is a very remote possibility.    

(This revises/updates my 1-9-07 post.)

(Tax) Lessons Learned From A Marion County (Indianapolis) Sheriff's Sale

In February of 2010, I wrote about Indiana Sheriff's Sales - Local Rules, Customs and Practices Control.  For secured lenders and their counsel preparing for a mortgage foreclosure sale in Marion County (Indianapolis), Indiana, I thought I'd expand upon that post and convey a handful of things about which I was reminded during recent experiences.  I'm directing this post mainly to plaintiffs/first mortgagees, who hold a judgment/foreclosure decree and who are "first in line" to make a judgment bid (credit bid) at the sale.  Because this post discusses cash that bidders must bring to the sale, however, the information will also be relevant to junior lien holders seeking to bid.   

Pre-sale sheriff's notice.  About fifteen days before a sheriff's sale, the Civil Sheriff's Office will send to the lawyer for the plaintiff/first mortgagee a sheet outlining certain information about the sale.  Click here for an example notice.  The notice includes such data as the sale number, the court cause number, the names of the plaintiff and the plaintiff's attorney, the parcel number and, perhaps most importantly, the current judgment amount, including interest, upon which the plaintiff is entitled to make a credit bid.  Finally, the notice lists the sale fees/costs and, as in my case, any delinquent property taxes.

Deposit.  Pursuant to Marion County's custom and practice, in order to perfect a bid, the plaintiff/bidder must deposit with the sheriff a check for the user fee, sheriff fee and advertising cost, which in my client's case was $608.40. The sale fees/costs must be paid to the "Marion County Sheriff."   (Remember that junior lien holders or third parties also must have on deposit with the sheriff’s personnel a certified check or cashiers check equal to or in excess of the amount of any bid submitted.)  

Taxes.  Beginning in 2011, Ind. Code 32-29-7-8.5 mandates that any delinquent real estate taxes, which by the way include delinquent sewer lien fees, be paid by the plaintiff/senior mortgagee before the sale.  In the past, checks for taxes were tendered with the sale bid, or in some counties taxes could be paid by the successful bidder after the sale.  Now (2011), Indiana statute requires the taxes to be current by the date of the sale, or the sale will be cancelled.  Proof of payment can come from a receipt from the County Treasurer's office.  However, in Marion County (Indianapolis), local procedure dictates that a Tax Clearance Form, stamped by the Treasurer's office, be provided to the sheriff with the presale bid package.      

Source of delinquent tax figure.  Without boring you with the details, I've learned the hard way that delinquent tax figures provided by the sheriff's office on its presale notice often are slightly inaccurate.  I would recommend that lenders or their lawyers go directly to the county treasurer's office in order to confirm (in writing, if possible) the amount of any delinquent taxes or fees. 

(This updates/revises my 12-15-08 post.)

Possessory Interest Key To Indiana Replevin (Repossession) Action

In my January 31, 2009 post “What is Replevin?”, I discussed the fundamentals of an Indiana claim for replevin, which is the judicial process to repossess personal property or, in the context of this blog, to foreclose upon non-real estate loan collateral.  I cited to the Whittington opinion by Judge McKinney from the Southern District of Indiana.  In 2010, the Seventh Circuit affirmed Judge McKinney’s opinion in Whittington v. Indianapolis Motor Speedway Foundation, 2010 U.S. App. LEXIS 7524 (7th Cir. 2010) (.pdf ).  Whittington did not involve a loan enforcement action but is interesting and informative for lenders nonetheless. 

Car trouble.  The plaintiff in Whittington sought a court order granting him possession of an antique race car that he transferred to the Indianapolis Motor Speedway’s Hall of Fame Museum in the 1980’s.  The plaintiff claimed that he loaned the car to the museum.  The museum contended that plaintiff donated the car.  The transfer was not documented, and the witness testimony was in dispute.  The Seventh Circuit lectured that it was:

handicapped . . . by the lack of documentation with respect to the nature of the transaction . . ..  [T]he lesson for [the plaintiff] should be that an unwritten contract is not worth the paper it isn’t written on.

(Remember that written memorialization is a very important aspect to any transaction of any significance.)

The basics.  Indiana case law provides that, to succeed on a claim for replevin, a plaintiff must prove (1) his right to title or possession, (2) that the property is unlawfully detained and (3) that the defendant wrongfully holds possession of the property.  Indiana also has a statute governing replevin at Ind. Code § 32-35-2.  The initial burden of proof is on the person seeking repossession – for purposes of this blog, the lender/creditor.  As noted by the Court, “the plaintiff must prove his right to possession on the strength of his own title, not merely the weakness of the defendant’s title or right to possession.” 

Possessory right.  The Court stated that having a present possessory interest in the property/car was an essential element to the replevin claim.  In loan enforcement actions involving non-real estate collateral, the right to possession element should be a non-issue by virtue of the security agreement between the creditor and debtor, and/or the UCC’s enforcement sections (I.C. 26-1-9.1-601 through 628).  My working understanding is that the “right to possession” facts necessary for a replevin action are satisfied by the terms of the loan or, more specifically, the secured lender’s/creditor’s remedies upon a default.  (For some background, see my December 7, 2010 post.)  Absent such a possessory interest, a replevin action will fail, as it did in Whittington.

Collateral only.  After analyzing all the evidence, the Seventh Circuit in Whittington concluded that the plaintiff failed to establish by a preponderance of the evidence that he possessed an existing property right in the antique car.  Upon a default, to repossess and ultimately liquidate most non-real estate loan collateral in Indiana, asset-based lenders and their legal counsel need to be armed with the necessary contractual repossession right found in most if not all security agreements.  This involves, in short, some kind of documented collateral pledge and is the premise upon which any replevin action is based.  Without this, any non-real estate assets of the borrower/debtor will not be subject to immediate repossession until the judgment execution process occurs, which process (including proceedings supplemental) is a substantially different and less effective method of collection.

Indiana Court Discusses Whether A Lender Was A “Bona Fide Mortgagee”

Imagine making a mortgage loan and later having a court determine that the mortgage is invalid.  What you thought was a secured debt suddenly becomes unsecured.  That’s what happened in Thomas v. Thomas 2010 Ind. App. LEXIS 389 (Ind. Ct. App. 2010). 

The story.  The Thomas case involved some pretty bizarre facts.  The case dealt with Lender, Father (who owned real estate) and Father’s two sons.  Father purchased the property in 1965 and lived there continuously and throughout the litigation.  For estate planning purposes, he deeded the property in 1977 to Son 1, with the oral understanding that Son 1 would deed the property back at any time upon request.  In 1995, Son 1 deeded the property to Son 2, and Son 2 knew that he must convey the property back to Father upon request.  In early 2001, Father asked Son 2 to deed the property back, but Son 2 refused.  In response, Father recorded a $200,000 mechanic’s lien notice on the property and also filed a quiet title lawsuit.  In late 2001, Son 2 obtained a $118,000 mortgage loan from Lender based, in part, on a forged and technically-flawed mechanic’s lien release.  In 2002, Father filed a foreclosure lawsuit with respect to the mechanic’s lien and named Lender as a defendant.  In 2003, Son 2 filed bankruptcy and ended up conveying the property back to Father.  In 2007, Lender had the mechanic’s lien rendered invalid in the mechanic’s lien foreclosure suit.  The mess thus boiled down to a battle, in the foreclosure case, between Father and Lender as to whether the mortgage was invalid. 

Bona fide mortgagee rule.  The Court’s opinion in Thomas surrounded whether Lender was or was not a “bona fide mortgagee.”  While I’ve previously discussed here (May 8, 2010 and October 4, 2009) the “bona fide purchaser” defense, I’ve not posted about the “bona fide mortgagee” doctrine.  The Court noted that the Indiana bona fide purchaser doctrine “applies with equal force to mortgagees.”  Although the Court did not articulate the test for how a lender/mortgagee would qualify as a bona fide mortgagee, application of the bona fide purchaser test suggests that the lender would have to acquire a mortgage in good faith, for valuable consideration, and without notice of the outstanding rights of others.  It follows that the defense is premised on the theory that every reasonable effort should be made to protect a lender who acquired a mortgage for valuable consideration without notice of a legal defect.

Duty to inspect?  Since Lender clearly acquired the mortgage for valuable consideration, the issues in Thomas were whether Lender (1) acted with good faith and (2) without notice of Father’s rights.  To my surprise, the Court sided with Father on both points and rendered Lender’s mortgage invalid.  The Court first focused on Father’s possessory rights.  In Indiana, generally speaking, “one who fails to examine land which he is about to purchase, and to inquire as to the rights of one in possession, is not acting in good faith and will not be treated as a bona fide purchaser.”  Furthermore, “possession of land puts the world on notice that the possessor may have a claim of ownership and right to possession.”  The Court utilized all these various legal principles to arrive at the following conclusion:

Quite simply, it is undisputed that [Father] was in possession of the property in question and that [Lender] nonetheless did nothing to ascertain his rights to it.  It is apparent that even a cursory investigation would have quickly uncovered both [Son 2’s] fraud and [Father’s] claims on the home.  Under the circumstances, [Lender] cannot have been a bona fide mortgagee, and we therefore affirm the trial court’s judgment in this regard.

Frankly, I’m still trying to wrap my head around what this holding means to lenders.  Remember, Son 2 had the deed and thus title to the property.  Beyond that, do lenders actually need to verify whether who is in possession of the property and determine his, her or its rights to title?  Hmmm . . ..  I welcome the posting of comments or emails about this matter.

Bogus lien release.  The Court seemed to back off of the notion that lenders must physically inspect their real estate collateral - - saying that, “even in the absence of a duty to inspect,” the “irregularities on the face of the forged release of mechanic’s lien” should have put Lender, as a reasonably prudent person, on inquiry notice that something was amiss.  Basically, the Court felt that anyone reviewing the mechanic’s lien release should have questioned the authenticity of it.  Lender “clearly had the means to discover that the lien the forged instrument purported to release did not exist . . . we believe that a reasonably prudent lender would have taken the simple steps necessary to verify that a superior $200,000 mechanic’s lien had indeed been released.”  All told, the Court held that Lender could not have been a bona fide mortgagee due to “its failure to investigate [Father’s] interest in the home.” 

Much more could be said about Thomas, particularly regarding the potentially scary proposition that under certain circumstances lenders may have some burden to physically inspect real estate before making a loan in order to verify the possessor is also the mortgagor/owner.  But allow me to conclude with this one piece of simple advice:  always get title insurance when you’re initially making a mortgage loan or later foreclosing on the mortgage.  Title work, including loan policies and owner’s policies, provide a critically-important level of protection for lenders.  Assuming the Lender/Son 2 closing was insured, presumably the title company and not the Lender ultimately will bear the loss in the Thomas case.   

“Service Of Process” Fundamentals For The Plaintiff Lender

Earlier this year, the Indiana Court of Appeals, on the same day, issued two opinions setting aside default judgments entered in favor of lenders in mortgage foreclosure actions.  The reason - inadequate service of process on the borrowers.  The two cases were:  Elliott v. JPMorgan Chase Bank, 920 N.E.2d 793 (Ind. Ct. App. 2010) (.pdf) and Yoder v. Colonial National Mortgage, 920 N.E.2d 798 (Ind. Ct. App. 2010) (.pdf).  As I reviewed the cases, it occurred to me that a blog post about service of process could benefit workout professionals. 

Job 1.  Service of process involves the delivery of a summons and the complaint to a defendant.  (Here is a form summons.)  Service of process is a necessary and critical initial step in any loan enforcement litigation.  “Ineffective service of process prohibits a trial court from having personal jurisdiction over a defendant, and a judgment rendered without personal jurisdiction over a defendant violates due process and is void.”  Elliott v. JPMorgan Chase Bank.  Constitutional law (notice and an opportunity to be heard) is at the heart of the service of process requirements. 

Types and manner of service.  In Indiana state law, “process” is governed by the Trial Rule 4 series, which starts with Rule 4 and ends with Rule 4.17.  Loan enforcement actions typically involve service upon adult individuals and/or organizations such as limited liability companies.  Service upon individuals is governed by Rule 4.1, and service upon organizations, such as LLCs, is governed by Rule 4.6.  Organizations can be served a number of ways, most notably by service on the “registered agent” designated  with the Indiana Secretary of State. 

Perhaps the simplest and cheapest way to serve either an individual or an organization is by certified mail.  A sometimes more effective approach is to have service of process accomplished by the county sheriff, which is an option available to plaintiffs in every county in the State.  Service by certified mail is covered by Rule 4.11.  Service by sheriff is covered by Rule 4.12.  Service by publication is covered by Rule 4.13.

Case study – copy service.  Elliott involved the Court’s reversal of a default judgment due to defective “copy service.”  Copy service typically refers to “leaving a copy of the summons and complaint” at an individual’s dwelling, house or usual place of abode.  Rule 4.1(A)(3).  In Elliott, the county sheriff’s office served the summons by leaving a copy at the defendant’s residence.  But, there was no evidence that the sheriff complied with Rule 4.1(B)’s second step (U.S. Mail) in the two-step copy service procedure:

the person making [copy] service also shall send by first class mail, a copy of the summons without the complaint to the last known address of the person being served, and this fact shall be shown upon the return.

Case study – publication.  In Yoder, the Court reversed the default judgment because service by publication pursuant to Rule 4.13 was insufficient.  Service by publication is just that – publication of the summons and related information in a newspaper circulated where the defendant resides.  This is a last resort method of service.  Plaintiffs in Indiana really cannot utilize the service by publication option unless they have used “due diligence to locate” the defendant first so as to actually deliver the summons.  In Yoder, the Court outlined how the plaintiff’s “cursory attempt to locate [the defendant did] not constitute a diligent search.”  Before turning to service by publication, it’s advisable to consider personal delivery by the sheriff or a private process server at any last-known address that can be reasonably found either in your files, through the Secretary of State’s office (if an organization) and/or an internet search tool, such as that offered by LexisNexis. 

Client’s decision.  The manner of service (certified mail, sheriff, private process server, etc.) may be dictated by the lender’s cost tolerance and/or sense of urgency to enforce the loan (or get the defendant’s attention).  Lenders and their counsel should discuss this issue around the time they are finalizing the complaint.  More often than not, certified mail service (handled by the clerk’s office) will work.  If, however, you don’t have a good mailing address and/or have reason to believe the particular defendant may avoid signing for the package, then the potential for delay may justify the costs of hiring a process server to get the job done. 

Creditor May Repossess Collateral And Sue For Full Debt Simultaneously, And Generally Is Not Compelled To Accept Short Sale

If you work for a commercial lending institution and have ever wondered (1) whether you must accept a short sale of non-real estate collateral and/or (2) whether you first must obtain a  judgment before repossessing that collateral, then SFG v. N59CC, 2010 U.S. Dist. LEXIS 20931 (N.D. Ind. 2010) (.pdf) will be of benefit to you. 

Enforcement measures.  SFG involved the standard parties to a commercial loan enforcement action:  a lender (the plaintiff), and a borrower and guarantors (the defendants).  The loan was for $1,020,000, and the collateral was an aircraft.  Upon the loan default, the lender filed a lawsuit based upon the promissory note and security agreement.  While the suit was pending (before judgment), the lender repossessed the aircraft.  Later, the lender filed a motion for summary judgment seeking the entire amount of the debt.  The SFG opinion dealt with the borrower/guarantors’ objection to the motion.

Parallel tracks fine.  The UCC, which governed the lender’s remedies, did not require the lender to choose between two remedies of money judgment and repossession.  The lender was “well within its authority to pursue a judgment against [borrower and guarantors] for the default while simultaneously repossessing the aircraft.”  Ind. Code § 26-1-9.1-601 states that, after a debtor defaults, a secured party may “reduce a claim to judgment, foreclose, or otherwise enforce the claim.”  The secured party’s rights are “cumulative and may be exercised simultaneously.”  (But be sure to check your security agreement for self-help and repossession rights and/or limitations.) 

Double recovery?  Theoretically, the pursuit of multiple remedies could give rise to the recovery of more than the original debt.  However, SFG reminds us that the “check on a plaintiff’s right to pursue multiple remedies . . . is the requirement that a plaintiff proceed in a commercially reasonable manner and apply the proceeds of the disposition to the amount owed by the defendant.”  See I.C. § 26-1-9.1-608 through 610.  This means, among other things, that the lender in SFG must later account to the defendants for any proceeds of the sale of the aircraft. 

Short sale lost.  While the motion for summary judgment was pending, a “short sale” offer for the aircraft surfaced that would have netted $570,000 to the lender.  The defendants conceded that the aircraft was worth more but were inclined to move forward anyway, assuming the lender committed to structure a settlement for the payment of the remaining balance (the deficiency).  For a variety of reasons, the lender allegedly failed to “seal the deal,” so the sale never occurred.  The defendants claimed that, to their detriment, the lender failed to act in a commercially reasonably manner.  The defendants contended that any judgment amount should therefore be reduced by $570,000.

Commercially reasonable?  Judge Simon devoted a substantial portion of his opinion to a discussion of whether the contemplated short sale was “commercially reasonable” or whether the lender’s alleged failure to agree to the short sale was “commercially reasonable.”  In the end, Judge Simon overruled the defendants’ objection to the motion for summary judgment on the grounds that issues of commercial reasonableness were not ripe for adjudication. 

If [lender] fails to conduct its sale of the plane in a commercially reasonable manner, [borrower or guarantors] may then bring an action to recoup any loss.  In the meantime, because [borrower and guarantors] concede liability and the amount of damages under the agreements, summary judgment in this action is proper. 

Short sale not mandated.  The defendants’ only chance of making any hay out of the lost short sale in SFG will be if, post-judgment, the lender fails to liquidate the aircraft for more than $570,000.00.  Conceivably, the defendants in SFG could then pursue a claim against the lender to recover the difference - by establishing that the lender failed to act in a commercially reasonable manner for not accepting the prior short sale.  Even then, however, there would be a multitude of factors that will go into the validity of such a claim, including an examination of the proposed short sale terms and conditions as compared to those of the subsequent liquidation sale.  Under the circumstances in SFG, the creditor was not initially compelled to accept the short sale. 

2011 Indiana County Sheriff's List

Thanks to Cindy Edmiston of SRI, Incorporated for circulating the attached list of Indiana sheriffs for 2011.  Sheriff's sale documents, such as the notice, clerk return and deed, should identify the county sheriff.  Evidently, there will be forty-six new sheriffs in 2011.  Mortgagees and their foreclosure counsel should update certain forms accordingly. 

Indiana Tax Sales, Part II: Redemption

My November 16, 2010 post discussed how lenders can and should be proactive in monitoring their commercial real estate loan collateral for delinquent taxes and tax sale status.  Today’s post addresses what to do upon the “oh no!” moment when the lender learns, after the fact, that a tax sale occurred.  Assuming the lender wants to keep its collateral in tact, the lender should exercise the statutory option to redeem as quickly as possible. 

Time to redeem.  Buyers at Indiana tax sales acquire a super-priority lien on the property for the amount paid.  Ind. Code § 6-1.1-24-9.  Buyers do not immediately receive a deed.  They simply receive a certificate from the County Auditor.  The lien trumps any and all other liens, including a lender’s mortgage lien.  The lien converts to a deed (title/ownership) after a statutory redemption period.  Depending upon the nature of the property and whether the County or a third party was the purchaser, the period can be 120 days or up to a year.  Generally, improved commercial property can be redeemed, with a 10% penalty, for up to six months, or for up to a year with a 15% penalty.  (I recommend that mortgagees and their counsel study the applicable tax sale statutes, I.C. § 6-1.1-24 and 6-1.1-25, for any specific questions.  The statutes are intricate and can be challenging to interpret.  I could never address every issue or nuance in one or two blog posts.) 

Redemption amount.  The amount required for redemption is covered by I.C. § 6-1.1-25-2.  Property sold at a tax sale can be redeemed for:  the “minimum bid” (meaning the pre-sale delinquent taxes, interest, penalties and sale fees) + a 10% penalty based upon the “minimum bid” + 10% per annum interest on any surplus paid (any amount paid over the “minimum bid”).  The 10% penalty becomes a 15% penalty after six months.  Note there will be a per diem interest amount if there was a surplus payment, so you’ll need that number to ensure the redemption check is correct.  On the other hand, if there was no surplus (a/k/a overbid), then there will be no per diem.

Redemption payee.  Redemption checks must be made payable to the County Treasurer and should be certified funds.  Upon receipt of the redemption payment, the Treasurer will provide a payment receipt and another official-looking document, sometimes labeled a “Quietus,” that documents the tax sale redemption.

Marion County (Indianapolis) information/guidelines.  Marion County’s website, http:\\www.indy.gov, has the following information , written in "plain English," that help explain the statutory procedure with regard to tax sales in Indianapolis:   

• Treasurer’s introduction
• Information for current owners of property
• Information for purchasers of tax sale certificates

Again, Indiana statutes applicable to tax sales are clouded and complicated, and I understand that they have been subject to revision fairly regularly over the years.  Secured lenders are advised to consult with their Indiana foreclosure counsel in the event they learn that their real estate collateral was unexpectedly sold at a tax sale.  Even though there is a grace period to redeem, the clock begins ticking immediately.  Ultimately, the lien from the sale can and will result in the issuance of a tax deed (title/ownership), at which point any prior mortgage lien is terminated. 

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales

Typically, an owner of commercial real estate that has failed to make its mortgage payments to its lender also has failed to make its real estate tax payments to the county treasurer (assuming no escrow).  When the taxes become delinquent, the real estate can become eligible for a tax sale.  (The statutory scheme for Indiana tax sales is located at Ind. Code 6-1.1-24.)  Tax sales are not good, and I’ll expand on that point another day.  Today’s post provides a tip to mortgagees on how to learn about, and avoid, their real estate collateral from being sold out from under them. 

Super-priority.  Because a secured lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important for lenders/mortgagees to monitor the status of the real estate taxes on their loan collateral and take action (read:  advance the taxes), if warranted.  Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place. 

Owners only.  The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale.  See, I.C. 6-1.1-24-4.  This makes monitoring the status of the real estate tax situation challenging for lenders, particularly when dealing with uncooperative borrowers. 

Written request.  The Indiana Code does, however, provide a mechanism for mortgagees to receive certain notices.  I.C. 6-1.1-24-3(b) deals with notices of the sale:

At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice.

I.C. 6-1.1-24-1(d) similarly provides for the mailing of a list of properties eligible for sale: 

Not later than fifteen (15) days after the date of the county treasurer's certification under subsection (a), the county auditor shall mail by certified mail a copy of the list described in subsection (b) to each mortgagee who requests from the county auditor by certified mail a copy of the list.   

So, if the mortgagee, on an annual basis, sends the required letter to the county auditor requesting tax sale information, the mortgagee should automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself. 

No guarantee.  Please note that both sections 3(b) and 1(d) contain language stating that the auditor’s failure to provide the requested notice will not invalidate an otherwise valid sale.  

Cost/benefit analysis?  Whether the benefits of receiving the statutory notices exceed the costs (time and expense) of sending the annual letters is unknown to me.  The important point is that the option is available should mortgagees choose to utilize it.  Otherwise, lenders will need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is scheduled.  I welcome comments or emails from anyone who has had experiences with the statutory letter requests, particularly any comments on how effective they’ve been in monitoring for tax sales.            

4 Years, 233 Posts

On November 1, 2006, I began publishing this blog.  Four years and 233 posts later, Indiana Commercial Foreclosure Law continues to be a very rewarding and instructive project for me.  Whether you read via subscribed email, RSS feed, Twitter,  Facebook or a simple Google search, I've appreciated the traffic, which continues to grow, together with the feedback.  I remain committed to my blog and don't intend to shut it down any time soon, if ever. 

Remember to click on the "About" link to see my bio, picture, contact information and link to my firm Wooden & McLaughlin's website.  Very soon, a link to my blog through my firm's website will feature a new look and feel, but the content and features will remain the same.      

Also bear in mind that the "Archives" section along the side of the home page allows you to review posts by month, but more importantly permits you to conduct a word search of all prior content on this blog.  This is like having Google specific to this blog.  You can research each and every blog post back to 11-1-06.  Remember that, among other things, I post on all published Indiana state and federal court judicial opinions relevant to the field of commercial foreclosure law.  How do I find the cases?  I have permanent computer searches set up on the Lexis legal research system.  Lexis delivers emails to me whenever a court publishes a new decision.  Readers will always be up to speed on any relevant legal developments under Indiana law (although admittedly I'm currently a few months behind due to the press of my "day job"). 

Don't forget the option to sign up for an RSS feed and/or subscribe to receive posts by email.  These are efficient and painless ways to have Indiana Commercial Foreclosure Law articles delivered to you.  By the way, the email feature is secure, and it will never result in any further contact by me.  Please pass these subscription programs along to your friends and colleagues.  Again, links to Twitter and Facebook also are available if that's how you get your media.

My vision was to provide a "one-stop shop" for secured lenders involved in the foreclosure of commercial real estate mortgages, enforcement of security interests and collection of business debts in Indiana.  I gear my content toward workout professionals and representatives of commercial lending institutions.  Naturally, in-house counsel and Indiana creditor's rights lawyers also may benefit from my efforts to provide an on-line resource for this specialized area.  Please keep reading and spread the word.  And, feel free to contact me with any ideas as to how I can improve. 

Finally, I'd like to thank my colleague Mike Valinetz, who for the past several months has been my second pair of eyes for proofreading my posts.  I have appreciated your time, Mike. 

Indiana’s Lender Liability Act Once Again Protects Bank From Borrower’s Claims

Indiana’s Lender Liability Act (Ind. Code § 26-2-9) saved another secured lender from litigation-related delays and costs.  Indiana Bank and Trust v. Hirsch, 2010 U.S.Dist. LEXIS 18505 (S.D. Ind. 2010) (.pdf) falls in line with my December 31, 2008 post regarding the Classic Cheesecake Company case.  When borrowers try to insert oral terms into written loan agreements, the Act is the lender’s first line of defense.

The problem.  The issue for the lender in Hirsch surrounded an alleged conversation that occurred between the borrower and the lender’s loan officer at the time of the origination of the subject loan.  The two individuals discussed the prospect of later converting the short-term line of credit into a conventional long-term mortgage loan.  The borrower subsequently defaulted on the loan by failing to pay off the line of credit by the maturity date.  In his defense, the borrower asserted that he entered into the loan based upon the loan officer’s promise that the short-term line of credit would later be converted into a long-term loan. 

Procedural posture.  The litigation started with the lender filing a mortgage foreclosure action against the borrower.  The borrower filed counterclaims for breach of contract, fraud and promissory estoppel – all based upon the allegation of an “oral agreement between [borrower] and [loan officer] that [lender] would, at some later time, convert the original line of credit into a long-term mortgage.”  The lender filed a motion to dismiss the counterclaims, together with its own motion for summary judgment.  Judge Barker of the Southern District of Indiana granted all of the lender’s motions. 

Missing link.  The borrower’s counterclaims all centered on the theory that a contract or commitment for long-term financing existed – in essence, that the loan should not have matured.  Significantly, however, there was no writing to support the borrower’s case.  The Court cited to I.C. § 26-2-9-1 and 5 and concluded that “even assuming all of the allegations in the counterclaim to be true, the contract alleged by the [borrower] never actually existed because it failed to meet the requirements of [the Indiana Lender Liability Act].”  The absence of a written, signed agreement was fatal to the borrower’s breach of contract counterclaim.  For similar reasons, the Court granted the lender’s motion to dismiss the borrower’s fraud and promissory estoppel claims.

Secured lenders in Indiana mortgage foreclosure cases, when faced with allegations of alleged oral promises that vary written loan agreements, need to remember that I.C. § 29-2-9 generally requires credit agreements to be in writing and signed.  Hirsch is a favorable decision for lenders, particularly because the Court entered an early dismissal of the borrower’s counterclaims that prevented litigation-related holdups and additional expense. 

Contractual Venue Provisions Enforceable In Indiana

I previously posted that parties can contractually stipulate to jurisdiction in Indiana.  For example, lenders can bring lawsuits against out-of-state guarantors in Indiana, assuming that’s what the guaranty says.  In Sunburst Chemical v. Acorn Distributors, 2010 Ind. App. LEXIS 280 (2010) (.pdf), the Indiana Court of Appeals confirmed that venue also can be dictated by contract.

Venue vs. jurisdiction.  Workout specialists should know the difference between the terms “venue” and “jurisdiction.”  Sunburst Chemical helps with the distinction:  “jurisdiction involves the court’s ability to hear a particular case, whereas venue concerns the proper situs for trial.”  With regard to state-court litigation, “jurisdiction” basically refers to the state, and “venue” refers to the county.  (“Jurisdiction” actually has a more comprehensive meaning.  “Venue,” on the other hand, is a more specific concept and, as noted by Black’s Law Dictionary, means “the particular county . . . in which a court with jurisdiction may hear and determine a case.”) 

Venue.  Ind. Trial Rule 75(A) spells out Indiana’s venue requirements.  The question in Sunburst Chemical was whether a suit to enforce a credit agreement should have been heard in Allen County (the location of the defendant) or Marion County (where the credit agreement’s contractual venue provision stated the case should be).  In a case like Sunburst Chemical, by rule the proper venue would be Allen County – the county of the defendant’s residence.  But in Sunburst Chemical, the credit agreement had a Marion County venue stipulation.  In Indiana, contractual venue provisions are enforceable.  Although the venue provision in Sunburst Chemical was somewhat vague, the Court ultimately concluded that the “agreement established venue in Marion County, and the trial court did not err by denying Sunburst’s motion to transfer venue.” 

Mortgages.  Sunburst Chemical was not a mortgage foreclosure case but rather a suit on a credit agreement for the collection of money.  In cases involving the foreclosure of a mortgage, plaintiffs in Indiana may file suit in the county where the real estate is located.  Ind. Code § 32-30-10-3(a); I.C. § 32-29-7-6(a).  Venue thus focuses, not on the residence of a party, but on the location of the subject real estate. 

Why choose?  Indiana law in this area is favorable to creditors.  Assuming clear language in the contract, an out-of-county resident or company can be forced to defend a suit in a foreign county - usually the county in which the creditor resides or is located.  For plaintiffs/creditors, contractual venue provisions result in the savings of time and expense through the centralization of litigation in one’s own backyard.  And, at least in theory, they may secure some level of “home court advantage.”

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.

Credit Card Debt's 6-Year Statute Of Limitations Held To Commence When Account Due

Quickly, and noting this is off topic, I wanted to post about the Indiana Court of Appeals' decision in Smithner v. Asset Acceptance, 2010 Ind. App. LEXIS 4 (.pdf) in which the Court granted summary judgment in favor of the defendant/borrower based upon the running of the six-year statute of limitations.  As outlined here, promissory notes also involve a six-year limitations period, but the Court in Smithner concluded that a credit card account is an "open account" governed by Ind. Code 34-11-2-7(1) that deals with "actions on accounts and contracts not in writing."  This distinction affects the date upon which the statute is triggered. 

Generally, "the date the account is due" is when the statute of limitations commences for an action on an open account.  In Smithner, the borrower last made a payment on 2-9-2000, and the plaintiff/lender requested a minimum payment on the account by 3-11-2000.  The borrower never made another payment.  Because the Court considered the statute to have begun running either on the date of the last payment or the date the next payment was due, the lender's suit filed 5-30-2006 was beyond the six-year deadline and thus time-barred.  Please review the decision for possible exceptions to the rule or facts that could affect the relevant dates, however.     

Strict Foreclosure Unavailable Once Foreclosing Mortgagee Transfers Property To Third Party

Last year, in the wake of the Indiana Court of Appeals’ opinions in Deutsche Bank v. Mark Dill Plumbing, I described in four separate posts on April 17, April 24, May 4 and July 20, 2009 what happens if your title company or your foreclosure lawyer misses a junior lien in the lawsuit to enforce your mortgage.  Deutsche Bank did not definitively answer the question raised in my April 24th post, namely what happens if the foreclosing lender conveys the property before clearing title.  The federal court decision in Brightwell v. United States of America, 805 F.Supp. 1464 (S.D. Ind. 1992) dealt with that very issue, but not until the 2010 decision in Citizens State Bank of New Castle v. Countrywide Home Loans, 922 N.E.2d 655 (Ind. Ct. App. 2010) (.pdf) did Indiana formally adopted the Brightwell analysis. 

Order of events.  Here’s what happened in Citizens State Bank:

04/27/05: Lender obtained mortgage.
06/09/06: Money judgment entered against owners; Judgment Creditor perfected judgment lien on property.
08/28/06: Lender filed complaint to foreclose mortgage but did not name Judgment Creditor in action.
10/30/06: Lender obtained foreclosure judgment without terminating Judgment Creditor’s lien.
02/22/07: Lender obtained title to property at sheriff’s sale.
03/15/07: Lender recorded sheriff’s deed.
05/03/07: Lender transferred title to property to Federal National Mortgage Association (FNMA).
10/02/07: Upon learning of prior judgment lien, Lender filed complaint against Judgment Creditor for strict foreclosure.

Initially, no merger.  Citing to and following Deutsche Bank, the Court in Citizens State Bank concluded that Lender’s mortgage lien and title to the property did not merge when Lender acquired the property through the sheriff’s sale.  At that point, Lender’s mortgage lien had been preserved.  Unlike Deutsche Bank, however, Lender took the additional step, before clearing title, of transferring the property to FNMA, a third party. 

Applying Brightwell.  Indiana’s anti-merger rule benefits only the foreclosing mortgagee:   

By transferring the property to FNMA, [Lender] has already had “first crack” at a full recovery ahead of any junior lien holders . . . and the purpose of the anti-merger rule has been satisfied.  After the transfer to FNMA, [Lender] no longer had any interest in the property to protect, and there was no basis for its mortgage-assertion right to pass to FNMA.

The Court declared that Lender’s right to assert the mortgage against the Judgment Creditor was extinguished upon subsequent transfer of the property to FNMA.  As such, the third party, FNMA, took the property subject to the valid judgment lien. 

Message.  The Court, in footnote 4, echoed a theme from all of my 2009 posts on Deutsche Bank regarding the importance of obtaining appropriate title work before, during and after the foreclosure process:

We feel compelled to state the obvious.  All of this could have been avoided had [Lender] conducted a thorough title search of the property prior to the original foreclosure or had FNMA done the same prior to purchasing the property from [Lender], as such searches surely would have revealed [Judgment Creditor’s] properly recorded judgment lien.  While [Lender] and FNMA fancy these mistakes as “technicalities,” they are significant when applying principles of equity.

NOTE:  On June 29, 2011, the Indiana Supreme Court issued its opinion on transfer in  Citizens State Bank.  Accordingly, please refer to my October 7, 2011 post. 

To Be Enforceable, Promissory Notes Must Be Endorsed And Delivered

As articulated in FH Partners v. Cajbin, 2009 U.S. Dist. LEXIS 109986 (N.D. Ind. 2009) (.pdf), under Indiana law to be an enforceable negotiable instrument, such as a promissory note, it must be validly negotiated.  Representatives of commercial lending institutions and their counsel need to know that both endorsement and delivery must occur for a promissory note to be enforceable. 

The situation.  The loan at issue in FH Partners was pretty standard.  It involved a 1999 promissory note, a mortgage and personal guaranties.  The twist surrounded a Chapter 11 bankruptcy filing by the borrower/mortgagor and specifically an effort to renegotiate the underlying promissory note in 2007, after approval of the bankruptcy reorganization plan.  Counsel for the lender sent a new promissory note and mortgage to counsel for the borrower, and requested that the documents be executed and delivered back.  Evidently the borrower may have signed the promissory note, but the note was never delivered back to the lender.  The lender/mortgagee ultimately sued to enforce the original (1999) loan.  

The defense.  In response to the lender’s motion for summary judgment, the defendants (borrower/mortgagor and guarantors) contended that the suit was based upon the wrong debt instrument.  Specifically, the defendants asserted that the 2007 proposed promissory note served to extinguish the 1999 promissory note, as well as the individual guaranties of that note. 

Enforceability of note.  Magistrate Judge Nuechterlein of the Northern District of Indiana found the defendants’ arguments to be “unpersuasive.”  In Indiana, to have an enforceable negotiable instrument, “there must be a valid negotiation.”  The Court noted that a valid negotiation is a “two-step process” that “requires the endorsement and the delivery of the instrument.”  Ind. Code § 26-1-3.1-201. 

Applying the legal principles.  It was undisputed in FH Partners that the 2007 promissory note was never returned to the lender/mortgagee.  “This undisputed fact is fatal to the defendants’ argument.”  Although the 2007 proposed promissory note may have been signed and thus validly endorsed, the defendants offered no evidence to establish that the note was transferred to the lender/mortgagee.  As such, the note was not properly negotiated between the parties and thus was not enforceable.

Novation.  A similar, alternative legal theory asserted by the defendants surrounded the defense of “novation.”  The defendants claimed that the failed attempt to renegotiate the original promissory note amounted to a novation.  But, “to have a novation there must be a valid new contract which extinguishes the old contract.”  In FH Partners, the Court found that there was no new contract between the parties, so “obviously [there] could be no novation.”  The defendants failed to complete the necessary conditions of the proposed new note, and those failures “precluded the formation of a new contract.” 

Judgment for lender.  The defendants in FH Partners argued that they entered into a subsequent, valid and enforceable promissory note that resulted in their release from the original loan obligations.  Normally cases like these surround the lender’s contention that a particular promissory note is valid and enforceable.  Here, the lender succeeded by taking the opposite position for purposes of enforcing a prior loan.  The Court granted the lender/mortgagee’s motion for summary judgment on all counts.

One thing secured lenders can take away from the FH Partners case is to be careful when entering into negotiations to restructure debt.  For example, as I’ve posted here before, certain steps must be undertaken to avoid unwittingly releasing a guarantor from his or her obligations.  In FH Partners, the lender/mortgagee helped to protect itself by utilizing a transmittal letter of the 2007 proposed promissory note, which letter requested that the documents be executed, notarized and delivered back to it.  Those preconditions were not met.  For those and other reasons, the alleged replacement promissory note was neither valid nor enforceable.

Judgment Lien And Mortgage Lien Governed By Different Statutes Of Limitations

In Welch v. Heavelin, 2009 Ind. App. LEXIS 2518 (Ind. Ct. App. 2009) (.pdf) , mortgagor tried to defeat mortgagees’ foreclosure action by asserting the ten-year judgment lien statute of limitations defense.  The Indiana Court of Appeals rejected the mortgagor’s position and explained that the mortgagees sought to enforce a mortgage lien not a judgment lien.   

Creation of lien.  Husband and Wife were divorced in 1993.  In the divorce decree, the court awarded Husband certain real estate but required Husband to pay Wife money.  Husband’s payment obligation was secured by a mortgage on the real estate.  Husband/mortgagor did not pay the monetary obligation called for under the divorce decree, but Wife never enforced the mortgage.  She passed away in 2003, and her heirs were assigned the mortgage and therefore became the mortgagees.  They filed a foreclosure action in 2008, fifteen years after the creation of the mortgage. 

Mortgagor’s defense.  Husband/mortgagor, based upon Ind. Code § 34-55-9-2, claimed that the foreclosure action was time-barred because the lien expired after ten years, or in 2003.  The Court noted, however, that I.C. § 34-55-9-2 applies only to judgment liens or, more specifically, lien created by judgments for the recovery of money.  I wrote about this ten-year judgment lien statute on November 13, 2008. The mortgagees did not sue to foreclose a judgment lien.  They sued to foreclose the mortgage lien.   The statute upon which Husband/mortgagor relied therefore did not apply. 

Mortgage lien statute of limitations.  The Court concluded that the mortgagees’ foreclosure action was not time-barred because the mortgage was filed within twenty years of the creation of the mortgage lien.  The Court cited to I.C. § 32-28-4-1 for the proposition that an action to foreclose a mortgage made to secure payment of money is controlled by a twenty-year statute:

(b)  An action may not be brought or maintained in the courts of Indiana to foreclose a mortgage . . . if the last installment of the debt secured by the mortgage . . . as shown by the record of the mortgage . . . has been due more than ten (10) years.  However, a lien or mortgage described in this section that was created before September 1, 1982, expires twenty (20) years after the time the last installment becomes due, and an action may not be brought to foreclose the mortgage . . . when the last installment has been due more than twenty (20) years.

20 years?  Given the nature of the lien, the Court correctly relied upon I.C. § 32-28-4-1.  But, I’ve been unable to reconcile the Court’s conclusion with the statute’s clear language regarding a ten-year limitations period.  The mortgage in Welch was created after September 1, 1982 (December, 1993 to be exact).  The twenty-year limitations period is limited to mortgages created before September 1, 1982.   

What’s missing?  I do not intend to be critical or otherwise disrespectful to the Court.  Perhaps the opinion does not fully articulate all of the relevant facts, which is not unusual.  For example, the specific terms of the subject mortgage, including when (or whether) the last installment of the debt secured by the mortgage was due, are variables in I.C. § 32-28-4-1(b) not addressed in the opinion.  With the help of my colleague Blaire Henley, the only explanation I’ve been able to come up with relates to Section 2 of I.C. § 32-28-4, which states in relevant part:

if the record of a mortgage or lien . . . does not show when the debt or the last installment of the debt secured by the mortgage or lien becomes due, the mortgage or vendor’s lien expires twenty (20) years after the date on which the mortgage or lien is executed.

Application of I.C.§ 32-28-4-2 gets the Court to the twenty-year limitations period and thus justifies the Court’s ruling in favor of the mortgagees.  (Section 2 was not cited in the opinion, however.)  Please post a comment, e-mail me or call me if you have any knowledge about the Welch case specifically or the Court’s treatment of these statutes generally.  Also, for more on statutes of limitations, please refer to my March 9, 2009 post.  

For purposes of this post, it is important to understand that Indiana has statutes of limitation applicable to many different causes of action, and the limitation periods can be different.  In Welch, the Court properly articulated that the statute of limitations for a mortgage lien suit may be different than a suit based upon a judgment lien.  Although matters like those in Welch will rarely arise in a commercial mortgage foreclosures, secured lenders and their counsel still need to be acquainted with some of these issues, particularly to the extent priority disputes may arise.

What's A "Praecipe"?

It's helpful for representatives of commercial lending institutions to know some "legalese" when dealing with their foreclosure counsel and the various governmental entities involved with the Indiana foreclosure process.  Today's vocabulary lesson surrounds what it means to "praecipe`" (pronounced "press-ah-pee") for a sheriff's sale of real estate loan collateral.

Trigger.  Once the secured lender and its counsel have received a judgment and foreclosure decree, and after observing the three-month waiting period (if applicable), it's time to sell the real estate for purposes of satisfying all or part of the judgment.  In Indiana, to trigger the sheriff's sale process, Ind. Code 32-29-7-3(b)requires the lender/mortgagee/plaintiff/judgment creditor to file a praecipe for sheriff's sale with the clerk of the court.  Upon the filing of a praecipe, the clerk "shall promptly issue and certify to the sheriff of that county a copy of the judgment and decree under the seal of the court."

Definition.  A praecipe is a fancy (actually, a Latin) word for a written request.  Black's Law Dictionary defines the term, in pertinent part, as follows:  "includes an order to the clerk of court to issue an execution on a judgment already rendered....  Also an order, written out and signed, addressed to the clerk of a court, and requesting him to issue a particular writ." 

Details vary.  The logistics of the praecipe for sheriff's sale may vary by county and will depend upon how a particular court, clerk or sheriff's office conducts its business.  For example, a separate writ of execution may need to be filed.  Or, the praecipe itself may need to attach copies of the judgment and/or involve the tender of sale fees in advance.  As written here before, I strongly advise contacting your civil sheriff's office to confirm the who, what, when, where, why and how of putting the sheriff's sale's wheels into motion.  

As an aside, I'd like to mention that the frequency of my posts has dipped this month due to some pre-planned time away from the office, as well as preparation for and participation in a five-day jury trial that concluded this past Monday.  I plan on getting back on track with weekly posts in September.  As always, thanks for reading, commenting and emailing....    

Contents of Indiana Foreclosure Judgment/Decree

Once a secured lender and its counsel have filed the complaint for foreclosure, and assuming service of process has been perfected on all parties, it’s time to reduce the lender’s claims to a judgment.  Indeed, that is the purpose of filing suit.

Three methods.  There are three basic ways to obtain a judgment:  (1) a default judgment, (2) a motion for summary judgment and (3) a trial.  I previously wrote about default judgments on August 2, 2007 and about summary judgments on November 28, 2006.  On June 18, 2008, I compared those two options and concluded that, in Indiana, a summary judgment is preferable to a default judgment.

Trial.  If motions for default and/or summary judgment are denied, the secured lender’s only recourse is to try the case (or settle).  Mortgage foreclosure actions are equitable and, as such, are tried to the bench (see my October 23, 2009 for more on that issue).  Normally, the need for a trial will stem from a common law contract defense or, more likely, a counterclaim asserted by a defendant.  Typically, straight forward commercial mortgage foreclosures are ready-made for motions for summary judgment, so trials are rare. 

Form of judgment.  Regardless of the type of judgment, ultimately you and your counsel will want to submit a proposed judgment to the court at the time of, or immediately after, the filing of a motion for default judgment, a motion for summary judgment or any trial of the action.  It is advisable to articulate findings of fact and conclusions of law upon which the judgment is based.  We always attach as an exhibit to the judgment/decree a legal description of the real estate, which will be used by the sheriff’s office and in connection with the sheriff’s sale process.   

One component to any Indiana foreclosure judgment will relate to the promissory note and personal liability for the debt, sometimes called an in personam judgment, to be collected from the borrower/mortgagor after the sheriff’s sale, assuming there is a deficiency.  (A deficiency is the amount of money still owed after the sheriff’s sale or, in other words, the result of subtracting the sheriff’s sale price from the judgment amount.)  A second component to any judgment will relate to the mortgage, sometimes called an in rem judgment, meaning that the judgment amount may be satisfied through the sale of the real estate. 

Priority.  The judgment will include a decree of foreclosure that details the rights and priorities of the parties to the real estate and orders the sheriff’s sale.  The priority, in turn, will dictate the order of payment of any proceeds from the sheriff’s sale, a topic I discussed on January 9, 2007.

Relevant statutes.  Here are some of the statutes that pertain to foreclosure judgments: 

• I.C. § 32-30-10-5 “Judgment of Foreclosure; Personal Judgment; Sale of Property”
• I.C.§ 32-30-12-1 and 2 “Final Judgment Given in First Instance” and “Sale of Mortgaged Property Ordered in all Cases”
• I.C.§ 34-54-1-1 “Execution”
• I.C.§ 34-54-10-2 “Mortgage Actions”

Again, on Indiana, the custom and practice is for lender’s counsel to prepare and submit the proposed judgment/decree for the court to execute and enter.  This is a critical part of the process and a necessary expense.  There is important language that should be included in every decree, so ensure that your counsel is familiar with the terms of the relief provided by your loan documents and Indiana law.

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.

Indiana Has Three-Month Waiting Period Before Sheriff's Sales Can Be Triggered

Workout specialists from commercial lending institutions often ask me how quickly they can repossess their real estate loan collateral here in Indiana. One of my very first posts, back in November of 2006, generally addressed that question: Basic Foreclosure Process/Timing In Indiana. As I've mentioned before, to the chagrin of secured lenders, particularly when they're facing loans in default with no hope of a turnaround, mortgage foreclosures must be judicial or, in other words, through the court system. Foreclosures are lawsuits, with all the attendant delays and expense.

Three months post-complaint. Generally, real estate collateral must be sold, pursuant to a judge's decree (a judgment), by the county civil sheriff. Before triggering the post-judgment sale process, lenders and their counsel should remain mindful that Indiana has a statutory three-month waiting period that must first expire. Ind. Code 32-29-7-3(a) states:

In a proceeding for the foreclosure of a mortgage executed on real estate, process may not issue for the execution of a judgment or decree of sale for a period of three (3) months after the filing of a complaint in the proceeding.

As noted, the period starts with the filing of the complaint.

Rare. My experience has been that this rule will be a non-issue in the vast majority of cases. As a practical matter, this grace period should only come into play in situations involving motions for default judgment, which I normally don't recommend in commercial foreclosure cases anyway.

Exception. There is an exception to the three-month rule in I.C. 32-29-7-3(a). Subsection (2) says:

if the court or an enforcement authority ... finds that the mortgaged real estate is residential real estate and 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.

As noted, this exception does not apply to commercial properties. For residential/consumer cases involving vacant/abandoned houses, you and your counsel should ensure the court includes these factual findings in your foreclosure decree so as to avoid the grace period.

Even though this three-month requirement will rarely be an obstacle in a commercial foreclosure, it's still important to know that it exists as you and your counsel consider how long it may be before there will be a sheriff's sale.

NOTE: I.C. 32-29-7-3 was amended in 2012. See my March 23, 2012 post.

Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b).  Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure sale.  Unlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

Thanks to our firm’s summer associate, Adam Wanee, for helping with this research.

Negative Equity/PMSI - Split Of Authority In The Seventh Circuit

On August 29, 2008, I addressed the question of "What is a 'purchase money security interest?'"  The case giving rise to my discussion was In Re: Myers, 2008 Bankr. LEXIS 2172, and the circumstances surrounded a bankruptcy case and whether a creditor's purchase money security interest (PMSI) extended to the negative equity part of a loan to purchase a vehicle.  Although the primary purpose of my post was to define and illustrate a PMSI, I necessarily had to point out that Myers concluded that the entire loan was secured -- the creditor's PMSI covered the money used to finance the negative equity. 

The purpose of today's post simply is to provide a footnote that bankruptcy courts within Indiana's circuit (the Seventh Circuit) are split on the negative equity issue.  Although representative of the minority view, In Re: White, 2009 Bankr. LEXIS 3156 (.pdf) is a strong opinion from Judge Lorch that negative equity "is merely the debtor's antecedent debt which is assumed by the [creditor]."  Thus it "does not fit within the definition of a PMSI...." 

The Myers and White opinons offer differing views on the negative equity question, but both are helpful in understanding the nature of a PMSI and a secured lender's rights in such a lien.   

 

Despite Lis Pendens, Onus Generally On Plaintiffs (Mortgagees), Not Tenants, To Deal With Leasehold Interests In Mortgage Foreclosure Actions

This follows-up my June 28th post about Myers v. Leedy, “To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions.”  What actions must the tenant take if it knows or should know about a pending foreclosure action? 

Seller’s contention.  One of the arguments of the land contract seller on appeal of the Myers case was that the tenant had both constructive and actual knowledge of the pending breach of contract action at the time the tenant entered into the lease for the 2006 crop season.  The seller claimed it should not have been forced to name the tenant as a defendant in the action; rather, the tenant should himself have intervened in that action in order to protect his interests. 

Lis pendens, generally.  The seller’s argument triggered the Court’s analysis of Indiana lis pendens law.  See, Ind. Code §§ 32-30-11-1 to 10 and Indiana T. R. 63.1.  “Lis pendens” is Latin for “pending suit.”  The Court outlined that, historically, lis pendens provided that one who acquires an interest in real estate during the pendency of a lawsuit concerning the title to that real estate takes notice of such lawsuit and has to take its interest in the real estate subject to any subsequent judgment.  Ind. Code § 32-30-11-2 modified the common law and requires that the plaintiff file a separate, written notice with the county clerk’s office to perfect the lis pendens protections.  (I also wrote about lis pendens on 12-27-07 and 9-20-07.) 

Lis pendens, exception.  Statutory written notice is not required if the suit is founded upon a written instrument executed by the party having title to the real estate (like a mortgage) as appears from the properly-filed county records.  Thus the filing of the mortgage foreclosure complaint itself will provide the requisite constructive notice to post-suit claimants.  From the Court: 

We have no quarrel with the general proposition that the commencement of a foreclosure action standing alone provides third parties with constructive notice of a pending lawsuit. 

Constructive notice, but . . ..  In Myers, the seller retained legal title to the subject real estate, which interest was reflected by the memorandum of contract recorded in the county recorder’s office.  Under Indiana lis pendens law, therefore, the tenant was deemed to have constructive notice of the suit on the land contract against the buyer commenced two years before the subject lease.  But the Court did not adopt the seller’s lis pendens-related argument, reasoning that it “makes no sense” to say that a lis pendens notice of a foreclosure proceeding should bind a tenant already in possession.  To hold otherwise, a tenant in possession “must regularly check the records of the County Recorder’s office to determine whether a foreclosure action has been filed.” 

Actual notice side-stepped.  The Court also addressed the issue of the tenant’s alleged actual notice of the underlying lawsuit.  Should the tenant have intervened in the pending litigation of which he was aware?  In the final analysis, it appears that the Court may have simply concluded that the evidence was not altogether clear on whether, or to what extent, the tenant knew of the suit as it may have related to the real estate and his rights.  The Court ultimately affirmed the trial court’s finding that, among other things, the tenant should have been allowed to finish planting and harvesting his crop in 2006.  The Court had to choose a side, and it did.

“Should have known.”  As noted in my June 28th post, one of the critical factors in the Court’s decision was that the seller had actual knowledge that the tenant was farming the property at the time seller filed suit.  Thus the Court did not expand on the “upon reasonable diligence should have known” part of the test.  The Court appears to be deliberate in its requirement of notice of a tenant’s “possession” of the property.  The Court’s charge seems to be that lenders must undertake reasonable measures to determine whether there is a tenant in possession of the property.  To me, this implies observing the real estate.  Perhaps a site visit or property inspection may need to occur.  Having said that, we must remember that Myers was not a mortgage foreclosure case and dealt with the unique situation of a single tenant (farmer) on the property.  Ultimately, a secured lender’s “reasonable diligence” will need to be evaluated on a case-by-case basis. 

Business decision.  As a practical matter, in most commercial mortgage foreclosure actions the lender/mortgagee will not want to terminate any of the existing leases.  The leases generate income and thus increase the value of the property.  There are, however, instances where one or more tenants of a subject property may be undesirable and thus the target of termination.  If a business decision is made to terminate such post-mortgage leasehold interests, I recommend that you and your counsel ensure that those tenants are named as defendants in the foreclosure action. 

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. 

To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions

Secured lenders struggling with the question of whether tenants must be parties to Indiana commercial mortgage foreclosure suits have been given a fairly definitive answer by the Indiana Supreme Court in Myers v. Leedy, 2009 Ind. LEXIS 1370 (Ind. 2009) (.pdf).  Myers actually involved the enforcement of a land contract, not a mortgage, but to the chagrin of Chief Justice Shephard, who concurred in the result, the Myers opinion applies with equal vigor to mortgage foreclosures.  In most instances, if a business decision is made to end a post-mortgage leasing relationship, the tenant in possession should be included in the litigation.

Myers particulars.  In August of 2002, two individuals entered into a land contract for the purchase of farmland and had a memorandum of that contract recorded.  In 2004, the land contract vendee (“buyer”) entered into a written lease with a third party to rent the tillable soil.  That third party (“tenant”) farmed the land in 2004, and the owner/land contract vendor (“seller”) had actual knowledge of this.  Leases between the same parties for the same purpose were entered into in 2005 and in 2006, again with the actual knowledge of the seller.  (The leases were not recorded, however.)

Proceedings.  In December of 2004, the seller sued the buyer for breach of the land contract but did not name the tenant as a defendant.  On May 17, 2006, the trial court ruled that the buyer had defaulted under the land contract and ordered the forfeiture of the buyer’s interest in the real estate.  On May 20, 2006, pursuant to the previously-existing lease, the tenant began farming the property.  The next day, the seller ordered the tenant off the property, and the tenant never returned.  Later, the tenant sued the seller because the seller prohibited the tenant from farming the property in 2006. 

The question.  The Myers case presented a matter of first impression: 

Whether a tenant’s leasehold interest in property survives a land contract vendee’s forfeiture when the tenant was not made a party to the forfeiture action and where the vendor had actual knowledge that the tenant was in possession of the property.

To answer that question, the Court examined whether a tenancy survives a foreclosure action.  The Court explained that, for purposes of its holding, there was no reason for treating forfeiture and foreclosure cases differently. 

Test for inclusion.  The Court in Myers set out the following test for inclusion of a tenant in a foreclosure action:

Where at the time a mortgagee files suit for foreclosure it knows, or upon reasonable diligence should have known, that a tenant is in possession of the property, the tenant’s leasehold interest survives the foreclosure action unless the tenant is made a party to that action.

The Court noted that the “weight of authority” provides that “a lease is terminated by the foreclosure of a prior mortgage if, and only if, the tenants are made parties to the foreclosure proceedings.” 

An aside.  Please note that the subject lease came into existence after the subject land contract.  Thus the Myers case speaks to post-mortgage leases, not leases executed before the recordation of the mortgage.  It is my understanding that, in Indiana, a foreclosing mortgagee generally will acquire the real estate collateral subject to any preexisting, recorded leases, regardless of whether the tenants are defendants in the action.  Whether a foreclosing mortgagee would acquire the property subject to any preexisting unrecorded leases is a post topic for another day . . ..)

Read all docs.  Footnote 2 on pp. 5-6 of the Court’s opinion acknowledges that the rights of the parties may otherwise be defined or governed by contract or subordinated without the need for joinder of the tenant.

Actual knowledge.  In Myers, the evidence was not in dispute that the seller had actual knowledge that the tenant was farming the subject property at the time he filed the breach of contract action against the buyer.  Because the seller failed to join the tenant in the action, the subsequent forfeiture of the buyer’s interest in the property did not extinguish the tenant’s leasehold interest.

I’m not finished with Myers … and will be posting one or two more articles based upon this significant opinion rendered by the Indiana Supreme Court….

Sheriff's Deeds In Marion County (Indianapolis): One-Page Rule

On March 7, 2010, I provided a Sheriff's Sale Checklist - Marion County Illustration.  As noted, one of a foreclosing lender's tasks is to tender a sheriff's deed (click for local form) to the sheriff's office to perfect the sale bid.  Last August, the Marion County Sheriff's Office revised some of its sale rules and requirements.  Here is a link to the office's site on that issue:  Real Estate Rules for Attorneys.

Rules.  With respect to the sheriff's deed form, the Marion County Sheriff's website says:  

Notices, deeds clerk returns and bid forms must be on 8 ½” by 11” paper.  All forms must have the Sheriff’s file number in the upper right corner.  Documents without the file number in the upper right corner will NOT be processed.  All forms MUST be completely filled out with accurate information.  Deeds must be one (1) page.  If second page is needed, the legal description may be an attachment, BUT the street address and parcel number must be spelled out in the area where deed indicates legal description is attached.  Deeds without the signature/notary page on front will NOT BE SIGNED!

As noted, deeds should be one page.

Rejection.  In the past, absent a very short legal description of the property, our firm routinely tendered sheriff's deeds with the legal description attached as an exhibit.  At a sale last month, for the first time the sheriff's office rejected our deed and required us to provide another deed with the legal description contained on its face.  The one-page rule was enforced.  (Lesson learned.) 

Rationale.  In speaking with the sheriff's office, I was told that the primary reason for the one-page requirement is to ensure that legal descriptions don't get misplaced or lost.  The goal is to protect the integrity of the deed.  Since Marion County processes 400-600 deeds for each month's sale, the one-page guideline is understandable.

Exception?  In order to squeeze our legal on last month's deed, my secretary had to work some magic with fonts, margins, etc.  She got it done, and the sheriff evidently has accepted our revised deed.  But what if the legal simply is too long to insert into a one-page deed?  I'm informed by the sheriff's office that the incorporation of an exhibit will be acceptable in those instances.  The rules above support this, but note that the street address and parcel number must still be typed on the face of the deed. 

Plan and discuss.  In the end, common sense should and likely will prevail, but clearly the "default" (preferred) approach by the Marion County Sheriff is to limit the deed to one page, without any attached exhibits.  Because local rules, customs and practices prevail in each county, I recommend that you or your lawyer contact the county sheriff's offices in advance of your sales to ensure you are complying with sale details, such as the form of deed.  In the meantime, please email me or post a comment with regard to your experiences with attaching legal descriptions to sheriff's deeds in counties other than Marion, thanks.    

IndyStar: Economic Storm Buffets Builder's American Dream

Click here for a story from today's Indianapolis Star that illustrates the current commercial development/foreclosure environment in Central Indiana and elsewhere.   

The Pesky Sales Disclosure Form - Marion County (Indianapolis) Update

I posted a sheriff's sale checklist on March 7, 2010, and I've written about the sales disclosure form (SDF) component to the sheriff's sale process previously.  The involvement and handling of SDF's in connection with the sheriff's sale of your real estate loan collateral continues to evolve.  Please remain mindful that local rules, customs and practices control.  To fully prepare for the sale, contact your county civil sheriff's office in advance.  

The Marion County Civil Sheriff's Office now requires that, before they will accept the SDF, it must first be submitted and completed on line.  Here is a link to the site for submission:  SDF Link.  I'm also providing a .pdf of a cheat sheet, with contact information, regarding this process:  SDF .pdf.  The plaintiff/mortgagee/bidder at the sheriff's sale must complete the SDF on line and then submit the printed form (with the auditor's fee check) to the sheriff's office at the time one submits the sale bid.  (This has something to do with the fact that the on line form, once printed, contains data in the upper right corner that shows the appropriate on line submission.)  Please note that the form itself will not be fully completed since the sheriff will need to execute it post-sale.  

Please email or post a comment if you or your foreclosure counsel have had a different experience.  I have not yet seen this on line requirement in other counties, but perhaps this is changing across the state.  As I've posted before, in other counties, including Marion County, a hard copy of the blank form could be completed and submitted to the sheriff.

Enough about SDF's -- I'm now going on a family vacation and will post something again during the week of June 14th, if not before....   

Corporate Veil Pierced In Recent Decision

Last week, while discussing the G4S case, I suggested that efforts to collect judgments by piercing the corporate veil may be better left for post-judgment proceedings supplemental.  With facts and circumstances like those in Longhi v. Mazzoni, 2009 Ind. App. LEXIS 2093 (Ind. Ct. App. 2009) (.pdf), however, clearly a pre-judgment effort to pierce can be appropriate.  Unlike the G4S case, Longhi involved very specific allegations and evidence of fraud.  In fact, the plaintiffs did not even name as defendants the corporate entities in question.  The plaintiffs proceeded directly against the alleged bad actor (corporate agent/representative) under the veil-piercing theory. 

Facts, distilled to their essence.  Veil-piercing cases tend to be very fact sensitive, so I must gloss over the facts.  The underlying corporate entities were in the business of residential real estate development.  The defendant was a shareholder/officer in the entities.  The defendant negotiated to build the plaintiffs a house at a 50% discount.  The plaintiffs entered into a purchase agreement.  The executed documents provided that the $50,000 paid by the plaintiffs was an earnest money deposit.  But other facts showed that the corporate entities actually intended the $50,000 to be an investment in the development project and not a standard earnest money deposit.  The entities never built the plaintiffs’ house, never deeded the real estate to them and never refunded the $50,000.

Piercing issues.  Longhi has a nice outline of the general rules applicable to piercing the corporate veil, which rules and policies I have posted here before.  Of the eight factors typically weighed by Indiana courts in deciding whether to pierce the corporate veil, the Court of Appeals focused in detail on (1) undercapitalization and (2) whether the defendant used the corporate entities to promote fraud. 

Undercapitalization.  The Court cited to a definition of “inadequate capitalization” as “capitalization very small in relation to the nature of the business of the corporation and the risks attendant to such business.”  The Court stated that the adequacy of capital is measured “by evaluating the amount of capital the company had at the time of its formation, unless the company at some point substantially expands the size or nature of its business with an attendant increase in business hazards.”  Again, these veil-piercing cases tend to be very fact-sensitive, meaning that courts typically must evaluate many pieces of information and documentation.  One should read the opinion for a more in-depth analysis of the facts.  In the end, the Court affirmed the trial court’s findings, which included (1) that the developers needed, but didn’t have, $400,000 at the time of the venture’s formation and (2) that the developers hoped to raise sufficient capital through large down payments.  The main point here is that undercapitalization may be a factor in veil-piercing cases and that the Longhi case provides guidance on the issue. 

Promotion of fraud.  The Court also affirmed the trial court’s decision as to the fraud element of the veil-piercing claim.  The alleged fraud centered upon the plaintiffs’ belief that they were making an earnest money deposit on a house, not an investment in the development project.  One of the critical facts was that the purchase agreement required the plaintiffs’ $50,000 to be placed into a broker’s trust account, but the money instead went to a corporate account used to finance the development of the project. 

Although not mentioned in the opinion, I’m guessing that that the plaintiffs in Longhi knew the corporate entities were judgment-proof, so the plaintiffs focused all of their energies on recovering their 50k from the key player in the transaction through a direct veil-piercing suit.  The plaintiffs succeeded in obtaining a judgment, which included treble damages, that the Court of Appeals affirmed.

Veil-Piercing Claim Better Left For Proceedings Supplemental

A recent decision by Magistrate Judge Jane Magnus-Stinson in the Southern District of Indiana, G4S Justice Services, Inc. v. Correctional Program Services, Inc., 2009 U.S. Dist. LEXIS 88689 (S.D. Ind. 2009) (.pdf), explains, albeit indirectly, why efforts to collect judgments by piercing the corporate veil are more appropriate in the context of proceedings supplemental.   

Strategic decision.  In G4S, the plaintiff pursued a strategy I have seen but have never myself utilized.  The plaintiff filed a lawsuit against a defendant corporation seeking, among other things, damages for breach of contract.  The contract/debt was not personally guaranteed by the owners of the corporation.  Nevertheless, the plaintiff included a cause of action seeking to pierce the defendant’s corporate veil and named the corporation’s shareholders, personally.  I’ve posted about veil piercing before, most recently on January 19, 2009. 

Dismissal, on technicality.  The Court’s opinion arose out of the defendant shareholders’ pre-trial motion for judgment on the pleadings seeking a dismissal of the count asserted against them.  The Court held that the plaintiff’s veil-piercing allegations in the complaint were conclusory and did not contain any details “that would plausibly justify concluding that [defendant corporation] did in fact [fraudulently] pay the [shareholders’] personal obligations.”  The Court seemed to feel that the allegations were not based upon anything other than speculation.  The Court therefore dismissed the count related to the defendant shareholders:  there was a “complete absence of any allegations that would justify piercing [defendant corporation’s] corporate veil.”

Better strategy.  In dicta (legalese for “opinions of a judge which do not embody the resolution or determination of the court,” Black’s Law Dictionary), Judge Magnus-Stinson suggested that veil-piercing claims are better left for post-judgment proceedings.  In the event the plaintiff in G4S subsequently obtained a money judgment that the assets of the defendant corporation could not satisfy, the plaintiff would have the ability to conduct proceedings supplemental, a post-judgment proceeding I touched upon on June 29, 2007.  Proceedings supplemental, commonly referred to by lawyers as “pro supp,” are equitable in nature and “permit the judgment-creditor to discover and obtain property held by third-parties that ought to be used to satisfy the judgment.”  For example, in that process:

The judgment-creditor can obtain access to the judgment-debtor’s books and records.  See Fed. R. Civ. Pro. 69(a)(2); Ind. T.R. 69(E)(4).  Using information obtained from those sources, judgment-creditors can—and do—argue that a court should pierce the judgment-debtors’ corporate veil and make their shareholders’ assets available to satisfy the judgment.

Later, perhaps.  The Court made it clear that the dismissal of the defendant shareholders was without prejudice (not final or permanent) and that the plaintiff could revisit veil-piercing during proceedings supplemental “in the event it obtains a judgment against [defendant corporation], and assuming that it can obtain evidence to support the imposition of such a remedy.” 

The notion is that there is a time and place for piercing the corporate veil - during post-judgment proceedings, not during the litigation of the underlying claims.  Perhaps other judges or lawyers may feel differently, but I share the Court’s view in G4S.  Please e-mail or post a comment with your thoughts.

Known Judgment Lien Is Purchaser’s Downfall In Recent Lien Enforcement Case

Judgment liens and the bona fide purchaser doctrine are topics in the Indiana Court of Appeals’ decision in Lobb v. Hudson-Lobb, 2009 Ind. App. LEXIS 1630 (Ind. Ct. App. 2009) (Lobb.pdf) .  The case arises out of a trial court’s order to sell real estate to satisfy a judgment lien created by a prior divorce decree.  As explained, the purchaser acquired the property subject to an enforceable judgment lien.

The setting.  Lobb involved Husband, Wife and the husband’s Parents.  Husband filed for divorce, which resulted in a decree that in part granted Husband title to real estate previously owned jointly by the couple.  The decree also provided that Wife receive $50,000 for her interest in the real estate, plus another $167,000 in cash.  Wife deeded her interest in the real estate to Husband and received the required $50,000.  Although Wife received additional cash payments, the entire amount owed by Husband remained unpaid when Husband deeded the real estate to Parents.  Wife later filed the subject action against Parents to foreclose her judgment lien on the real estate.  The trial court rendered a foreclosure judgment in favor of Wife that led to the subject appeal.

Valid lien?  The first issue addressed in the Lobb opinion was whether the money judgment in the divorce decree constituted an enforceable judgment lien.  Parents contended that the lien was not valid because it was not recorded with the county recorder’s office.  In Indiana, a judgment lien is purely statutory, and Ind. Code § 34-55-9-2 provides that all final judgments for the recovery of money constitute a lien upon real estate in the county where the judgment has been “entered and indexed . . ..”  T.R. 58(A) states, in part, that the court shall promptly prepare and sign the judgment, and “the clerk shall thereupon enter the judgment in the Record of Judgments and Orders” (commonly known in Indiana as the “judgment docket”).  This step is an act to be performed by the county clerk, not the parties.  As such, Wife was not required to cause the decree to be entered in the judgment docket.  Perfection of judgment liens in Indiana essentially occur automatically and do not involve recordation in the recorder’s office. 

BFP defense defeated.  The Lobb opinion suggests that it was not entirely clear whether the divorce decree had been entered into the judgment docket.  Nevertheless, the Parents lost the case because it was clear that they had prior, actual knowledge of Wife’s judgment lien.  Parents asserted that Wife’s foreclosure action should be defeated because Parents were bona fide purchasers without notice - a doctrine I’ve discussed here previously.  But the Court noted that “the controlling and dispositive fact is that the [Parents] had actual notice of Wife’s judgment lien.”  Before buying the real estate, Parents had a copy of the decree and knew the decree awarded wife $167,000.  In Indiana, “a person with actual notice is bound by the terms of a valid instrument, even when that instrument has not been recorded so as to provide constructive notice.”  The Court concluded Parents were bound by such decree:

[Parents] are not bona fide purchasers and, thus, they have not shown that they are exempt from execution levy.  In sum, this case does not involve a good faith purchaser of the property for value and without notice, and our holding is limited to situations in which the purchaser of the property has actual knowledge of the unsatisfied judgment lien.

Points.  The primary thing secured lenders can take away from Lobb is that any money judgment they obtain in Indiana automatically becomes a lien on real estate owned by the defendant in the county where the judgment was entered.  Unlike with mortgages, deeds, etc., there is no need in Indiana to separately record the judgment with the recorder’s office.  A secondary point from Lobb is that proof of a purchaser’s actual knowledge of an adverse lien will prevent the purchaser from utilizing the bona fide purchaser defense to defeat the lien enforcement action.  

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. 

Wells Fargo, Part III: Absence Of Loan Default Interferes With Appointment of Receiver

This is the third of three posts about the loan enforcement/receivership-related opinion in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  Today’s edition explores a rare scenario in Indiana when a defendant borrower defeated a plaintiff lender’s motion to appoint a receiver.  The Court of Appeals concluded that, technically, the trial court erred when it denied the receivership, but in the end the error was harmless.

Error.  The lender in Wells Fargo sought the immediate appointment of a receiver.  The trial court denied the motion, and the lender appealed.  On appeal, the lender asserted that it properly met the statutory requirements in I.C. § 32-30-5-1(4) as interpreted by Citizens v. Innsbrook, 833 N.E.2d 1045 (Ind. Ct. App. 2005).  The Court stated:  

Here, it is undisputed that (1) the [real estate] is not occupied by [borrower] as its  principal residence, (2)[borrower] agreed in the Mortgage to the appointment of a receiver in the event of foreclosure proceedings, (3) the [real estate] is a commercial retail complex occupied by tenants who are entitled to possess a portion of the property and who are not liable for the debt secured by the mortgage, and (4) all or any portion of the property is being leased to those tenants.  Pursuant to Subsection 4, therefore, the appointment of a receiver was mandatory.

(See July 25, 2008 post.)  The Court conceded that, pursuant to the receivership statute “the trial court should have granted [the lender’s] motion to appoint a receiver . . ..” 

But . . . The Court’s analysis did not end there.  Critical to the outcome was the unenforceability of the cross-guaranty I discussed last week.  The borrower had made timely payments on the subject loan (Loan 1) for ten years and was prepared to pay off Loan 1 until the lender, citing to the cross-guaranty, rescinded a previously-submitted payoff statement.  Evidently, the lender later refused to accept payment without an accompanying payoff of Loan 2, the alleged cross-collateralized loan that was in default and already had been accelerated. 

An out, maybe.  The Court remanded the case to the trial court with instructions that the lender “provide a reasonable payoff statement within a reasonable period of time to be determined by the trial court and that [the borrower] then be given a reasonable period of time to pay off the mortgage accordingly.”  If the borrower complies with the pay off, then the lender’s foreclosure action will be moot.  If, however, the borrower is unable to comply with the new payoff statement, “then at that point the loan undisputedly would be in default and the trial court would and should appropriately appoint a receiver.”  But at the current stage in the proceedings, “the trial court’s decision to deny the request for receiver was, at most, harmless error.”

Lack of cross-default the key.  The receivership issue in Wells Fargo was rather unique given the facts and circumstances in the case, including the problems with the loan documents and certain pre-suit negotiations.  The case rested on an unenforceable cross-collateral/default agreement, meaning that the loan at the center of the receivership dispute was not in default at the time the foreclosure suit began.  The Court gave the borrower a second chance to pay off the subject loan.  (By then, the loan had matured.)  Assuming a payoff, the lender will not be permitted to foreclose, much less have a receiver appointed.  

Although, in general, appointments of receivers in Indiana commercial mortgage foreclosure cases are mandatory, Wells Fargo provides insight into one of the only ways around that mandatory requirement - if the borrower can convince the trial court that the subject loan is not in default.  Normally, of course, that is a difficult proposition, given that the basic premise of all mortgage foreclosure cases is that the loan is in default.

Unsigned Cross-Collateralization Agreement Unenforceable In Recent Case

This will supplement my April 5, 2010 post regarding Wells Fargo v. Midland.  If you’re a secured lender struggling with cross-defaulted and cross-collateralized loans, hopefully you have fully-signed agreements clearly capturing the intent of the deal.  Wells Fargo shows what might happen if you don’t. 

Cross-collateralization problems.  One of the two loans at issue in Wells Fargo was not in default.  The borrower thus fought the foreclosure action related to the loan that was current.  The question became whether a non-executed draft of a cross-guaranty, which contained cross-default and cross-collateralization provisions, should have been incorporated into the executed loan documents memorializing two loans.  The subject borrower never executed the cross-guaranty.  Despite that fact, the lender sought to establish that an executed mortgage incorporated the cross-guaranty so as to permit the lender to enforce defaults on both loans.   

Statute of Frauds.  If you have ever heard the term “Statute of Frauds” and wondered what it meant in the foreclosure context, Wells Fargo provides guidance.  The applicable statute in this case is I.C. § 32-21-1-1(b).  Generally, contracts subject to this statute “must be in writing and signed by the party against whom enforcement is sought.”  In Wells Fargo, the cross-guaranty in question was subject to the Statute of Frauds because it was “a promise to answer for the debt of another.” 

Exception to statute?  In Indiana, there are limited circumstances in which an unsigned document can satisfy the Statute of Frauds.  A memorandum satisfying the statute may consist of several writings even though only one writing is signed.  The test is:

The signed instrument must so clearly and definitely refer to the unsigned one that by force of the reference the unsigned one becomes a part of the signed instrument.

Thus the question in Wells Fargo was whether the signed mortgage “so clearly and definitely [referred] to the unsigned cross-guaranty that by force of that reference, the cross-guaranty became a part of the mortgage.”  The Court examined the loan documents and ultimately concluded that they did not satisfy the test. 

Lender Liability Act.  The lender in Wells Fargo got creative with a second theory around the Statute of Frauds that focused on Indiana’s Lender Liability Act, about which I wrote on July 11, 2008.  The lender argued that the conclusion not to enforce the cross-guaranty necessarily meant that the original mortgage had been amended.  Because the ILLA provides that a credit agreement may not be amended without a written agreement, the lender asserted that the signed mortgage must control all the material terms and conditions of the loan, including the alleged cross-collateralization term.  (See I.C. § 26-2-9-5).  But the Court rejected the premise that there was a change and/or revision to the mortgage, stating “that the cross-guaranty provision in the mortgage was, essentially, meaningless” from the start:

When the parties either failed to agree upon the terms of a cross-guaranty, or failed to ensure that the final version was executed, their own conduct resulted in a document that contained a provision referring to a document that did not exist.

Get signatures.  The Court stood firm that the unexecuted cross-guaranty did not survive the Statute of Frauds and that the result did not run afoul of the ILLA.  The obvious lesson here is to make sure all the relevant papers memorializing the terms and conditions of a loan are signed by the appropriate parties.  The absence in Wells Fargo of a signed cross-collateralization agreement, which may have been a simple oversight, prevented the lender from fully enforcing rights that even the borrower may have intended to be a part of the deal.

Next week’s post will explain how the lender’s cross-default/cross-collateralization problem complicated its efforts to have a receiver appointed.

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.

Receiver Not Authorized To Sell Property Without Mortgagor’s Consent

On January 11 and January 20, 2010, I discussed issues related to Indiana receiver sales and some of the unresolved questions under Indiana law.  Shortly thereafter, the Indiana Court of Appeals definitively answered one of those questions in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  The opinion provides that the trial court erred in a mortgage foreclosure case when it gave the receiver the authority to sell the subject real estate at a private sale without the mortgagor’s consent.

Backdrop.  Lender/mortgagee Wells Fargo filed a commercial mortgage foreclosure suit against borrower/mortgagee Tippecanoe.  Wells Fargo promptly filed a motion for the appointment of a receiver, and the order granting the motion provided that the receiver had the power to sell the subject real estate at a private sale without Tippecanoe’s consent. 

Operative statutes.  The Court first noted that the general receivership statute provides “a non-exhaustive list of the powers” a court may grant to a receiver at Ind. Code § 32-30-5-7(5).  Among other things, “the receiver may, under the control of the court or the judge:  (5) sell property . . . in the receiver’s own name . . ..”  The Court next cited to a “more specific statute” governing receiverships in mortgage foreclosure actions that articulates the receiver’s role more narrowly and, significantly, “does not include the right to sell the mortgaged property at a private sale.”  See, I.C. § 32-29-7-11(a).  The Court concluded that the latter statute carried more weight because it was a more specific statute pertaining to the subject of mortgage foreclosures. 

Stripping the right of redemption.  The Court then considered Indiana’s statutory right of redemption at I.C. § 32-29-7-7.  The Court proclaimed that “every defendant in a mortgage foreclosure action has the right to redeem its property by paying off the amount due at any time before the property is sold at a sheriff’s sale.”  Tippecanoe asserted that the trial court’s authorization of the receiver to sell the subject real estate at a private sale, without Tippecanoe’s consent and before the sheriff’s sale, “stripped Tippecanoe of its statutory right of redemption.”  The Court agreed.

The only “sale” contemplated by the statutes governing receiverships over mortgage[d] property is a sheriff’s sale.  I.C. § § 32-29-7-3, -4, -7, -8, -9, -10.  Thus, all property owners are entitled to redeem their property up to the date on which their property is sold by the sheriff.  See also I.C. § 32-29-1-3 (prohibiting a mortgage instrument from authorizing the mortgagee—i.e., the bank—from selling the mortgaged property); Ellsworth v. Homemakers Fin. Serv., Inc., 424 N.E.2d 166, 169 (Ind. Ct. App. 1981) (holding that “[a] mortgagee is not permitted to sell mortgaged premises, but such sale shall be made by judicial proceeding” and that “[t]he judgment of foreclosure shall order the mortgaged premises sold by the sheriff”).  It must be true, therefore, that any receiver charged with preserving and maintaining mortgaged property must do so through the date of the sheriff’s sale and may not sell the real property prior to that time without the owner’s consent.  By giving the receiver herein the authority to sell the Tippecanoe property prior to a sheriff’s sale and without Tippecanoe’s consent, the trial court stripped Tippecanoe of its statutory right of redemption.

Waiver?  The primary contention of Wells Fargo on appeal was that Tippecanoe previously waived its right of redemption in the mortgage, which indeed contained a waiver clause.  The argument failed, however, because Tippecanoe executed the waiver before the default occurred.  Pursuant to Indiana cases, the waiver could not be enforced. 

Going forward.  The Wells Fargo opinion definitively answers the question of whether the receiver, in a mortgage foreclosure case and at the request of the plaintiff mortgagee, can sell the property if the owner/borrower/mortgagor contests the sale.  The decision does not, however, conclusively resolve the issue of whether the receiver can sell the property when other parties, such as junior mortgagees or mechanic’s lien holders, object.  One could argue that the Court’s rationale supports the notion that the consent of all parties may be required for a receiver’s sale to happen.  I’ll continue to monitor the cases to see whether anything else develops in this area. 

Wells Fargo addresses a handful of other important issues that are useful for commercial mortgage lenders and their foreclosure counsel.  Next week’s post will discuss those points.  This week’s lesson is that a lender cannot force a receiver’s sale over the objection of a borrower.  Mortgagees and receivers need the mortgagor’s consent. 

Judgment Granted To Lender Despite Absence Of Signature On Promissory Note

Has your lending institution failed to maintain an original or copy of an executed promissory note?  Similar to the case discussed in my February 7, 2009 post No Signatures, No Promissory Notes, No Problem, the Indiana Court of Appeals in Baldwin v. Tippecanoe Land & Cattle, 2009 Ind. App. LEXIS 1491 (Ind. Ct. App. 2009) (.pdf) upheld a summary judgment for the plaintiff lender even though the lender could not produce the signed promissory note. 

Procedural history.  Lender filed a claim to foreclose its second mortgage and attached to the complaint a promissory note that was not signed.  (The mortgage did, however, appear to contain the borrower’s signature, and the unsigned note referred specifically to the accompanying mortgage.)  In his response to the lender’s claim, the borrower entered a “general denial” pursuant to Indiana Trial Rule 8(B).  The lender later filed a motion for summary judgment that the trial court granted.

The borrower’s contentions.  The borrower argued that the mortgage was unenforceable because the note was not signed by him. 

The lender’s contentions.  The lender’s theory to get around the absence of the signature rested upon Ind. T. R. 9.2(B), which states:

When a pleading is founded on a written instrument and the instrument or a copy thereof is included in or filed with the pleading, execution of such instrument . . . shall be deemed to be established . .  . unless execution be denied under oath in the responsive pleading or by an affidavit filed therewith.

The lender’s point was that the execution of the note was deemed to be established pursuant to this trial rule. 

Rule 8(B) versus 9.2(B).  The Court of Appeals analyzed the technical requirements of Trial Rules 8(B) and 9.2(B), as well as Rule 11(A) dealing with signatures on court filings.  Those rules, collectively, “mean that the attorney’s signature on a general denial [per Rule 8(B)] rejects the assertions in the claim, but does not constitute an oath by which the pleader denies the execution of an instrument attached to a claim [per 9.2(B)].” 

Must deny under oath.  Because the borrower failed to deny, under oath, the execution of the subject note, the Court affirmed the summary judgment granted in favor of the lender:

As [lender] attached the Note and Second Mortgage to  its cross-claim, execution of both would be deemed to be established, by operation of Trial Rule 9.2(B), unless [borrower] denied under oath that they were executed.  [Borrower], himself an attorney, filed a general denial.  He signed it as “respectfully submitted.”  He omitted to include a statement that his general denial was truthful and made under penalty for perjury.  Thus, [borrower] failed to deny under oath the execution of the Note.  We therefore conclude that execution of the Note was deemed to be established . . ..

As was the case with the Bonilla opinion, which was the subject of my February 7, 2009 post, Indiana law seemingly allowed the lender in Baldwin to dodge a bullet in order to obtain a pre-trial judgment in its favor.

Indiana Only Requires The Guarantor To Sign A Guaranty

Secured lenders pursuing guaranty enforcement actions sometimes face resistance from guarantors despite clear and well-written guaranties.  Guarantors may go to great lengths to avoid a judgment.  The recent Indiana Court of Appeals case of Grabill Cabinet Company, Inc. v. Sullivan, 919 N.E.2d 1162 (Ind. Ct. App. 2010) (.pdf ) appears to be one of those cases, but the ultimate decision favors creditors.

What happened.  Plaintiff Supplier sued defendant Individual, who was once a manager and member of LLC.  In 2006, LLC submitted a credit application to Supplier, and Individual signed a guaranty of the LLC debt owed to Supplier.  Individual signed in her personal capacity.  Individual subsequently assigned her interests in LLC and resigned from the company.  A couple years later, LLC ordered product from Supplier for which LLC failed to pay.  This resulted in a lawsuit in which Supplier named Individual as a defendant based upon her guaranty. 

General guaranty law.  The Court’s opinion has a nice summary that defines a guaranty and a continuing guaranty, as well as an outline of the general rules applicable to the liability of a guarantor.  If you or your counsel need to learn more about the basics of guaranties, click on the .pdf of the decision I’ve provided above.

The defense.  Individual’s primary defense was that Supplier needed to sign the guaranty in order for it to be valid and enforceable.  She also argued that the guaranty should have been automatically terminated upon her disassociation with LLC.  The trial court bought the argument.  The Court of Appeals didn’t. 

The Statue of Frauds.  The Court found no Indiana case law supporting the proposition that, for a guaranty to be valid, it must be signed by the primary debtor and/or the creditor.  The Court focused upon Indiana’s Statute of Frauds, Ind. Code § 32-21-1-1(b), which states in pertinent part:

  A person may not bring any of the following actions unless the
  promise, contract, or agreement on which the action is based, or
  a memorandum or note describing the promise, contract, or
  agreement on which the action is based, is in writing and signed
  by the party against whom the action is brought or by the party’s
  authorized agent:

   (2)  An action charging any person, upon any special promise, to answer for the debt, default, or miscarriage of another.

The holding.  The Court concluded:  “although the Statute of Frauds requires a guaranty to be in writing, only the ‘party against whom the action is brought’ need sign it, and that requirement has been met here.”  The Court also found the language in the guaranty to be consistent with the outcome.  The Court was, indeed, emphatic that, for a guaranty to be valid and enforceable, a guaranty need not be signed by anyone other than the guarantor. 

Of interest.  Supplier initiated its collection action on August 10, 2008.  The date of the Court of Appeals decision reversing the trial court was January 14, 2010, almost one-and-a-half years after the filing of the case.  The case still needed additional trial court proceedings to adjudicate Supplier’s damages.  My point – bear in mind that Indiana collection cases, including mortgage foreclosure actions, are like any other lawsuit, which can be full of unexpected delays and expense.

Indiana Sheriff's Sales: Local Rules, Customs and Practices Control

This replaces my April 14, 2008 post and includes the most current links to various Indiana county sheriff's offices.  In Indiana, mortgage foreclosures must be judicial or, in other words, through the court system.  As a general proposition, real estate collateral must be sold, pursuant to a judge's decree, by the county civil sheriff's office. 

County-specific.  Although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific rules and procedures vary by county.  I once presented at a foreclosure-related seminar, and one of my co-presenters accurately stated, in essence, that there are 92 counties in Indiana and therefore 92 different sets of rules applicable to sheriff's sales.  My advice is to call or visit the local civil sheriff's office to confirm the hoops through which you must jump, and when, to start and finish a successful sheriff's sale.

State link.  Many Indiana counties provide at least some guidance through the internet.  The Indiana Courts home page, for which I have a permanent link on the left side on my blog's home page, has an "information by county" menu on the left that allows you to surf through county websites to determine whether the local sheriff's office has any on-line sale information.

Marion County.  I'm located in Indianapolis, Marion County, Indiana, and our civil sheriff has a helpful site - click here - that I've permanently linked to on my home page. 

Contiguous counties.  Here are links to sheriff's sites in the seven counties contiguous to Marion County:

• Hamilton County
• Hancock County
• Shelby County
• Johnson County
• Morgan County
• Hendricks County
• Boone County

Other counties and third party servicers.  The following are links to sheriff's sites in some of the larger counties in Indiana:

• Allen County (Ft. Wayne)
• Tippecanoe County (Lafayette)
• Vanderburgh County (Evansville)
• Vigo County (Terre Haute)

As you'll see, some of the counties provide more information and forms than others.  In addition, many Indiana counties (about 17, including Boone and Vigo), outsource all or a portion of the sheriff's sale process through SRI, Inc.  Another contractor, Lieberman Technologies, serves six Indiana counties, including Shelby and Vanderburgh.

Despite information that may be available on the internet, I've found it to be invaluable to talk to, and form a working relationship with, the representatives who will be handling your sale.

Indiana Court Touches Upon Factoring Agreements

The U. S. District Court for the Northern District of Indiana recently addressed some procedural issues associated with the enforcement of a factoring and security agreement.  Here is a .pdf of JD Factors v. Freightco, 2009 U.S. Dist. LEXIS 72636 (N.D. Ind. 2009).  There are a handful of things to take away from JD Factors.

1.  The business of factoring is a kind of financing characterized by “the buying of accounts receivable at a discount.”  In JD Factors, JD and Brankle entered into a factoring and security agreement whereby JD agreed to buy Brankle’s accounts receivable under an agreed-upon discount formula.  Under the agreement, JD advanced money to Brankle in exchange for an assignment of all rights, payments and proceeds in Brankle’s accounts.  Account debtors then paid JD directly.  The factoring and security agreement granted JD a first priority security interest in Brankle’s assets, including the accounts receivable.

2.  Generally, factoring agreements can involve a security interest being granted in an account.  As such, Indiana’s version of the UCC can govern the relationship.  Ind. Code § 26-1-9.1-109(a) states that Article 9 will apply to a transaction intended to create a security interest in accounts and to any sale of accounts.

3.  I.C. § 26-1-9.1-607 states:  “If so agreed, and in any event after default, a secured party . . . may enforce the obligations of an account debtor . . . and exercise the rights of the debtor with respect to the obligation of the account debtor . . . . to make payment or otherwise render performance to the debtor . . ..”  Under the UCC, therefore, JD (as a secured party) was entitled to enforce collection of defendant Freightco’s (the account debtor’s) debt.

4.  The Court rejected the proposition that the secured party/factoring relationship was akin to that of principal and agent.  Again, Article 9 of the UCC, not principal/agency law, applied.  “Here, [plaintiff/JD] is not acting as a mere collection agent for Brankle; rather, the two entities are parties to a sophisticated lending relationship.”  Only JD, not Brankle, possessed the authority to seek collection of the receivable.  “[JD] is a secured party possessing a right to be enforced, and Section 607 of the Indiana UCC provides the statutory authority for its enforcement of the [debt/account receivable].” 

The JD Factors opinion arose out of a technical dispute surrounding “diversity of citizenship” and whether the case could be in federal court, as opposed to state court.  For any lawyers reading this post, the Court concluded that “[JD] as a secured party possesses a right subject to enforcement in this action and thus is a ‘real party in interest’.  Consequently, diversity of citizenship exists between plaintiff [JD], a company of California citizenship, and defendant Freightco [account debtor], a company of Indiana citizenship . . ..”  Freightco asserted that the Indiana citizenship of Brankle should destroy diversity so as to force the case to be heard in the Indiana state courts.  The Court denied Freightco’s motion to dismiss. 

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. 

Mortgage Securing Residential Subdivision Development Primes Site Work Mechanic’s Liens

Today’s post follows up my July 3, 2007, July 7, 2007 and September 6, 2008 posts dealing with the priority of commercial construction mortgages over mechanic’s liens.  If you are struggling with lien priority questions related to the development of a residential subdivision, the Indiana Court of Appeals’ decision in Lincoln Bank v. Conwell Construction, 2009 Ind. App. LEXIS 1047 (Ind. Ct. App. 2009) (Lincoln.pdf) provides answers.

The interests.  Nichols Group owned real estate that it intended to develop into a residential subdivision.  Lincoln Bank gave a mortgage loan to Nichols Group to fund the development, and the bank recorded its mortgage in 2006.  General contractor, Conwell Construction, contracted with Nichols Group to develop the site (earth work, sewer, water, curbs and paving).  Conwell Construction, in turn, contracted with subcontractors Hedger (for curbs), Mitchell (for drains) and Grady (for paving).  The contractors only performed site development work.  They did not construct any houses, nor did they improve any specific lots.  Indeed no houses were ever built on the property.  Since the contractors didn’t get paid, they filed mechanic’s liens in 2007. 

The controversy.  The Court addressed the question of whether Lincoln Bank’s mortgage should have priority, as opposed to the bank and the four contractors sharing pro rata in any foreclosure proceeds.

Inventory of statutes.  Lincoln Bank, a thorough and logical opinion, addresses the applicable Indiana statutes:

 a. I.C. § 32-28-3-1 – Contractors may file mechanic’s liens for, among other
  things, the labor and materials at issue.

 b. I.C. § 32-28-3-5(c) – Mechanic’s liens are equal in priority to other
  mechanic’s liens.

 c. I.C. § 32-28-3-5(d) – Priority of construction mortgages (see also July 11, 2007
  and September 6, 2008 posts).

 d. I.C. § 32-28-3-5(d)(1-3) – Exceptions to general rule of construction mortgage
  priority for homes, improvements auxiliary to homes and utilities.

Section 5(d) and its three categories of exceptions.  The Court noted that a recorded mortgage has priority over a subsequently-recorded mechanic’s lien, per I.C. § 32-28-3-5(d), “to the extent of the funds actually owed to the lender for the specific project to which the lien rights relate.”  There was no dispute Lincoln Bank recorded its mortgage before the recordation of the mechanic’s liens, nor was there a dispute that Lincoln Bank’s mortgage “was for the specific project to which the lien rights relate.”  Therefore, if § 5(d) applied, Lincoln Bank’s mortgage would have priority over the mechanic’s liens.  The Lincoln Bank decision focused on the three stated carve outs in § 5(d) for construction (1) of houses, (2) of improvements auxiliary to houses and (3) on property controlled by a utility.  For those categories, Ward v. Yarnelle would control, meaning that there would be parity among the mortgage and the mechanic’s liens.

Exceptions not applicable.  Since the underlying site development work in Lincoln Bank related to the ultimate construction of houses, seemingly the door was open for the Court to apply one or more of the three exceptions to § 5(d)’s priority rule.  Instead, the Court viewed the work for what it was – construction, for a real estate investor, of a commercial project.  The work in question did not directly involve the building of an individual homeowner’s residence.  The closest call for the Court was § 5(d)(2), which governs the development or construction of “an improvement on the same real estate auxiliary to a Class 2 structure [house].”  Despite concluding that the contractors’ earth moving operations and asset installations were indeed “improvements,” the Court relied heavily on the fact that “no home had yet been constructed on the land” in concluding that § 5(d)(2) “does not apply to preparing land for the subsequent construction of houses.” 

Result.  The Court concluded, with regard to the foreclosure proceeds, that “the first priority is to satisfy Lincoln Bank’s mortgage.”  Thereafter, “the four mechanic’s liens are equal in priority.”  Lincoln Bank is particularly relevant today given recent failures of many residential subdivision development projects across Indiana.  These projects have, in certain instances, stalled before any houses were built or any specific lots were improved.  According to Lincoln Bank, where the general contractor or subcontractors have devoted resources only to subdivision site work, lenders holding a timely and perfected construction mortgage will not be forced to share equally with such contractors.