Indiana Commercial Foreclosure Law

Does A Guarantor’s Bankruptcy Stop A Foreclosure Case Against the Borrower?

Sometimes when secured lenders file suit to enforce a note and a guaranty and to foreclose a commercial mortgage, the guarantor (but not the borrower) files a bankruptcy petition.  Pursuant to 11 U.S.C. 362, the collection action, as to the debtor (the guarantor), is stayed.  Some wonder whether the entire case is stayed. 

Borrower idle.  The defendant borrower may not seek bankruptcy protection, for example, if it is a single-asset entity with no value beyond the real estate and whatever cash may be generated by the real estate.  In other words, there are no assets to protect beyond the loan collateral, the value of which may not cover the debt and the collection costs.  So, while the borrower essentially throws in the towel, the guarantor runs for cover in bankruptcy court.

The issue.  The question is whether the bankruptcy stay applies only to the guarantor or whether it extends to the borrower.  The answer, generally, is no, despite the confusion that sometimes arises out of this situation.  Meaning no disrespect to state court judges, but because they rarely deal with bankruptcy issues, they sometimes conclude, perhaps intuitively, that a bankruptcy filing by one defendant will stay the case as to all defendants, at least until the bankruptcy court orders otherwise.  To be fair, this scenario has puzzled lawyers and lender reps too (including me).

General rule.  In Pitts v. Unarco Industries, Inc., 698 F. 2d 313, 314 (7th Cir. 1983), the Seventh Circuit, which includes Indiana, stated that “the clear language of Section 362(a)(1) thus extends the automatic stay provision only to the debtor filing bankruptcy proceedings and not to non-bankrupt co-defendants.”  This is because the language in Section 362 “unambiguously states that the stay operates only as ‘against the debtor.’”  Id.; 555 M Manufacturing, Inc. v. Calvin Klein, Inc., 13 F. Supp. 2d 719 (E.D. Ill. 1998); Federal Land Bank v. Stiles, 700 F. Supp. 1060, 1062-63 (Mon. 1988) (noting generally that stays pursuant to Section 362(a) are limited to debtors and that there are no special exceptions for circumstances involving a co-defendant who is jointly liable on a debt with the debtor). 

LLC’s.  The United States Bankruptcy Court for the Northern District of Iowa in In Re Calhoun, 312 B.R. 380 (N.D. Iowa 2004) addressed the issue of who was covered by the automatic stay.  An individual debtor had sought Chapter 7 bankruptcy relief.  The debtor, however, had an interest in a limited liability company (an LLC).  In Iowa, not unlike Indiana, an LLC is an entity separate and distinct from its members and managers.  The Court held that the automatic stay did not apply to the LLC.  “The separate legal existence of a corporation is respected in bankruptcy.  The automatic stay does not stay actions against separate entities associated with the debtor.”  Id. at 384.  The bankruptcy court concluded, therefore, that only the named petitioner (debtor) is protected by the automatic stay.  “None of the LLCs referred to are parties to the bankruptcy.  They are not proper parties and not protected by the provisions of the automatic stay.”  Id. at 384-385.  See also, In Re Merlyn L. Johnson, 209 B.R. 499, 500 (Neb. 1997) (a creditor generally is permitted to sue a guarantor or a co-debtor and to collect from property of a third party that is pledged to secure debts of the debtor).

Proceed.  Thus the law seems to be clear that, in general, a second lender should be permitted to proceed to judgment against a borrower and to foreclose on a borrower’s mortgage.  Note that courts recognize limited exceptions to this general rule, not to mention the fact that the guarantor could seek an order from the bankruptcy court to extend the stay to the borrower.  There are “special circumstances” that may permit the extension of the stay, but the onus should be on the guarantor or borrower to prove them.  (A couple of recognized exceptions that the guarantor or borrower might seek to prove are, first, where the relationship between the debtor and the third-party defendant is such that a judgment against the third-party defendant will effectively be a judgment against the debtor and, second, where the litigation against the third-party defendant would cause “irreparable harm” to the debtor or estate.)  Otherwise, as long as the plaintiff secured lender and its counsel provide notice to the parties of the intention to proceed with foreclosure despite the bankruptcy filing, the plaintiff lender should be free to continue with the foreclosure case.  Thanks to my bankruptcy colleague, Chris Jacobson, for her insights.

In Indiana, A Summary Judgment Is Preferable To A Default Judgment

There are occasions when a defendant does not appear in a lien enforcement lawsuit or otherwise timely respond to the complaint.  Many of us intuitively consider the next step to be an application for default judgment pursuant to Indiana Trial Rule 55.  Recently, my colleague Chris Jacobson and I discussed the benefits of foregoing a T.R. 55 motion and proceeding directly with a T.R. 56 motion for summary judgment.  Secured lenders and their counsel should consider this approach in Indiana matters.

Is it proper?  The first question is whether a plaintiff can file a motion for summary judgment before an answer, or even an appearance, has been filed by a defendant.  The answer appears to be yes.  T.R. 56(A) states that “a  party seeking to recover upon a claim . . . may, at any time after the expiration of twenty (20) days from the commencement of the action . . . move . . . for summary judgment in his favor upon all or any part thereof.”  (Under T.R. 3, an action is commenced by the filing of a complaint, by paying the filing fee and by furnishing the clerk with the required copies of the complaint and summons.)  Nothing in T.R. 56 (or T.R. 55) suggests that a motion for summary judgment cannot be utilized when an application for default judgment could be.  Case law supports the notion that a T.R. 56 motion is appropriate against a party eligible to be defaulted.  Anderson v. The Broadmoor Corporation, 363 N.E.2d 1042 (Ind. Ct. App. 1977); see also, Royalty Vans v. Hill Brothers, 605 N.E.2d 1217, 1219 (Ind. Ct. App. 1993):

[Defendant] very well might have been vulnerable to the entry of a default judgment in this case . . . ..  However, the court clearly acted pursuant to [Plaintiff’s] motion for summary judgment and entered judgment only after [Plaintiff] had met its burden of demonstrating that there was no genuine issue of material fact for trial.

Is it better?  Applying for a default judgment is fairly quick and easy, and courts essentially focus only on whether there has been good service of process and whether the defendant has failed to timely respond to the complaint.  It’s sort of a technical knockout.  (See my post, “What If A Borrower Ignores A Lender’s Foreclosure Suit?”)  A summary judgment, while a bit more labor intensive to obtain, provides a more definitive result.  The court’s decision is on the merits.  The court in Anderson, 363 N.E.2d at 294-95 noted, for example:

A summary judgment qualifies as a final judgment and a trial court may award “the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in his pleadings.”  A T.R. 55 judgment is limited to the amount prayed for in the pleadings.   

In addition, Indiana courts are geared toward setting aside default judgments.  T.R. 55 has a specific subsection about setting aside a default and specifically refers to T.R. 60(B).  T.R. 60(B) also applies to summary judgments, but the cases we’ve reviewed show quite clearly that setting aside a summary judgment is a more difficult proposition.  Furthermore, Indiana has specific legal policies stating that default judgments are not favored.  There is a strong judicial preference for deciding cases on their merits and for giving litigants their day in court.  Summary judgments tend to meet those standards.  Default judgments tend not to.

Is notice documented?  An important matter, implicit in the Anderson opinion, is to prove that the defendant had notice of the summary judgment proceedings.  In instances of unrepresented parties, one way to do this is to provide the party, by certified mail, with copies of the motion and any order setting the matter for hearing.  (A hearing is not mandated by T.R. 56, unless a party requests one, but it is fairly common for Indiana trial courts to hold a hearing.)  Lender’s counsel then can attach the letter(s), with the certified mail return receipt(s), to an affidavit for submission to the court.  If the plaintiff can show that the defendant had actual notice of the proceedings, but failed to take any action, then such proof reduces dramatically the chances of setting aside the judgment in the trial court or overturning the judgment on appeal.  Conversely, the easiest way for a defendant to get a second chance is to convince a court that it did not know about a motion or a hearing. 

Think MSJ.  There is no right or wrong answer to the question of whether to pursue relief through a default judgment or a summary judgment.  The circumstances of the particular case should guide the decision.  A T.R. 55 default judgment arguably can occur more quickly and with less expense.  Having said that, a summary judgment, as opposed to default judgment, should result in more conclusive, definitive relief that is less prone to being set aside on technical grounds.  In such cases, the defendant’s recourse may be limited to an appeal, which should be futile if the undisputed facts and the law support the judgment.  Ultimately, my advice for secured lenders and their counsel is to bypass a default and to seek a summary judgment.  (For more on summary judgments in the foreclosure context, please see my post, “Motion For Summary What?”)

I would like to thank my colleague Chris Jacobson for her thoughts on this issue, and I would like to credit our summer associate, Julia Bochnowski, for assisting me with the research for this post, particularly while I was on vacation last week. 

PRO HAC VICE ADMISSION IN INDIANA AND THE ROLE OF LOCAL COUNSEL

I'm on vacation this week, so I'm re-posting one of my more popular articles, originally published January 1, 2007:

You’re an out-of-state lawyer with a client who needs to foreclose on property within Indiana.  You’re not licensed to practice in the state, and no one in your firm is admitted in Indiana.  You don’t want to relinquish control over the case, but instead wish to be in charge of representing your long-standing client in its important matter.  What you need is to be admitted pro hac vice in the Indiana court. 

More Latin.  “Pro hac vice” in English means “for this turn; for this one temporary occasion.”  Black’s Law Dictionary.  In the legal context, the phrase refers to the limited admission to practice in a court.  Admission pro hac vice is governed by the Indiana Rules for Admission to the Bar and the Discipline of Attorneys, including specifically Rule 3, which has been amended, effective January 1, 2007. 

The 7 hoops.  Indiana’s rules require prospective pro hac vice admitees to jump through a number of hoops.  Filings are required both with the Clerk of the Indiana Supreme Court and in the particular trial court.  Here’s what needs to be done:

1. Hire a member of the bar of the State of Indiana to act as co-counsel and ensure he or she has an appearance on file.
2. Pay the Clerk of the Indiana Supreme Court a registration fee of $105.  See, Rule 2(b).  (The registration fee must be paid annually until the proceeding has concluded.) 
3. Provide the Clerk with a copy of the Verified Petition for Temporary Admission that will be filed with the trial court. 
4. Procure from the Clerk a temporary admission attorney number and payment receipt. 
5. File a Verified Petition for Temporary Admission with the trial court, co-signed by Indiana co-counsel, setting forth the nine specific disclosures articulated in Rule 3, § 1(a)(4). 
6. Obtain from the trial court an order granting the verified petition.
7. File with the Clerk of the Indiana Supreme Court a notice that includes a statement of good standing issued by the highest court in each jurisdiction in which the attorney is admitted to practice law, a copy of the verified petition requesting temporary permission and a copy of the order granting the petition. 

Once these steps are met, counsel may file an appearance in the trial court.

Further handling of the case.  Beware of Rule 3 § 1(d), which mandates that all papers filed in the cause of action be co-signed by the Indiana co-counsel.  On the other hand, unless ordered by the trial court, local counsel need not be personally present for court appearances.  Here is a .pdf of an excellent article entitled “Taking the Vice Out of Pro Hac Vice:  Temporary Admission and Local Counsel” from the October, 2006 issue of Res Gestae, the official publication of the Indiana State Bar Association: article.pdf.  Donald R. Lundberg, the Executive Secretary of the Indiana Supreme Court Disciplinary Commission, is the author.  The article describes the January 1, 2007 changes to the rules.  It also explains why Indiana co-counsel cannot be a “potted plant,” but instead must play a meaningful role in the case, particularly with written submissions.  In response to those who feel that Indiana’s procedural requirements for admission pro hac vice may be burdensome, Mr. Lundberg makes a great point:  “would you rather take the bar exam?”

The General and the Lieutenant.  My standard approach to serving as local counsel is based on the philosophy that, as with most cases, there needs to be a General and a Lieutenant.  Someone - one person – should be in charge, and others should follow that person’s orders.  Otherwise, the “too many cooks in the kitchen” syndrome develops, followed by reduced efficiency and increased costs to the client.  Usually, but not always, my primary purpose as local counsel is to support the out-of-state lawyer – to be a Lieutenant – regardless of the age or experience of the non-Indiana attorney.  Most good local counsel set their egos aside and do as little (or as much) as the lead counsel wants.  To me, the main objective of any out-of-state, lead attorney should be to hire a responsive, cost-effective role player with local knowledge of the law and procedures.  Certainly I’m always ready, willing and able to be lead counsel, and there are times when the referring attorney hires me to serve in that capacity.  But most of the time, out-of-state Generals simply want a local Lieutenant, which is fine with me.

I'm on vacation this week, so I'm re-posting one of my more popular articles, originally published January 1, 2007:

You’re an out-of-state lawyer with a client who needs to foreclose on property within Indiana.  You’re not licensed to practice in the state, and no one in your firm is admitted in Indiana.  You don’t want to relinquish control over the case, but instead wish to be in charge of representing your long-standing client in its important matter.  What you need is to be admitted pro hac vice in the Indiana court. 

More Latin.  “Pro hac vice” in English means “for this turn; for this one temporary occasion.”  Black’s Law Dictionary.  In the legal context, the phrase refers to the limited admission to practice in a court.  Admission pro hac vice is governed by the Indiana Rules for Admission to the Bar and the Discipline of Attorneys, including specifically Rule 3, which has been amended, effective January 1, 2007. 

The 7 hoops.  Indiana’s rules require prospective pro hac vice admitees to jump through a number of hoops.  Filings are required both with the Clerk of the Indiana Supreme Court and in the particular trial court.  Here’s what needs to be done:

1. Hire a member of the bar of the State of Indiana to act as co-counsel and ensure he or she has an appearance on file.
2. Pay the Clerk of the Indiana Supreme Court a registration fee of $105.  See, Rule 2(b).  (The registration fee must be paid annually until the proceeding has concluded.) 
3. Provide the Clerk with a copy of the Verified Petition for Temporary Admission that will be filed with the trial court. 
4. Procure from the Clerk a temporary admission attorney number and payment receipt. 
5. File a Verified Petition for Temporary Admission with the trial court, co-signed by Indiana co-counsel, setting forth the nine specific disclosures articulated in Rule 3, § 1(a)(4). 
6. Obtain from the trial court an order granting the verified petition.
7. File with the Clerk of the Indiana Supreme Court a notice that includes a statement of good standing issued by the highest court in each jurisdiction in which the attorney is admitted to practice law, a copy of the verified petition requesting temporary permission and a copy of the order granting the petition. 

Once these steps are met, counsel may file an appearance in the trial court.

Further handling of the case.  Beware of Rule 3 § 1(d), which mandates that all papers filed in the cause of action be co-signed by the Indiana co-counsel.  On the other hand, unless ordered by the trial court, local counsel need not be personally present for court appearances.  Here is a .pdf of an excellent article entitled “Taking the Vice Out of Pro Hac Vice:  Temporary Admission and Local Counsel” from the October, 2006 issue of Res Gestae, the official publication of the Indiana State Bar Association: article.pdf.  Donald R. Lundberg, the Executive Secretary of the Indiana Supreme Court Disciplinary Commission, is the author.  The article describes the January 1, 2007 changes to the rules.  It also explains why Indiana co-counsel cannot be a “potted plant,” but instead must play a meaningful role in the case, particularly with written submissions.  In response to those who feel that Indiana’s procedural requirements for admission pro hac vice may be burdensome, Mr. Lundberg makes a great point:  “would you rather take the bar exam?”

The General and the Lieutenant.  My standard approach to serving as local counsel is based on the philosophy that, as with most cases, there needs to be a General and a Lieutenant.  Someone - one person – should be in charge, and others should follow that person’s orders.  Otherwise, the “too many cooks in the kitchen” syndrome develops, followed by reduced efficiency and increased costs to the client.  Usually, but not always, my primary purpose as local counsel is to support the out-of-state lawyer – to be a Lieutenant – regardless of the age or experience of the non-Indiana attorney.  Most good local counsel set their egos aside and do as little (or as much) as the lead counsel wants.  To me, the main objective of any out-of-state, lead attorney should be to hire a responsive, cost-effective role player with local knowledge of the law and procedures.  Certainly I’m always ready, willing and able to be lead counsel, and there are times when the referring attorney hires me to serve in that capacity.  But most of the time, out-of-state Generals simply want a local Lieutenant, which is fine with me.

Indiana Foreclosure Sale Terminates The Right Of Redemption

Recently, an out-of-state client asked whether the defendant borrower, in an Indiana commercial foreclosure case we're handling, will have the right to redeem the mortgage after the sheriff's sale.  The client was pleased to learn that, even though some states may permit redemption post-sale, Indiana is not one of them. 

Indiana redemption rights.  Indiana does provide a pre-sale right of redemption.  Please see my February 1, 2008 post for details.

Mortgages.  Ind. Code 32-29-7-13 states:  "There may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter."  Thus the general statutory rule is that there is no right of redemption.  (My 2-1-08 post addresses the "before the sale" statutory exception, Ind. Code 32-29-7-7.)  Well-settled Indiana case law provides that "a foreclosure sale cuts off a mortgagor's rights of redemption."  Patterson v. Grace, 661 N.E.2d 580, 585 (Ind. Ct. App. 1996); Overmyer v. Meeker, 661 N.E.2d 1271, 1275 (Ind. Ct. App. 1996); Vanjani v. Federal Land Bank of Louisville, 451 N.E.2d 667, 672, n.1 (Ind. Ct. App. 1983).

UCC Security Interests.  Similarly, Indiana's UCC, at Ind. Code 26-1-9.1-623, also covered in my prior post, calls for redemption rights to be terminated upon disposition of the collateral.  The "Official Comment" to the section states that "the debtor or another secured party may redeem collateral as long as the secured party has not collected, disposed of or contracted for the disposition of, or accepted the collateral."  The "Indiana Comment" states that Section 623 "recognizes the right of the debtor and other secured parties to redeem any time after default before disposal of the collateral or rescission under Section 502(2), unless otherwise agreed in writing after default."

When the fat lady sings.  Lenders enforcing mortgage liens or security interests in Indiana can rest assured that, once there is a sheriff's sale or a disposition of personal property collateral, the borrower's/debtor's right of redemption is terminated.  The borrower/debtor no longer owns the property, and no longer has any rights in or to the property.  If warranted, deficiency collection, among other things, can commence.

How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale?

I first wrote about this topic on August 15, 2007, but I've decided to delete that post.  Today's post provides a revision of my prior research and analysis, and I believe more accurately articulates the answer to the question.  I'd like to thank my partners Tom Dinwiddie and Tom Hanahan for their input.

_______________

Your lending institution has an Indiana decree of foreclosure related to commercial real estate.  You have reason to believe the judgment amount exceeds the value of the collateral, so you want to preserve the right to collect the deficiency from the borrower or a guarantor.  If you’re wondering how low the mortgage foreclosure sale price can be without rendering the sale defective, keep reading.

An extreme example.  Conceivably, a lender/senior mortgagee, as the sole bidder, could acquire the property at a sheriff’s sale for a small fraction of the fair market value by submitting a credit bid that expends only a portion of the judgment amount.  This would allow the lender to resell the property at a profit and to pursue collection of the deficiency, potentially resulting in a double recovery.  The lower the sale price is, the higher the deficiency judgment will be.   

No statutes.  There are no Indiana statutes regulating the price that parties must bid at a mortgage foreclosure sale.  Unlike an execution sale, in which a judgment debtor can demand an appraisal under the so-called “valuation and appraisement laws,” mortgage foreclosure sales are exempted from this rule.  See, Ind. Code § 32-29-7-9(b); Trial Rule 69(C); Arnold v. Melvin R. Hall, Inc., 496 N.E.2d 63, 65 (Ind. 1986).

The shock test.  Indiana appellate court opinions do not articulate a formula for a lawful sale price.  They merely provide guidelines.  The Indiana Supreme Court’s decision in Arnold is the definitive case on this subject.  A borrower/mortgagor, whose interest in property has been sold at a sheriff’s sale, need not accept the results of the sale without question and has the right to file a motion seeking that the sale be set aside.  Indiana law presumes that the sheriff’s sale “provides a decent method by which value can be fixed . . ..”  Arnold, 496 N.E.2d at 65.  “Thus, it is manifest that the purpose of the sale is not to afford some stranger an opportunity to make off with the debtor’s property to his own great advantage and to the great disadvantage of the debtors or creditors.”  Id.  Where it appears that the results of a sale are such that the entry of a deficiency judgment “is shocking to the court’s sense of conscience and justice,” the sale may be set aside.  Id.  The burden of proof is on the borrower or guarantor to establish that “the disparity between the value of the property sold, and the price paid, [was] so great as to shock the sense of justice and right.”  Id.  See also, Newhouse v. Farmers National, 532 N.E.2d 26 (Ind. Ct. App. 1989).    

Fair market value not the issue.  The United States Supreme Court in BFP v. Resolution Trust, et al., 511 U.S. 531 (1994) addressed the question of whether the consideration received from a sheriff’s sale satisfied the Bankruptcy Code’s requirement that transfers of property by insolvent debtors within one year of the filing of a bankruptcy petition be in exchange for “a reasonably equivalent value.”  Id. at 533; 11 U.S.C. § 548(a)(2).  BFP dispels the notion that the price paid at a sheriff’s sale must equate to fair market value.  “Market value, as it is commonly understood, has no applicability in the forced-sale context; indeed, it is the very antithesis of forced-sale value . . ..  In short, ‘fair market value’ presumes market conditions that, by definition, simply do not obtain in the context of a forced sale.’”  Id. at 537-38. 

  An appraiser’s reconstruction of “fair market value” could show
  what similar property would be worth if it did not have to be sold
  within the time and manner strictures of state-prescribed foreclosure.
  But property that must be sold within those strictures is simply worth
  less.  No one would pay as much to own such property as he would
  pay to own real estate that could be sold at leisure and pursuant to
  normal marketing techniques.

Id. at 539.  The Supreme Court deemed that a fair and proper price, or a reasonably equivalent value, for foreclosed property “is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.”  Id. at 545.      

What to bid?  Arnold, coupled with BFP, establish an extremely high evidentiary burden for a borrower or guarantor to set aside a sheriff’s sale.  Certainly the most conservative approach for a lender would be to submit a bid based upon fair market value, but Arnold specifically, and BFP generally, reject the proposition that sheriff’s sales must be set aside if the property sells for less than the appraised value.  Again, the only question is whether the difference between the price paid and the property’s value will shock the judge’s sense of justice and right.  What does that mean?  Who knows.  This is one of those gray areas in Indiana law.   

The best bet is to analyze the facts and circumstances of the specific case, and then formulate a logical and fair number.  Be prepared to offer evidence (documents and witness testimony) to support the price in the event a party challenges it.  Use common sense.  There are a multitude of factors that could justify a bid, including a prior appraisal, market conditions, current cash flow, or lack thereof, as well as future fees and expenses associated with resale, taxes, insurance premiums, repairs, maintenance, etc.  Be creative, but don’t take extreme or overly-arbitrary positions. 

Move on.  Lenders/senior mortgagees should avoid tendering an absurdly low bid, which would only serve to invite a motion to set aside the sheriff’s sale.  Such a motion would result in the loss of valuable time and money in connection with defending the motion and/or holding another sale.  A balance should be struck between maximizing the deficiency judgment and preventing court proceedings to set the sale aside.  The ultimate goal should be to get the sale and the litigation behind you, so your institution can move forward with liquidation and any post-sale collection proceedings. 

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

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 sheriff's office. 

Although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific rules and procedures vary by county.  I presented at a foreclosure-related seminar last month, 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.

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.

I'm located in Indianapolis, Marion County, Indiana, and our civil sheriff has a helpful site - click here - that also is permanently set up on my home page.  Here is information concerning links to sheriff's in the seven counties contiguous to Marion County:

• Hamilton County
• Hancock County
• Shelby County (None)
• Johnson County
• Morgan County
• Hendricks County
• Boone County 

Here is information with regard to 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 links provide more information and forms than others.  In addition, many Indiana counties outsource all or a portion of the sheriff's sale process through SRI, Inc.  Ultimately, talking to, and forming a working relationship with, the representative who will be handling your sale can be invaluable.

CONSTRUCTION MORTGAGE VS. MECHANIC’S LIEN: Win, Lose or Draw?

Recently, I met with a commercial lender who mentioned a problem with one of his projects.  Construction had started, but the developer hadn’t closed the construction loan.  Thus the lender’s mortgage hadn’t been recorded, but likely would be soon.  He wondered how the delay might affect the priority of his bank’s mortgage lien.  Secured lenders involved in real estate development in Indiana probably should be aware of some of the rules governing these situations.      

1910: A Draw.  The Indiana Supreme Court’s 1910 decision in Ward v. Yarnelle, 91 N.E.7 (Ind. 1910) is the landmark opinion on this subject.  At the time, Indiana’s mechanic’s lien statute “failed to address the lien priority between a [construction mortgage] and the mechanic’s liens of those who [completed] the construction.”  In Re Venture, 139 B.R. 890, 895 (N.D. Ind. 1990).  The Court therefore announced the equitable “doctrine of parity” in which a “real estate mortgage executed while a building was in the process of construction was entitled to equal priority with the claims of [contractors that] worked after [recordation] of the mortgage and with full knowledge of its purpose and effect.”  Beneficial Finance v. Wegmiller Bender, 402 N.E.2d 41, 47 (Ind. Ct. App. 1980) (no parity because contractor completed its work before lender recorded its mortgage); Brenneman Mechanical v. First Nat. Bank, 495 N.E.2d 233, 242 (Ind. Ct. App. 1986) (parity because contractors had knowledge of loan, which helped pay them). 

Whether the contractor had knowledge of the construction mortgage was critical to the Ward analysis.  In such instances, the Court felt that lenders and contractors were in a kind of “common enterprise.”  Ward, 91 N.E. at 15.  Under Ward, if funds derived from the mortgage were used in the construction project and if the contractors had knowledge of the loan when they performed their work, then the mortgage and the mechanic’s lien had equal priority.  Conversely, if the loan was not for purposes of construction or if the contractors worked without knowledge of the purpose of the loan, then the mortgage had priority over mechanic’s liens for work performed after recordation of the mortgage.  Venture, 139 B.R. at 896

1999: Statutory Amendments.  Ind Code §32-28-3-5 is the pivotal statute.  Subsection (b) provides that a mechanic’s lien is “created” when the lien notice is recorded.  But the recorded lien relates back to the date the work began, which could pre-date a mortgage.  In 1999, Indiana’s legislature added the language now in subsection (d) that says construction mortgages have priority over mechanic’s liens if the mortgage is recorded before the notice of mechanic’s lien is recorded (not created).  My reading is that subsection (d) disposes of Ward’s doctrine of parity, at least as to commercial and industrial projects.  (Note that section 5(d)(1)-(3) has carve-outs for certain residential and utility projects.)  Accordingly, Indiana courts should focus on relative filing dates, and not on work dates or contractor knowledge.   

Post-1999: One Case.  The meaning of section 5(d) has not been tested on appeal, however, and I.C. §32-28-3-2(b)(2) priority, which favors contractors, may to some extent conflict with section 5(d) priority, which favors lenders.  Section 2(b) might permit contractors to argue that, despite section 5(d), they have priority as to their specific improvement.  Provident Bank v. Tri-County Southside, 804 N.E.2d 161, reh’g granted, 806 N.E.2d 802 (Ind. Ct. App. 2004) gives some insight into the potential statutory inconsistency.  Provident Bank dealt with a contractor’s improvement (installation of a driveway) at a residence long after a purchase money mortgage had been recorded.  Believe it or not, the majority opinion held that the contractor’s statutory remedy was to remove and sell the driveway.  Anyway, the dissenting opinion toyed with Ward and the new I.C. §32-28-3-5.  “In 1999, our legislature amended I.C. §32-28-3-5 and specifically addressed the situation before our supreme court in Ward and again discussed by the bankruptcy court in Venture.”  Id. at 168.  As an aside, the dissent concluded that I.C. §32-28-3-5(d) applies “where funds from the loan secured by the mortgage are for the project which gave rise to the mechanic’s lien.  In such an instance, the mortgage lien has priority over the mechanic’s liens recorded after the mortgage.”  Id. at 169

2007: Lender Wins.  At least as to a standard commercial project, therefore, the Ward doctrine of parity seems to be a thing of the past.  The lender, in the scenario presented to me, shouldn’t be forced to share equally with any contractors that started construction before the developer closed the deal.  Instead, the lender should hold a superior lien, assuming the lender records his mortgage before a contractor records a notice of mechanic’s lien.  In other words, if the project goes south, the lender should get paid first.  Having done all the research and reasonably assured myself of the answer to the question, therefore, I believe my lender contact can relax.  Minimal delays with the closing should not adversely affect his bank’s mortgage lien.  But, he should make sure he records the mortgage sooner rather than later, and certainly before any of the contractors record a notice of mechanic’s lien.

DEEDS IN LIEU OF FORECLOSURE: Who, What, When, Where, Why and How

In the event a loan becomes non-performing, commercial lending institutions that hold mortgages in Indiana need to be familiar with deeds in lieu of foreclosure.

Who.  The parties to a deed in lieu are the mortgagor (generally, the borrower) and the mortgagee (usually, the lender).  Both sides must consent.  Most lawyers will say that it isn't advisable to accept a deed in lieu if there are multiple lien holders.  Lenders will have to negotiate releases of those liens in order to secure clear title.  The better approach may be to proceed with foreclosure, which will wipe out such liens.   

What.  A deed in lieu of foreclosure is a document that conveys title to real estate.  What is unique about this particular deed is that the mortgagor surrenders its interests in the real estate to the mortgagee in consideration for a complete release from liabilities under the loan documents.  The release, among other things, usually is articulated in a separate settlement agreement.

When.  Lenders normally pursue deeds in lieu when there is no chance of collecting a deficiency judgment - the mortgagor is judgment proof.  For example, this option makes sense with non-recourse loans.  Another consideration is when the value of the property unquestionably exceeds the amount of the debt.  If the lender thinks it may be able to liquidate the real estate for more than the borrower owes, pursuing a money judgment may be superfluous.

The parties typically will explore a deed in lieu of foreclosure early on in the dispute - once a determination is made by the lender to foreclose.  Although this is the point in which deeds in lieu are best utilized, in Indiana it's possible to execute the deed right up until the time the property is sold at a sheriff's sale.

Where.  Deeds in lieu are the product of out-of-court settlements.  The process of the securing of a deed in lieu is non-judicial. 

Why.  The fundamental reasons why a lender may want to take a deed in lieu of foreclosure involve time and money.  A deed in lieu grants to the lender immediate possession of the real estate.  Several months, conceivably years, can be saved.  Just as importantly, spending thousands of dollars, primarily in attorney's fees, could be avoided by cutting to the chase with a deed in lieu.  Expediency and expense are the primary factors that motivate lenders to accept a deed in lieu of foreclosure. 

How.  Other than the obvious - executing a deed - there are certain steps a lender should consider taking before it enters into a deed in lieu.  The lender should know whether it is acquiring clear title.  A title insurance policy commitment should be ordered to examine the status of any liens, taxes and other potential clouds on title.  Work also may need to be done to get a handle on the value of the property.  This may include an appraisal, an inspection or an environmental assessment.  These things generally are recommended when evaluating how to proceed with any distressed loan.

One potential land mine must be specifically highlighted here.  Without getting too technical, in Indiana there needs to be language in the deed protecting against a merger of the mortgagor's fee simple title and the mortgagee's lien interest, which merger could extinguish the mortgagee's rights under the mortgage.  Without the appropriate language expressing the intent of the parties in the deed, the lender's interest in the property could become subject to junior liens without the right to foreclose.  So, be sure that you or your lawyer inserts an anti-merger clause into the deed.  Please contact me if you want to see an anti-merger clause our firm has used.

NOTICES OF DEFAULT: WHO SHOULD SEND THE LETTER?

Loan documents often require the commercial lending institution to provide written notice (a letter) to the borrower before initiating foreclosure or lien enforcement proceedings.  Some of our clients have wondered whether, in Indiana, the default letter can come from outside counsel.  In my view, an effective notice can come from counsel.  But, if the borrower has its own lawyer, the letter probably should come directly from the lender.

Is notice required?  To my knowledge, there is no common law rule or statutory requirement that the borrower receive notice and an opportunity to cure.  (The UCC, Article 9.1, has a notice provision in Part 6 “Default,” but the notice requirements apply only to the disposition of collateral after default.)  Indeed there are loan documents that do not contain notice provisions, in which case the lender can immediately file suit upon default.  On the other hand, if there is a notice clause, basic contract law dictates that notice be sent.  Usually, notice to the borrower must come from the lender and must be sent to a specific person at a specific address.  The best way to ensure effective notice is to do exactly what the parties agreed to do in the written contract(s).

Problem #1 – effective notice.  The common question is whether outside counsel can send the letter on the lender’s behalf.  Sometimes it makes practical sense for outside counsel to do so, and I believe this is the routine practice for many Indiana lawyers.  Default notice letters sent by outside counsel raise two potential problems, however.  The first relates to the effectiveness of the letter.  A literal reading of most loan documents state that notice must come from the lender, not from a lawyer on the lender’s behalf.  A creative advocate for the defaulting party may argue such notice is invalid.  To my knowledge, there is no Indiana case speaking to this specific question.  But I think most if not all judges would conclude that notice from outside counsel is effective because the lawyer is a representative of the lender.  More importantly, the borrower got the letter.  Who sent the letter, it seems to me, is a distinction without a difference.

Problem #2 – ethics.  The second and perhaps greater problem, at least for the lender’s attorney, surrounds the ethics of writing to the client of another attorney.  The issue is governed by the Indiana Supreme Court’s Rules of Professional Conduct, which regulate the practices of Indiana attorneys.  Rule 4.2 “Communication with person represented by counsel” states:

  In representing a client, a lawyer shall not communicate about the
  subject of the representation with a person the lawyer knows to be
  represented by another lawyer in the matter, unless the lawyer has
  the consent of the other lawyer or is authorized by law or a court order.

The purpose of Rule 4.2 relates to protections against “overreaching by other lawyers” . . . “interference by those lawyers with the client-lawyer relationship” . . . and “the uncounseled disclosure of information relating to the representation.”  (See, Official Comments).  Assuming the default notice letter is a standard, straight forward and to-the-point communication, the spirit of the rule, in my view, is not being violated.  This is particularly true if lender’s counsel “carbon copies” the borrower’s attorney on the letter, so that the borrower’s attorney has actual knowledge that the letter has been sent and can counsel his or her client accordingly.  Having said that, it’s my understanding that some Indiana lawyers disapprove of this practice and assert it is an ethical violation.  I concede there is a decent argument the practice technically violates Rule 4.2. 

Safety first.  Despite what I understand to be a relatively common practice, the more prudent approach is for default letters to come from the lender, not lender’s counsel, unless the borrower is unrepresented.  This technique will avoid conflict with the opposing party that could result in ill-will, which in turn could hamper settlement discussions or, more importantly, drive up legal fees associated with a fight.  Keep in mind that the letter still can be drafted by outside counsel.  It just needs to be signed in-house and on the lender’s stationery.  I therefore recommend that, in Indiana, commercial lending institutions declaring a default should (1) follow the explicit notice instructions in the operative loan documents and (2) have any required default letter come from the lender, not outside counsel, in the event the borrower is represented by an attorney. 

YIELD MAINTENANCE FEES, PART II: APPLYING INDIANA LAW

This is the second of a two-part article dealing with yield maintenance fees in the context of Indiana commercial foreclosure law.  In Part I, posted under the Court Commentary category, I summarized the only three Indiana cases on point.  I’ll now apply that case law and, given the rules, explore some of the decisions commercial lenders may face.

The rules.  The law from the Seventh Circuit and the Indiana Court of Appeals is definitive as to a few issues.  The general rule is that reasonable prepayment provisions are enforceable.  Thus yield maintenance fees (a/k/a prepayment premiums) can be recovered.  But there is an exception if a lender accelerates the debt (forecloses).  In that instance, the lender waives its claim to yield maintenance fees.  In other words, an election to accelerate generally is an exclusive remedy that will preclude the recovery of yield maintenance fees. 

Payoff vs. acceleration.  Assuming a reasonable yield maintenance fee provision is in the note, a pure payoff by the borrower (an election to prepay the note) generally will permit the assessment of reasonable yield maintenance fees designed primarily to compensate the lender for its lost interest.  On the other hand, a pure foreclosure by the lender (an election to accelerate the note payments) probably will defeat a claim for such fees.  When lenders hire my firm to foreclose on loan collateral, therefore, we advise that it will be difficult to recover yield maintenance fees.  Usually, the lender’s only remedy will be what is articulated in the default/acceleration clause of the note, typically the recovery of the unpaid principal balance, accrued interest, late fees and litigation expenses.  Of course, not all cases are the same, and there are exceptions to every rule.  As a foreclosing lender, don’t give up on yield maintenance fees until you or your lawyer fully evaluate the issue.

The junior lender’s dilemma.  Recently, a lender hired my firm to protect its interests, many but not all of which were subordinate to a senior lender’s.  Although our junior lender client was getting paid, the senior lender was not.  So, our client got dragged into the senior lender’s foreclosure case.  Our note had a yield maintenance provision.  Of course the client wanted yield maintenance fees as part of its damages.  But, for several reasons, our client’s best interests dictated acceleration and foreclosure, which weakened our argument for those fees.  The client understood and relented on its claim.

Decisions like these can be difficult for junior lenders involved in a foreclosure.  Typically, the junior lender could choose to declare a default (triggered by the default on the senior debt), accelerate the debt, file a cross-claim against the borrower and reduce its claims to a judgment, as we did in our recent case.  There are advantages to this approach, including the creation of a judgment lien.  This option, however, almost certainly will result in a waiver of yield maintenance fees.  On the other hand, the junior lender could elect to simply answer the complaint, protect its collateral position (priority) in the litigation and await a payoff request when the collateral is disposed of.  This scenario likely will result in a recovery of, or a strong argument for, yield maintenance fees.  In the final analysis, decisions depend upon an almost infinite number of factors, and there is no case law applicable to every situation.  The key is for junior lenders to remain mindful of the general rules and make strategic decisions accordingly. 

Demand a calculation.  As a competing lender, beware of other lenders improperly building in yield maintenance fees to their judgment amounts.  Borrowers and their counsel may not aggressively police the damages claimed by lenders, or they may not know the law.  As a party to a foreclosure case, it’s in a lien holder’s best interests to force the plaintiff, and all competing lien holders for that matter, to provide a calculation, based upon admissible evidence, of the nature and extent of the claimed debt.  This is particularly true for junior lenders because the amount of a junior lender’s recovery, if any, will increase as the senior lender’s recovery decreases.  If a competing lender is not entitled to yield maintenance fees, a timely objection to the claim should be made.   

Uncharted waters.  Bear in mind that there has been no Indiana case on the topic of yield maintenance fees for over fifteen years, and there are gaps in the law.  So creative contract drafting may net positive results.  In the commercial setting, courts are disinclined to rewrite contracts and generally will lean toward enforcing what the parties clearly and unambiguously agreed to.  For instance, although it may not be a common contract term, it’s conceivable that reasonable yield maintenance fees built into an acceleration clause (to be paid upon foreclosure) could be upheld by an Indiana court.  “Reasonable” means, among other things, that the fees are tied to interest formulas in the note or based on present value calculations.  Arbitrary or purely penal computations are far less likely to be enforced.  As always, I will be keeping an eye out for any new Indiana case law on this issue and will log new posts accordingly.

THE COMMERCIAL LENDER’S 8-ITEM CARE PACKAGE FOR ITS FORECLOSURE ATTORNEY

As a secured lender, once you decide to foreclose on a business borrower’s loan collateral, you must provide certain information and documentation to your lawyer so he or she can file suit.  The more quickly you send this data, and the more thorough the data is, the more efficient your attorney can be in initiating the action. 

Care Package.  I recommend that lenders develop a practice of compiling a “care package” for their lawyers when assigning a non-performing loan for collection.  The package should include:

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

2.  Defaults.  Although most defaults will be for non-payment, there may be other breaches of the loan documents.  All such defaults need to be identified in the Complaint.  To give your attorney a jump start on the default analysis, a listing of any and all contract breaches, with the operative dates and citations to loan document sections, will be useful. 

3.  Debt figures.  Even though the loss amount may change (increase) over time, the standard practice in Indiana is to specify the debt (damages) as of the filing of the Complaint.  These figures will include any losses recoverable under the loan documents, mainly the entire unpaid principal (assuming the debt is being accelerated), accrued interest and late fees.  A brief calculation of the figures should be explained, including relevant dates, interest rates, etc.

4.  Notice letter.  A copy of the notice and cure letter to the borrower should be provided, assuming that the loan documents required one and that you sent one.  Not only will your counsel need to evaluate the notice and cure element of the case, but it’s good practice to attach the letter as an exhibit to the Complaint.

5.  Title/UCC searches.  If you have a prior title insurance policy and/or UCC search, those materials should be sent with the care package.  Lenders could save some expense simply by ordering an update to the title policy from the same company.  Or, a separate title insurance company may provide a new commitment faster and more cheaply based on a prior policy.

6.  Environmental analysis.  If an environmental liability analysis has been performed, the report should be included in what you send to your counsel.

7.  Appraisals.  If the you had any collateral appraised in the weeks leading up to the decision to foreclose, the appraisal reports should be provided.  Knowing the present value of the collateral may be helpful in work-out negotiations or decisions regarding the disposition of the collateral.

8.  Contact information.  Current contact information for the borrower or, if applicable, the borrower’s counsel should be supplied.  It’s also a good idea to provide a copy of all correspondence between the lender and the borrower (or the borrower’s lawyer) related to pre-suit/work-out discussions.  This information will enable your counsel to understand better the nature of the dispute, and to hit the ground running with future communications.   

Efficiency.  Two things are saved when lenders and their counsel are efficient:  time and expense.  If, at the beginning of an assignment, your staff provides outside counsel with the care package I propose, law firms (at least mine) will initiate the foreclosure action quicker and for less money.  Delays and attorney’s fees can be avoided by bypassing the follow-up that usually is required in obtaining data from the lender – things that can be provided at the outset, even before the lender first contacts its attorney. 

PRO HAC VICE ADMISSION IN INDIANA AND THE ROLE OF LOCAL COUNSEL

You’re an out-of-state lawyer with a client who needs to foreclose on property within Indiana.  You’re not licensed to practice in the state, and no one in your firm is admitted in Indiana.  You don’t want to relinquish control over the case, but instead wish to be in charge of representing your long-standing client in its important matter.  What you need is to be admitted pro hac vice in the Indiana court. 

More Latin.  “Pro hac vice” in English means “for this turn; for this one temporary occasion.”  Black’s Law Dictionary.  In the legal context, the phrase refers to the limited admission to practice in a court.  Admission pro hac vice is governed by the Indiana Rules for Admission to the Bar and the Discipline of Attorneys, including specifically Rule 3, which has been amended, effective January 1, 2007. 

The 7 hoops.  Indiana’s rules require prospective pro hac vice admitees to jump through a number of hoops.  Filings are required both with the Clerk of the Indiana Supreme Court and in the particular trial court.  Here’s what needs to be done:

1. Hire a member of the bar of the State of Indiana to act as co-counsel and ensure he or she has an appearance on file.
2. Pay the Clerk of the Indiana Supreme Court a registration fee of $105.  See, Rule 2(b).  (The registration fee must be paid annually until the proceeding has concluded.) 
3. Provide the Clerk with a copy of the Verified Petition for Temporary Admission that will be filed with the trial court. 
4. Procure from the Clerk a temporary admission attorney number and payment receipt. 
5. File a Verified Petition for Temporary Admission with the trial court, co-signed by Indiana co-counsel, setting forth the nine specific disclosures articulated in Rule 3, § 1(a)(4). 
6. Obtain from the trial court an order granting the verified petition.
7. File with the Clerk of the Indiana Supreme Court a notice that includes a statement of good standing issued by the highest court in each jurisdiction in which the attorney is admitted to practice law, a copy of the verified petition requesting temporary permission and a copy of the order granting the petition. 

Once these steps are met, counsel may file an appearance in the trial court.

Further handling of the case.  Beware of Rule 3 § 1(d), which mandates that all papers filed in the cause of action be co-signed by the Indiana co-counsel.  On the other hand, unless ordered by the trial court, local counsel need not be personally present for court appearances.  Here is a .pdf of an excellent article entitled “Taking the Vice Out of Pro Hac Vice:  Temporary Admission and Local Counsel” from the October, 2006 issue of Res Gestae, the official publication of the Indiana State Bar Association: article.pdf.  Donald R. Lundberg, the Executive Secretary of the Indiana Supreme Court Disciplinary Commission, is the author.  The article describes the January 1, 2007 changes to the rules.  It also explains why Indiana co-counsel cannot be a “potted plant,” but instead must play a meaningful role in the case, particularly with written submissions.  In response to those who feel that Indiana’s procedural requirements for admission pro hac vice may be burdensome, Mr. Lundberg makes a great point:  “would you rather take the bar exam?”

The General and the Lieutenant.  My standard approach to serving as local counsel is based on the philosophy that, as with most cases, there needs to be a General and a Lieutenant.  Someone - one person – should be in charge, and others should follow that person’s orders.  Otherwise, the “too many cooks in the kitchen” syndrome develops, followed by reduced efficiency and increased costs to the client.  Usually, but not always, my primary purpose as local counsel is to support the out-of-state lawyer – to be a Lieutenant – regardless of the age or experience of the non-Indiana attorney.  Most good local counsel set their egos aside and do as little (or as much) as the lead counsel wants.  To me, the main objective of any out-of-state, lead attorney should be to hire a responsive, cost-effective role player with local knowledge of the law and procedures.  Certainly I’m always ready, willing and able to be lead counsel, and there are times when the referring attorney hires me to serve in that capacity.  But most of the time, out-of-state Generals simply want a local Lieutenant, which is fine with me.

MOTION FOR SUMMARY WHAT?

If you’ve heard colleagues or your lawyer mention a “motion for summary judgment” and wondered what exactly it was, allow me to shed some light on the subject in the context of an Indiana commercial foreclosure.  A motion is a request by a party for the trial judge to do something – in this case grant a summary judgment.  A summary judgment is an expedited final ruling by the judge on a claim of a party. 

The basics.  Here are some summary judgment nuts and bolts:

• Courts use summary judgment to address legal issues and reach legal conclusions when the facts are not disputed and only their legal meaning is in question.

• There are two critical elements of a successful motion for summary judgment:  (a) the evidentiary materials of record show that there is no genuine issue as to any material fact and (b) the party filing the motion is entitled to judgment as a matter of law.

• The purpose of summary judgment is to terminate litigation about which there can be no factual dispute and which may be determined as a matter of law. 

William F. Harvey, Indiana Practice Series, Volume 3A. 

Faster.  There is no real difference between a “judgment” and a “summary judgment.”  In both instances, the court adjudicates (determines) a claim or claims.  The main distinction between the two is this – a summary judgment avoids a trial.  A lender can repossess and therefore dispose of the collateral much faster (and with much less expense) than if it had to try the case.

Rule 56.  Motions for summary judgment are governed by Rule 56 of the Indiana Rules of Trial Procedure.  Black’s Law Dictionary explains “summary judgment” as:  “Rule of Civil Procedure 56 permits any party to a civil action to move for a summary judgment on a claim . . . when he believes that there is no genuine issue of material fact and that he is entitled to prevail as a matter of law….”   A “genuine issue of material fact” for purposes of summary judgment is:

In determining what constitutes a genuine issue as to any material fact for purposes of summary judgment, an issue is ‘material’ if the facts alleged are such as to constitute a legal defense or are such nature as to affect the result of the action.  A fact is ‘material’ and precludes grant of summary judgment if proof of that fact would have effect of establishing or refuting one of essential elements of a cause of action or defense asserted by the parties, and would necessarily affect application of appropriate principle of law to the rights and obligations of the parties.  Black’s.

In a typical commercial foreclosure case, there are two fundamental issues for the court to determine:  (1) whether there has been a default under the operative loan documents and (2) what the damages are.  If there is no dispute as to either of those issues, lenders can file a motion for summary judgment. The borrower has thirty days within which to respond to the motion.  It is not unusual for this period to be extended for another thirty days or so.  The plaintiff lender then may file a reply brief, and the court thereafter usually will hold a hearing. 

Supporting materials.  In support of the motion, you need an affidavit (1) to authenticate the loan documents and establish a default and (2) to outline of the amount of money to which the lender is entitled.  Unless the borrower can demonstrate that no default has occurred or that the lender has miscalculated the amount of damages, the court will be compelled to enter summary judgment.  A properly-supported motion for summary judgment could result in the reduction of the lender’s claims to a money judgment/foreclosure decree within a few months.  A resolution of the claims will not be dependent upon the court’s availability to hold a trial, which takes several months if not years. 

The objective.  Should a defendant borrower appear in the suit and answer the complaint, the plaintiff lender will be confronted with a contested, or at least a delayed, foreclosure.  (If there is no appearance in the case or answer to the complaint, lenders can achieve an even quicker judgment by applying for a default judgment under Trial Rule 55.)  In order to turn collateral into cash as quickly as possible, and if a default judgment is unavailable, the lender and its counsel should aggressively pursue summary judgment.  But make sure there will be no factual disputes in connection with proving a default (a breach of the loan documents) or the amount of the debt.  If lenders take debatable or extreme positions as to either of those issues, the motion could be defeated, resulting in delays and compounding financial losses.

"IF YOU THINK THAT HAVING AN ATTORNEY THAT IS QUALIFIED IS EXPENSIVE, TRY NOT HAVING ONE"

Those aren't my words, nor is that a quote from a lawyer.  In a column today from The New York Times entitled "Don't Underestimate Value of an Attorney",  which column appears in The Indianapolis Star, a small-business owner talks about the benefits of seeking legal counsel in connection with business transactions, including specifically secured loans.

BASIC FORECLOSURE PROCESS/TIMING IN INDIANA

Need a handle on how long it will take to liquidate your borrower’s collateral in Indiana?  Since the foreclosure process officially starts with the filing of a complaint, my timelines start there.  A complaint cannot be filed until there has been a default under the terms of the real estate mortgage or personal property security agreement.  Needless to say, many weeks if not months might pass between the initial loan default and the decision to file suit. 

The timing of the foreclosure process largely depends upon whether and to what extent the borrower contests the proceeding:   

Uncontested Foreclosure:  4½ - 6 months minimum.  If a business debtor does not contest foreclosure (but will not agree to a deed in lieu), the process can move relatively quickly.  Here are the major steps and applicable ranges of time:

1. Filing of the Complaint
2. Service of process on the debtor:  occurs in 5-10 days unless service by publication
3. Application for default judgment:  can be sought 21-24 days after service of process
4. Entry of default judgment and decree of foreclosure:  should occur within approximately 30 days after the Application is filed
5. Praecipe for Sheriff’s sale, including notice of same:  by statute, cannot be filed until 3 months after the Complaint
6. Sheriff’s sale:  happens about 45-90 days from Praecipe, depending on the county

Contested Foreclosure:  6-9 months minimum.  Given the vagaries of litigation, it’s virtually impossible to conclusively estimate how long a contested foreclosure case may last.  Much depends upon how clear the default and the damages are.  Perhaps the most significant factor relates to the time associated with workout negotiations.  In that regard, each case is different.  Here are the main steps of a fairly quick contested foreclosure:

1. Filing of the Complaint
2. Service of process on the debtor:  occurs in 5-10 days unless service by publication
3. Appearance of debtor’s attorney and motion for one or more 30-day extensions of time to respond to the Complaint:  filed 20-23 days after service of process
4. Answer to Complaint:  filed 30 days after filing of Appearance and expiration of last motion for extension
5. Motion for summary judgment:  can be filed immediately after the filing of the Answer
6. Objection to motion for summary judgment:  due 30 days after the filing of the motion for summary judgment
7. Summary judgment hearing:  usually held 75-120 days after the motion is filed
8. Entry of judgment and decree of foreclosure:  occurs on day of hearing, or soon thereafter, unless the motion is vigorously contested with viable defenses
9. Praecipe for Sheriff’s sale:  can be submitted immediately after the entry of judgment assuming more than 3 months have passed since the complaint was filed
10. Sheriff’s sale:  takes place 45-90 days from Praecipe, depending on the county

Judicial sales.  Indiana law requires a judicial sale in order to foreclose a mortgage.  I.C. 32-29-7-4 is a nice option for creditors looking to expedite a sale.  The statute permits, under certain limited circumstances, the sheriff’s sale to be conducted by a private auctioneer on the civil sheriff’s behalf.  This may be advisable in counties without regularly-scheduled sheriff’s sales.  (I should note that, as to personal property security interests, UCC/Article 9.1 and/or the terms of a security agreement may allow the creditor to repossess the collateral without a sheriff’s sale.) 

Be prepared for delays.  Although the basic procedure is the same throughout Indiana, the timing can be impacted dramatically by the dockets of the individual courts and/or the schedules of the individual civil Sheriffs’ offices.  The periods described are the minimum time periods.  The actual time usually is longer.  This is especially true if there are multiple creditors named in the lawsuit.  Further, in contested cases involving debtors represented by counsel, opposing attorneys can prolong the process in a variety of ways, including multiple motions for extensions of time, requests for discovery and vigorous challenges to a motion for summary judgment.  In the event a trial must occur, a resolution of the case can be delayed several months if not years.  In addition, a bankruptcy can be filed up until the time when the Sheriff’s sale begins, and that can delay the foreclosure process indefinitely.

Depending on the goals of the lender, the lawyer representing the lender can push the case aggressively toward a sale.  Or, counsel can be more passive to give the parties time to assess whether a refinancing arrangement may be warranted.  The parties can settle, or the debtor can redeem - real estate / I.C. § 2-29-7-7; personal property / I.C. § 26-1-9.1-623 - right up to the sale or disposition of the collateral.  Debtors’ attorneys know this, so don’t be surprised if a borrower waits until the eve of sale either to file for bankruptcy protection, redeem or yield to the lender’s loan modification terms.

JUST WHAT IS COMMERCIAL FORECLOSURE LAW?

The cast of characters.  Everyone knows what a bank is.  Most of us understand what a lender is – an institution from whom money is borrowed.  Adding the word “commercial” to describe a lender simply means that the financial entity deals with businesses as opposed to individuals.  Black’s Law Dictionary defines “commercial loans” as:  “loans made to businesses as distinguished from personal-consumer credit loans.”  Although a lender could make both commercial and consumer loans, this blog is dedicated primarily to commercial matters. 

The field of law.  To me, commercial foreclosure law refers to the rules and procedures applicable when a business defaults on a loan secured by some kind of collateral.  So, if you work for an institution that loaned money to a business, and if the borrower defaulted under the terms of the loan agreement, then commercial foreclosure law provides the judicial framework for the protection of your rights.  Typically, those rights involve the ability to collect money owed by the borrower through the sale of the loan collateral. 

Collateral.  Black’s states that collateral is property pledged as security for the satisfaction of a debt.  If a business defaults on a loan, the lender can initiate a foreclosure action to compel the sale of the loan collateral and therefore collect the amounts owed by the borrower through proceeds from the sale.  There are all kinds of business-related collateral.  Perhaps the most recognizable is real estate – the land a business owns.  Some of the most interesting cases, however, deal with personal property collateral, which can be any property imaginable that is owned by a business – a fleet of cars, office furniture or intangibles such as accounts receivable. 

Lien.  A lien is a description of an encumbrance on property:  “a claim . . . on property for payment of some debt.”  Black’s.  In the context of my blog, a lien arises by written contract between a lender and a borrower – either a real estate mortgage agreement or a personal property security agreement.  The lien granted by a borrower to a lender gives a lender the right to foreclose upon the subject property (collateral) for payment of the debt in the event of a default.

Commercial foreclosure.  Turning again to Black’s, a foreclosure is defined, in part, as the “enforcement of a lien . . . or mortgage . . ..”  Paraphrasing Black’s, foreclosure is the legal process by which real or personal property subject to a lien is sold in satisfaction of a debt.  To foreclose means to terminate a borrower’s rights in the subject property.  A foreclosure that is commercial merely refers to the termination of a business borrower’s rights in its property. 

A form of collection.  Commercial foreclosure law is a special kind of collection law.  It’s a body of rules governing how banks and financial institutions recover money by asserting rights in, and selling, collateral that a business granted to secure the loan.  It’s the set of legal principles applicable to a lender needing to collect money owed by a business, which failed to make its loan payments or otherwise defaulted under the terms of the loan documents. 

If any of these matters are relevant to what you do for a living, I welcome your visits to my blog and hope that you will e-mail me with your questions or comments.