Indiana Commercial Foreclosure Law

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.     

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.

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.

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’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years

Lenders filing loan enforcement cases in Indiana should know that their actions may be time-barred if not filed within six years. 

What is a “statute of limitations”?  When trying to describe general legal concepts, I often turn to (what else?) Black’s Law Dictionary:

Statute of limitations.  A statute prescribing limitations to the right of action on certain described causes of action . . . that is, declaring that no suit shall be maintained on such causes of action . . . unless brought within a specified period of time after the right accrued.  Statutes of limitation . . . are such legislative enactments as prescribe the periods within which actions may be brought upon certain claims or within which certain rights may be enforced.

Basically, a statute of limitations is a deadline to file a lawsuit. 

2 statutes – 6 years.  The Indiana Code’s provisions applicable to statutes of limitation include Ind. Code § 34-11-2-9 “Action upon promissory notes, bills of exchange, or other written contracts for payment of money:”

An action upon promissory notes . . . or other written contracts for the payment of money executed after August 31, 1982, must be commenced within six (6) years after the cause of action accrues.

Indiana’s version of the Uniform Commercial Code, specifically Chapter 3.1 “Negotiable Instruments,” has a similar provision at I.C. § 26-1-3.1-118 “Action to enforce obligation of party--”:

(a)  Except as provided in subsection (e) [not applicable], an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

Both statutes seemingly apply to promissory notes, although as noted in my January 16, 2008 post, not all notes are negotiable instruments under the UCC.  While the two different statutes create some confusion as to which statute applies and when, both statutes fortunately have a six-year limitations period – a “distinction without a difference” kind of situation. 

The complicator - accrual.  Although Indiana law may be clear as to when the limitation period ends (six years), the more difficult issue surrounds when the limitation period begins.  What event, date, etc. causes the statute of limitations to start running?  Based upon my limited research for this post, there is not a readily-available, crystal-clear answer to the question. 

The “after the cause of action accrues” language in I.C. § 34-11-2-9 has been, and continues to be, subject to debate in all sorts of cases.  That language usually refers to the date the plaintiff knew or should have known it had a cause of action (i.e. a known default).  Here, the law is complicated by the fact that most promissory notes contain “no waiver” clauses, which serve to negate what could be various default-related triggers. 

I.C. § 26-1-3.1-118(a) is a little more clear, however, and suggests the applicability of a couple of different accrual dates:  either (1) the date of maturity or (2) the date of acceleration. 

The basics.  Although I have not comprehensively researched Indiana law on the subject, I think it’s safe to say that, generally, the day after the note’s maturity date usually will be the first day of the six-year limitations period.  If, however, the lender accelerated the note, then the date of acceleration may trigger the limitations period.  Of course there are many circumstances that might call for a different result.  The primary purpose of today’s post simply was to address the six-year time period and advise lenders and their counsel that, normally, you’ve got six years to initiate a promissory note enforcement action.  Given the negative consequence of an untimely lawsuit (i.e. loss of the case), it is good practice to be conservative in calculating deadlines of this type.

No Signatures, No Promissory Notes, No Problem

Has your lending institution lost its promissory note?  Is the defaulting mortgagee claiming she did not sign the mortgage?  As explained in Bonilla v. Commercial Services, 2009 Ind. App. LEXIS 112 (Bonilla.pdf), all may not be lost.

History.  In the mid-1980’s, husband arranged for two loans that were secured by real estate upon which a gasoline service station operated.  The mortgages contained the signatures of both husband and wife as co-mortgagors.  Husband died in 1991.  The mortgagee filed a foreclosure action against wife in 2000.  Wife lost at trial, and appealed.  Her appeal centered on two arguments:  (1) she did not sign the subject mortgages and (2) the plaintiff (mortgagor) failed to produce the underlying promissory notes.

Signatures.  Wife claimed that she adequately established her non-participation in the mortgage executions.  She even submitted handwriting samples to contest the alleged signatures.  The trial court found the samples to “clearly show a distinct difference between the signatures of wife in the exemplars and the purported signature of wife on the mortgages.”  Wife’s purported signatures on the mortgages, however, were notarized, which created a presumption that wife signed them.  Ind. Code § 33-42-2-6 provides that the “official certificate of a notary public, attested by the notary’s seal, is presumptive evidence of the facts stated in cases where, by law, the notary public is authorized to certify the facts.”  The trial court concluded that wife’s evidence was inadequate to rebut the presumption, and the Indiana Court of Appeals affirmed.  Significantly, the trial court found that wife admitted she knew of the debts and of her husband’s unsuccessful attempts to settle them before his death.  Furthermore, she made no effort during any of the intervening twenty years to either set aside the mortgages, to quiet title to the property or to return any of the funds associated with the mortgages.  Finally, wife admitted at trial that she benefited from the funds received from the loans associated with the mortgages. 

Damages.  Wife’s second argument on appeal was that the trial court erred in determining the damages owed.  The mortgages had been submitted into evidence, but the promissory notes were not.  Based upon the Indiana Supreme Court’s decision in Yanoff v. Muncy, 688 N.E.2d 1259 (Ind. 1997) and I.C. § 26-1-3.1-309 "Enforcement of lost, destroyed, or stolen instrument", the notes’ absence was not a bar to recovery.  In Indiana, a plaintiff in a foreclosure action does not necessarily need to produce the promissory note to recover the debt.  The debtor in Yanoff provided testimony of the essential terms of the debt, such as the amount of the original debt, the interest rate, the existence of a mortgage securing the debt, and the schedule of payments.  Such evidence, according to Yanoff, was “enough to prove both the existence of the promissory note underlying the mortgage and its essential terms.” 

In Bonilla, the Court of Appeals found that the record contained undisputed evidence establishing the terms, dates, amounts of, and interest rates on the two mortgages.  Wife also conceded that no payments had been made on the mortgages since they were executed over twenty years ago.  Even though the Court did not have the precise terms of the notes, there was a reasonable inference to draw from the evidence submitted at trial “that the failure to make a single payment on the notes in over twenty years is an event of default.” 

Wife lost the case, even though she presented fairly strong evidence that she did not sign the mortgages and even though the plaintiff mortgagee was unable to produce the promissory notes.  In the end, Indiana law allowed the mortgagee in Bonilla to dodge a bullet.

Promissory Note = Negotiable Instrument

On November 13, 2008,  the United States District Court for the Northern District of Indiana in United States of America v. Lockett, 2008 U.S. Dist. LEXIS 92998 (Lockett.pdf) granted summary judgment in favor of lender in a straightforward promissory note default case.  Lockett provides a nice primer on Indiana’s basic rules surrounding promissory notes and the evidentiary hoops through which a lender must jump in order to obtain a summary judgment in federal court.

Federal court summary judgment standard.  The procedural standard for summary judgments in Indiana’s federal courts is different from Indiana’s state courts.  Without going into detail, the movant’s initial procedural burden is easier to meet in federal court.  For those interested, here is the procedural standard as articulated in Lockett:

Summary judgment is appropriate when “the pleadings, depositions, answers to the interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.”  Fed. R. Civ. P. 56(c).  In deciding whether a genuine issue of material fact exists, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.”  No genuine issue of material fact exists when a rational trier of fact could not find for the nonmoving party even when the record as a whole is viewed in the light most favorable to the nonmoving party.  A nonmoving party cannot rest on mere allegations or denials to overcome a motion for summary judgment; “instead, the nonmovant must present definite, competent evidence in rebuttal.”  Specifically, the nonmoving party must point to enough evidence to show the existence of each element of its case on which it will bear the burden at trial. 

(Indiana’s state court standard requires the movant to designate evidence that definitively negates each element of the nonmovant’s case.)

Promissory note, defined.  Judge Miller reminds us that a promissory note “is a negotiable instrument subject to Indiana’s version of the Uniform Commercial Code.  See, Ind. Code § 26-1-3.1-104.  In Indiana, the holder of a negotiable instrument (usually, a lender) may recover on the instrument simply by:

  producing the signed note, or a copy;
  proving that the note was executed; and
  showing that the note is due and unpaid.

See, I.C. § 26-1-3.1-308.  Typically, these matters easily are established by filing an affidavit from a lender representative.  At that point, the only way the defendant (the borrower) can avoid entry of judgment is to prove some defense to liability.  The potential defenses are too voluminous to list or discuss here, but they would involve, for instance, evidence that the borrower did not sign the note or that the borrower contests the amounts due. 

In Lockett, the borrower failed to refute any of the lender’s factual allegations and failed to raise any legal defense to negate her responsibility to pay the full amount of the loan.  The borrower, who was unrepresented in the litigation, simply expressed a desire to settle the debt.  Accordingly, the Court concluded that there were no genuine issues of material fact for trial and held that the holder of the note was entitled to a judgment as a matter of law in the amount requested.

The fundamentals.  The Lockett case warranted a short post to remind secured lenders and their counsel involved in Indiana commercial foreclosures of the basic proof needed to obtain a pre-trial disposition of the case through summary judgment.  For the Indiana lawyers who may be reading, Lockett would be a nice case to cite in a summary judgment brief involving a default on a promissory note.

Fried Tomato Grower, Part II: Lack of Consideration

Today’s post will explore the second, and successful, defense asserted by defendant Jackson, namely that the Note was unenforceable for lack of consideration.  Part I of my commentary about Jackson v. Luellen Farms discussed how the Indiana Court of Appeals arrived at its conclusion that Jackson could be personally liable on the Note.  Keep reading, however, to gain an understanding of the concept of “consideration,” particularly in situations involving antecedent debt, and how the Court ultimately ruled in Jackson’s favor.

Consideration, general rules.  Because the Court deemed the Note not to be a negotiable instrument, the UCC and specifically I.C. § 26-1-3.1-303(b) did not apply.  (Section 303 articulates what “consideration” is under the UCC.) 

For a contract to be valid, there must be an exchange of consideration, as noted by the Court in Jackson:

  Consideration is defined as ‘[s]omething of value (such
  as an act, a forbearance, or a return promise) received
  by a promisor from a promisee.’  ‘To constitute
  consideration, there must be a benefit accruing to the
  promisor or a detriment to the promisee.’

The plaintiff creditor, LFI, argued that there was consideration for the Note because of the unpaid balance owed by HPI to LFI at the time of the Note’s execution. 

Past consideration.  In fact, the Note was a promise by Jackson to pay an antecedent (prior) debt of a third party, HPI.  The Indiana Court of Appeals held that the promise was not enforceable because “past consideration” generally cannot support a new obligation or promise.  As stated by the Court, in Indiana:

  if a person has been benefitted in the past by some
  act or forbearance for which he incurred no legal
  liability and afterwards, whether from good feeling
  or interested motives, he makes a promise to the
  person by whose act or forbearance he has benefited,
  and that promise is made on no other consideration
  than the past benefit, it is gratuitous and cannot be
  enforced. 

Neither HPI nor Jackson received any benefit in exchange for the Note.  Jackson, personally, had no liability on the debt when he signed the Note – only HPI did.  There was no evidence that Jackson signed the Note in exchange for LFI’s promise to delay collection (forbear), in which case there would have been consideration.   

Valid guaranty?  LFI actually was angling to assert that the Note was a personal guaranty.  Under Indiana law, “it is not necessary for a guarantor to derive any benefit from the principal contract or the guaranty for consideration to exist.”  But, generally the guaranty must be made “at the time of the principal contract” (for example, when the tomatoes were delivered).  There are exceptions to this general rule, but none of them existed in Jackson.  There was, therefore, no legal consideration to support the alleged guaranty of HPI’s debt to LFI. 

Too late.  The tomato grower lost the case for a lot of reasons, including most importantly the fact that Jackson, individually, did not promise to pay HPI’s debt at the time the tomatoes were delivered.  Even then, once HPI began having trouble paying LFI, there still could have been personal liability had Jackson signed the Note in exchange for LFI’s forbearance in collecting against HPI.  The Court said, “[t]he problem in Jackson is that neither Jackson nor [HPI] received anything of benefit pursuant to the Note.  Instead, the only party that benefitted from the Note’s execution was the promisee, LFI.  Although Jackson had some motive to sign the Note, the Note was not supported by consideration.  Under these circumstances, LFI may not enforce the Note against Jackson.” 

In most commercial cases, there will be appropriate and timely loan documentation.  So, the circumstances present in the Jackson case may not be common in the day-to-day operations of most commercial lending institutions.  If, however, you as a lender agree to forbear on a borrower’s debt and, as a part of that agreement, intend to obtain for the first time some kind of personal guaranty, make sure the loan documents are clear that the parties intend for there to be personal liability and that appropriate consideration (exchange of benefit) exists. 

Fried Tomato Grower, Part I: Personal Liability

Informalities in connection with loans often lead to costly results.  In Jackson v. Luellen Farms, 2007 Ind. App. LEXIS 2754 (JacksonOpinion.pdf), the Indiana Court of Appeals discussed in its December 12, 2007 opinion how a thirty-year business relationship turned into $200,000 in losses for a supplier of raw tomatoes.  This is the first of two posts that address the Jackson case and the efforts of a party owed money to collect an antecedent debt from an owner/operator of a corporation.  Advanced planning and documentation sometimes may be inconvenient, expensive or awkward, but it almost always can help protect lenders against financial losses. 

Context.  The plaintiff was LFI, a grower and supplier of tomatoes.  Defendant Jackson was the owner and operator of HPI, a corporation that purchased and canned tomatoes.  HPI often would not pay LFI on delivery but would wait until the first of the year.  In October, 1999, HPI owed LFI about $225,000 for tomatoes delivered in 1998 and 1999.  LFI evidently became nervous about getting paid, so for the first time the parties executed a Note to memorialize the amount owed.  HPI made some payments on the Note but ultimately went under, owing $2.5-$3.0 million dollars to various creditors.  LFI sought recovery from Jackson individually, and Jackson asserted two defenses:  (1) he was not personally liable on the Note because he signed in a representative capacity and (2) the Note failed for a lack of consideration.  I discuss the first defense in this post.

Was the Note a negotiable instrument?   A sub-issue was whether Indiana’s UCC, specifically I.C. § 26-1-3.1-402 dealing with negotiable instruments, applied.  (Typically, the UCC applies because most promissory notes meet the requirements of a negotiable instrument.)  If the UCC applied, the burden of proof was on Jackson to in essence prove a negative:  that both parties did not intend for him to be personally liable under the Note.  Was the document was in fact a “negotiable instrument” as defined in I.C. § 26-1-3.1-104?  The Court of Appeals concluded it was not, essentially because it purported to incorporate by reference the terms of a separate contract.  The Note not only referred to a non-existent mortgage but, more importantly, indicated that all agreements and covenants in that mortgage applied to the Note – a no-no under the UCC.  So, Jackson was not held to the heavy burden “to show that both parties to the Note intended that Jackson not make himself liable.” 

Contract law.  The issue of personal liability thus turned on the common law of contracts, not the UCC.  And, plaintiff LFI had the burden of proof.  In this scenario, courts apply a set of rules of construction and interpretation to arrive at a decision as to what the parties intended in the written document.  The Court weighed a plethora of details about the language in the Note and the circumstances leading up to its execution.  For example, after his signature, Jackson did not have the word “President.”  In the final analysis, the Court concluded that “based on the manner in which Jackson signed the Note and our consideration of the surrounding circumstances, we conclude that the Note evidences a promise on the part of Jackson to pay LFI the amount owed by [HPI].”  So, despite winning on the UCC/burden of proof issue, Jackson still got beat on his first defense.   

On the hook?  The Court’s conclusion in Jackson is favorable to Indiana creditors, particularly in the rare scenario where a Note does not constitute a negotiable instrument under the UCC.  Absent clear and unambiguous language and/or facts showing that the amount of money was owed solely by the corporate entity, owners purporting to sign in a representative capacity could be at risk.  In part II of this post, however, I’ll explain why the Indiana Court of Appeals ultimately found the Note to be unenforceable as to Jackson.  LFI won a battle, but lost the war.