Indiana Commercial Foreclosure Law

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 Banks, As Garnishee Defendants, Need Not Restrict Withdrawal Of Subsequently-Deposited Funds

From time to time, the enforcement of secured loans will evolve into the collection of  deficiency judgments.  One of the available collection tools is a garnishment order.  The Indiana Court of Appeals in JPMorgan Chase v. Brown, 2008 Ind. App. LEXIS 1029 (Ind. Ct. App. 2008) (Chase.pdf) recently interpreted Ind. Code § 28-9-4-2 and addressed the question of whether a depository financial institution, which has received notice of garnishment proceedings, is required to restrict withdrawal of funds that are subsequently deposited into the account.  Surprisingly, the answer is no.

What happened.  Collection agency filed a motion for proceedings supplemental naming Chase as a garnishee defendant and asserting that Chase possessed deposit accounts in which the defendant/judgment debtor had an interest.  (A “garnishee” essentially is an entity, like a bank, that has money in its possession belonging to a defendant.)  In answers to interrogatories, Chase confirmed that the judgment debtor maintained an account with the bank that had a balance, as of March 5, 2007, of $20.61.  Furthermore, the bank confirmed that it immediately restricted the withdrawal of those funds.  Later, the judgment debtor made four deposits totaling over $1,000 to the account.  Because the collection agency sought about $2,200, the court signed an order requiring Chase to pay over to the clerk approximately $2,200 from the account.  Chase did not do so, however, and only restricted the account balance of $20.61.  The trial court thereafter found Chase in contempt and entered a judgment against Chase for $1,045.99, the balance of the account that included the subsequent deposits.  

Chase’s position.  On appeal, Chase argued that it only was required to restrict withdrawal of funds “in an amount equal to the balance of  [judgment debtor’s] account at the time [Chase] received notice of the garnishment proceedings.”  Chase based its contention on a 1998 amendment to the operative statute.

The statute.  I.C. § 28-9-4-2 provides in part that a depository financial institution shall restrict deposit account withdrawals in an amount equal to “the balance in the account at the time of receipt of the documents in process . . ..”  I.C. § 28-9-4-2(a)(2)(B).  The pre-1998 version of the statute specifically provided for restriction of additional funds “subsequently deposited into” the account.  When the legislature amended the statute, it deleted those words. 

When courts interpret statutes, their goal is to determine and give effect to the intent of the legislature.  In this case, the Court would “not simply re-read language into a statute that the legislature has deleted.”  The Court therefore held:

In light of the legislature’s amendment to I.C. § 28-9-4-2, we agree with [Chase] that the statute only required it to restrict withdrawal of the balance in [judgment debtor’s] account at the time it received the documents and process required by I.C. § 28-9-3-4(d).  The legislature’s decision to omit the words “or subsequently deposited into” from I.C. § 28-9-4-2 is irrefutable and, as required by the rules of statutory construction, we will not reinsert the omitted language into the statute when construing the statute.  Thus, we agree with [Chase] that the trial court erred by finding it in contempt for failing to restrict withdrawal of funds that were subsequently deposited into [judgment debtor’s] account. 

Odd result.  The Indiana Court of Appeals clearly did the right thing in this case.  The question for me is whether Indiana’s General Assembly did the right thing when, in 1998, it deleted from the operative statutory section the words “or subsequently deposited into” from the law.  The statutory amendment means that lenders attempting to collect deficiency judgments through the garnishment of judgment debtors’ bank accounts may need to issue multiple garnishment requests to the same bank.  Otherwise, the bank only is compelled to restrict the withdrawal of funds in the account at the time of a particular request.  While there may have been good reasons for the 1998 statutory amendment, the consequences for debt collectors – whether intended or not – appear to be unfavorable and impractical. 

Media Reports: It's "Game Over" For Premier Properties - Is Chris White Next?

As my regular readers are aware, I've been following the fascinating story of the fall of Indianapolis-based real estate developer Premier Properties USA since the Indianapolis Business Journal first started covering it earlier this year.  Today - May 30 - as noted below is a significant day.  I will continue to update this post, and I ask you to email me links to other media reports, which I'll post here.  A friend and business associate of mine mentioned yesterday that someone should write a book about the rise and fall of Chris White's real estate empire.  I wish I had the time ... perhaps a local journalist will do it some day.

March 10:    Click here for an article about the continued financial struggles of local real estate developer Premier Properties and its owner, Chris White.  Embedded in the article are links to two prior stories regarding the matter.

Bridgewater Falls put in receivership - story from March 11.

April 7 update from IBJ:  click here .  Mr. White is keeping many lender workout departments and creditor's rights lawyers busy (including me, by the way). 

April 9's breaking news:  click here for latest IBJ story.

April 10 story from The Indianapolis Star:  click here.

April 12 article on front page of Star:  Lawsuits show free-spending CEO in grip of soaring debt.

April 17, post-auction to mezz lender Dominion reports:  IBJ and Star.

April 24, post-bankruptcy (Chapter 11) filing by Premier Properties:  IBJ and Star.  It does not appear Mr. White, personally, has filed for bankruptcy protection to this point.  Click - .pdf - for a copy of the April 23 bankruptcy petition in Case No. 08-04607-BHL-11.

April 25, IBJ: Emergency hearing scheduled in bankruptcy court.

April 26, IBJ:  Criminal charges possible in Premier blowup - Bankruptcy puts slew of creditors' lawsuits on hold. 

May 7, Star:  Judge orders "exam" of Premier books

May 12, IBJ:  Trustee to intervene in Premier bankruptcy

May 15, Star:  Colts want Premier Properties decision on stadium suite - looks like there will be another suite available for the new Lucas Oil Stadium....

May 19, IBJ:  DeBartolo to buy Premier Properties' Metropolis from Dominion Capital 

May 28, Star:  Metropolis may have a buyer.

May 29:  Star columnist John Ketzenberger's two cents:  Defaulted debt by Premier goes on and on.

May 30:  The fat lady is singing:  (1) Star:  Premier Properties throws in the towel - (2) IBJ:  Premier Properties to be liquidated. 

I've heard rumors that a personal filing by Chris White is on the horizon - a Chapter 7 liquidation.  My contact's opinion is that we'll see a bankruptcy petition in two weeks.  I'll keep you posted on any such developments. 

June 2, IBJ:  Boberschmidt appointed Premier trustee.

June 11, IBJ:  Trustee working to determine Premier assets.

June 16, IBJ:  Chris White charged with three felonies.  Star:  Developer charged with check fraud, $100,00 theft.

June 18, Star:  Arrest warrant issued on June 17.

June 23, IBJ:  Authorities can't find Premier's White.  Star:  Premier Properties founder hasn't reported to jail yet .

June 26, IBJ:  White taken into custody, posts bond.  Star:  Mall developer booked on fraud charges. 

As my regular readers are aware, I've been following the fascinating story of the fall of Indianapolis-based real estate developer Premier Properties USA since the Indianapolis Business Journal first started covering it earlier this year.  Today - May 30 - as noted below is a significant day.  I will continue to update this post, and I ask you to email me links to other media reports, which I'll post here.  A friend and business associate of mine mentioned yesterday that someone should write a book about the rise and fall of Chris White's real estate empire.  I wish I had the time ... perhaps a local journalist will do it some day.

March 10:    Click here for an article about the continued financial struggles of local real estate developer Premier Properties and its owner, Chris White.  Embedded in the article are links to two prior stories regarding the matter.

Bridgewater Falls put in receivership - story from March 11.

April 7 update from IBJ:  click here .  Mr. White is keeping many lender workout departments and creditor's rights lawyers busy (including me, by the way). 

April 9's breaking news:  click here for latest IBJ story.

April 10 story from The Indianapolis Star:  click here.

April 12 article on front page of Star:  Lawsuits show free-spending CEO in grip of soaring debt.

April 17, post-auction to mezz lender Dominion reports:  IBJ and Star.

April 24, post-bankruptcy (Chapter 11) filing by Premier Properties:  IBJ and Star.  It does not appear Mr. White, personally, has filed for bankruptcy protection to this point.  Click - .pdf - for a copy of the April 23 bankruptcy petition in Case No. 08-04607-BHL-11.

April 25, IBJ: Emergency hearing scheduled in bankruptcy court.

April 26, IBJ:  Criminal charges possible in Premier blowup - Bankruptcy puts slew of creditors' lawsuits on hold. 

May 7, Star:  Judge orders "exam" of Premier books

May 12, IBJ:  Trustee to intervene in Premier bankruptcy

May 15, Star:  Colts want Premier Properties decision on stadium suite - looks like there will be another suite available for the new Lucas Oil Stadium....

May 19, IBJ:  DeBartolo to buy Premier Properties' Metropolis from Dominion Capital 

May 28, Star:  Metropolis may have a buyer.

May 29:  Star columnist John Ketzenberger's two cents:  Defaulted debt by Premier goes on and on.

May 30:  The fat lady is singing:  (1) Star:  Premier Properties throws in the towel - (2) IBJ:  Premier Properties to be liquidated. 

I've heard rumors that a personal filing by Chris White is on the horizon - a Chapter 7 liquidation.  My contact's opinion is that we'll see a bankruptcy petition in two weeks.  I'll keep you posted on any such developments. 

June 2, IBJ:  Boberschmidt appointed Premier trustee.

June 11, IBJ:  Trustee working to determine Premier assets.

June 16, IBJ:  Chris White charged with three felonies.  Star:  Developer charged with check fraud, $100,00 theft.

June 18, Star:  Arrest warrant issued on June 17.

June 23, IBJ:  Authorities can't find Premier's White.  Star:  Premier Properties founder hasn't reported to jail yet .

June 26, IBJ:  White taken into custody, posts bond.  Star:  Mall developer booked on fraud charges. 

Nat City Calls Loan On Frank E. Irish Co.

From today's Indianapolis Star:  Prices were pinching Frank E. Irish Co. when loan was called.

From yesterday's IBJ.com:  Stadium contractor ends operations.

As to the credit issue, here's a telling quote: 

Irish Chief Executive Officer Patrick Dooley said the company was working to extend its line of credit with National City when the bank changed some calculations associated with the loan that eliminated the types of inventory that could be used for collateral.

It would be interesting to hear Nat City's side of the story and to learn more about the collateral calculations.  Evidently, Nat City's reps wouldn't comment.

May 22 Ketzenberger column:  Star columnist John Ketzenberger provides further insight into the Irish default and blames, in part, the subprime lending crisis:  "[Mr. Irish] won't be the last business owner to cry as the subprime lending debacle reverberates through the economy."  Click, Bank's woes put end to Irish's luck.  I'm not sure how much the lender is to blame, but it's a sad story nonetheless.

May 25 Star editor Dennis Ryerson, on the Ketzenberger column:  More to story behind the Irish Co. story.  Ryerson quotes a Nat City rep, who appears to question Ketzenberger's theory that the subprime lending crisis caused the bank to call Irish's loan. 

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In other news, today's Cincinnati Enquirer is reporting that one of the city's downtown hotels - The Hyatt Regency Cincinnati - is headed for a receivership:  Lender seeking foreclosure on downtown hotel.  Midland Loan Services is the plaintiff in the suit. 

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.

Indiana Mortgage Foreclosure Sales: Buyers Beware

Do junior lenders/mortgagees need to disclose, in the statutory notice of sheriff’s sale, that the real estate is being sold subject to a senior mortgage?  On April 22, 2008, the Indiana Court of Appeals in Indi Investments v. Credit Union 1, 2008 Ind. App. LEXIS 793 (Ind. Ct. App. 2008) said no (Indi.pdf).  Indiana law generally places the onus on buyers at sheriff’s sales to bid with their eyes wide open. 

Those involved.  Indi Investments, LLC purchased the property at a sheriff’s sale following a mortgage foreclosure action brought by Credit Union 1, which held a second mortgage.  Waterfield Mortgage held the first mortgage on the property but did not foreclose.

Procedural background.  Indi filed suit to foreclose its second mortgage and ultimately obtained a judgment, which ordered a sheriff’s sale of the property subject to Waterfield’s first mortgage.  Indi purchased the property and obtained a sheriff’s deed that Indi recorded on August 18, 2006.  Despite the fact that the sheriff’s deed contained language indicating the property had been acquired subject to Westfield’s mortgage, it was not until June, 2007 that Indi filed a petition to set aside the sheriff’s sale.  Indi generally claimed it didn’t know about Waterfield’s mortgage and wanted to unwind the sale.  The trial court and the Court of Appeals refused to set aside the sale, however. 

Ignorance is not bliss.  Indi asserted a number of arguments, all of which centered on its claim that it lacked knowledge of the Waterfield mortgage when it purchased the property.  Indiana requires the publication of a notice of sale in advance of sheriff’s sales.  In this case, the notice did not mention Waterfield or its senior mortgage.  At the sale itself, nothing was disclosed with regard to the Waterfield mortgage.  Although the language in the sheriff’s deed identified the Waterfield mortgage, Indi claimed that it “was not immediately aware of the content of the Sheriff’s Deed or the legal impact of the statement.”  The Waterfield mortgage, however, had been properly recorded and was in title.  What's more, the trial court’s judgment stated that the property was to be sold subject to Waterfield’s interests.  In other words, there were at least two places for Indi to have discovered, pre-sale, that Waterfield held a mortgage on the property:  the county recorder’s office and the trial court.

Technical arguments rejected.  Should Credit Union 1 have disclosed in the notice of sale that the property was being sold subject to the Waterfield mortgage?  No.  Ind. Code § 32-29-7-3 governs notices of mortgage foreclosure sales and does not require the notice to contain information concerning senior mortgages.  Did the judgment mandate that information related to Waterfield’s mortgage be included in the notice?  No.  The judgment only required the property to be sold subject to the mortgage and did not require any such language in the notice of sale.  Should the sale have been set aside because Indi was unaware of the Waterfield mortgage?  Not in this case.  Generally, there is no warranty in judicial sales in Indiana.  The doctrine of caveat emptor (buyer beware) applies “with all its force” to sales made by virtue of an execution.

Indi not a bona fide purchaser.  Indiana has an exception to the caveat emptor rule, however.  Indiana cases have held that buyers in good faith and without notice are protected as bona fide purchasers for valuable consideration against prior equities and unrecorded deeds.  Indiana defines a “bona fide purchaser” as “one who is given value and acted in good faith without actual or constructive notice.”  Constructive notice is provided when a mortgage is properly acknowledged and placed in the record as required by statute.  Actual notice is when notice has been directly and personally given to the person to be notified, and actual notice may be implied or inferred “from the fact that the person charged had means of obtaining knowledge which he did not use.”  The Court of Appeals concluded that Indi had the means of obtaining information regarding the Waterfield mortgage.  First, it could have performed a title search.  Second, it could have reviewed the trial court’s file.  Indi evidently did neither.  As such, “Indi Investments is charged with actual notice of the Waterfield mortgage and, consequently, is not a bona fide purchaser.” 

Lender protected.  While it may not be feasible or cost effective for a third party to order a title insurance policy commitment before bidding at a sheriff’s sale, a title search would have informed Indi of the Waterfield mortgage.  An easier and cheaper method for Indi to protect itself would have been to visit the court and review the judgment.  By doing neither, Indi assumed the risk of acquiring the property subject to any liens that were not wiped out in the foreclosure action.  Junior mortgagees that struggle with the decision of whether to publicize, in the notice of sheriff’s sale, that the property is being sold subject to a senior mortgage can take comfort in the Indi decision.  The Court of Appeals, based largely upon I.C. § 32-29-7-3, confirms that such notice need not be given.  Lenders generally are protected by the procedures applicable to this scenario.  Sheriff’s sale buyers are not.

S&P: Defaults In U.S. To Accelerate Through 2008

Click here for a news piece from monitordaily.com.  "The pace of corporate defaults in the first quarter of 2008 equaled the total for all of 2007, according to a new report from Standard & Poor's...."

Seventh Circuit: Indiana Writs of Assistance Do Not Need To Be Executed In A Commercially-Reasonable Manner

This supplements my March 2, 2007 post:  The execution of a writ of assistance need not be "commercially reasonable."  Please click here for that post, which in part dealt with the federal district court's February 16, 2007 conclusion that Indiana Trial Rule 70(A) writs of assistance should be executed by the county sheriff immediately and without regard to commercially-reasonable standards.  The Seventh Circuit agreed with the opinion of Judge Tinder (who is, incidentally, now a Seventh Circuit Judge).

Affirmed.  At issue was the timing of an eviction of a property owner after after an execution sale of the real estate.  The owner, Mr. Dempsey, cried foul because JP Morgan Chase refused to delay the eviction to allow Mr. Dempsey to attend a funeral.  Here's what the Seventh Circuit said regarding the appeal of that issue: 

We likewise agree with the district court that there is no merit to Dempsey’s claim that the writ of assistance was executed unfairly because Chase refused to delay the eviction to allow Dempsey to attend a funeral. Dempsey has provided no support whatsoever for his contention that the writ must be executed in a commercially reasonable manner. “A writ of assistance is an equitable remedy used to transfer real property, the title of which has been previously adjudicated, as a means of enforcing the court’s own decree” where the party that the writ is issued against has refused to obey that decree—like Dempsey did here. See TeWalt v. TeWalt, 421 N.E.2d 415, 418 (Ind. Ct. App. 1981); see also IND. R. TRIAL P. 70(A). Thus, it is not surprising that the sheriff has the “right and duty” to execute the writ immediately upon receiving it. 7 C.J.S. Writ of Assistance § 14. As the district court noted, “Dempsey could have avoided his trouble by moving out voluntarily and promptly when Chase obtained title to the property as opposed to forcing Chase to utilize the sheriff’s department to enforce the court’s decision.”

For a .pdf of the entire March 31, 2008 decision in Dempsey v. JP Morgan Chase, 2008 U.S. App. LEXIS 7707 (7th Cir. 2008) click here.pdf.

Tool for creditors.  Again, if you acquired title to real estate at a sheriff's sale and if the owner will not vacate voluntarily, your remedy is a writ of assistance.  Dempsey provides powerful legal precedent, favorable to creditors, associated with how Indiana writs of assistance can and should be executed.

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.

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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.

Memo To Title Insurers: Disclose All Recorded Liens, Even Legally-Deficient Ones

As reported on this blog, over the past several months the Indiana Court of Appeals has issued a number of opinions directly or indirectly related to defective titles searches.  On March 31, 2008, in House v. First American Title, et. al., 2008 Ind. App. LEXIS 618, the Court again provides guidance to commercial lenders and other parties affected by title defects post-foreclosure.  As always, I provide .pdf's of the opinions I discuss:  House.pdf.

Situation.  The facts of House are straightforward.  Plaintiff Wayne House bought a home from Centex, which held title after foreclosing on the prior owners.  Defendant Security Title had performed a title search for House and reported no liens on the property.  House improved the property and then attempted to flip it.  A prospective buyer wouldn't close upon learning that judgment liens existed on the property.  The judgment liens were held against the prior owners - the owners upon which Centex foreclosed.  House filed suit to clear title.

Security Title exposed to liability.  Security Title claimed it did not have to disclose the judgment liens because they were legally deficient.  The Court noted, however, that neither Indiana law nor Security Title's contract with House supported the proposition that Security Title was not required to disclose recorded liens it believed were legally deficient.  Moreover, given the procedural context of the decision - a Trial Rule 12(B)(6) motion to dismiss - the Court could not at the pleading stage determine as a matter of law, without further factual inquiry, whether the liens were in fact legally deficient. 

Some Indiana lien laws.  Security Title asserted that a handful of well-settled laws applicable to judgment liens, and enforcement of such liens, warranted a dismissal of House's case.  It's helpful to be reminded of these Indiana legal principles:

• Real property held by the entireties is immune to seizure and satisfaction of the individual debts of the husband or wife.  A husband and wife are presumed to hold real property as tenants by the entireties.  Ind. Code 32-17-3-1.
• A purchase money mortgage has priority over a prior judgment.  Ind. Code 32-29-1-4. 
• Liens on real property expire ten years after judgment is rendered.  Ind. Code 34-55-9-2. 
• A judgment lien can be executed after ten years, however, upon leave of court.  Ind. Code 34-55-1-2. 

The litigation continues....  Given the nature of the subject liens, Indiana's laws seemingly should protect Security Title from liability stemming from the judgment liens.  Nevertheless, issues regarding whether the prior owners held the property as tenants by the entireties and/or the priority or enforceability of the judgment liens were factual and thus inappropriate for a T.R. 12(B)(6) dismissal.  The House case generally teaches us that companies conducting title searches should disclose all recorded liens, regardless of whether the searchers believe such liens are deficient.  Indeed this is one of the primary reasons why foreclosing lenders order title work in the first place - to determine whether there are liens on the property that need to be dealt with during the foreclosure suit.       

Sheriff’s Sales Of Separate Tracts: Principal’s Real Estate First, Surety’s Second

The Keesling v. T.E.K. Partners case has produced a second appellate court opinion.  I wrote about Keesling I on March 23, 2007.  That post dealt with the liability of sureties (or accommodation parties) when an original obligation is materially altered.  The latest opinion, decided March 6 (2008 Ind. App. LEXIS 431) (KeeslingII.pdf), discusses among other things the order (sequence) of the sheriff’s sales when there are multiple tracts to be sold.  So, Keesling I discusses liability issues, and Keesling II addresses judgment enforcement-related matters.  Commercial lenders may want to note Keesling II in the event they need guidance where there is more than one parcel of real estate subject to a foreclosure sale. 

Overview.  The Keeslings and Heritage Land were the defendants in the case and were deemed to be accommodation parties/sureties on the original note.  The collateral in question consisted of two separate tracts, a thirty-six-acre tract and a ten-acre tract.  The Court stated that the thirty-six-acre tract was the “property of the surety,” while the ten-acre tract was determined to be the principal collateral for the original note.  The specific issue in Keesling II was whether the thirty-six-acre tract or the ten-acre tract should be sold at a sheriff’s sale first.  The defendants clearly wanted to protect their interests in the thirty-six-acre tract.  The primary contention of the Keeslings/Heritage Land in the appeal was that, if the thirty-six-acre “surety collateral” was to be sold at all, then it should only be sold to satisfy any deficiency that remained on the original note after the ten-acre “primary collateral” posted by them had first been sold.

Legal principles.  An Indiana statute and an Indiana trial rule controlled the appellate court’s decision.  Ind. Code § 34-22-1 et seq. deals with the remedies of sureties against their principals.  Specifically, I.C. § 34-22-1-4 entitled “Order on levy upon property of principal and surety,” section (a), provides that where a court finds in favor of a surety on the question of a suretyship, the court shall make an order directing the sheriff to levy first upon the property of the principal and to exhaust the property of the principal before levying upon the property of the surety.  And, Ind. Trial Rule 69 generally governs sheriff’s sales.  The rule states “unless otherwise ordered by the court, the sheriff or person conducting the sale upon execution shall not be required to offer it for sale in any particular order.”  T.R. 69(A).  The Court stated that this rule applies to the foreclosure of mortgage liens “and in commercial transactions, it is not uncommon for the loan documents to provide that in the event of default the creditor shall have recourse to the collateral in any order, without priority.”  The Court focused on the “unless otherwise ordered by the court” language for its conclusion that, based upon the facts of this case, the order of sale and the allocation of proceeds must correlate with the liabilities of the parties and their collateral.

36 acres saved, perhaps.  A separate entity, Heritage/M.G., was the principal debtor on the original note, and the ten-acre tract was the principal collateral for that debt.  Heritage Land (a connected entity) and the Keeslings merely were accommodation parties, or sureties, on the original note, and the thirty-six-acre tract was the property of the sureties.  Thus the case apparently involved a fairly uncommon scenario where the accommodation parties/sureties pledged real estate collateral to secure the borrower’s note.  Given I.C. § 34-22-1-4(a), the Court concluded that the ten-acre tract must be sold first, and the thirty-six-acre tract was to be sold “only if the sale of the ten acres does not satisfy the debt on the original note.”  This result is consistent with the basic notion that an accommodation party’s liability is secondary to the liability of the principal. 

Indiana Tax Sale And Related Proceedings Violate Bankruptcy Stay

From time to time, rights arising out of property tax liens collide with rights arising out of mortgage liens.  Priority determinations and related issues sometimes can be complicated.  The Indiana Court of Appeals case ATFH Real Property v. Stewart, 879 N.E.2d 1184 (Ind. Ct. App. 2008) (ATFHOpinion.pdf) provides some clarity regarding whether and when formal property tax lien proceedings impact a mortgagor and, in turn, a mortgagee when the mortgagor has filed for bankruptcy protection.

Procedural history.  Mortgagor petitioned for Chapter 13 bankruptcy protection.  Among mortgagor’s assets was mortgaged real estate.  Post-petition, a tax lien on the property was sold to a party in a Marion County, Indiana tax sale.  The County, however, had not applied for relief from the bankruptcy automatic stay.  The purchaser of the tax lien then assigned its lien to another party (assignee).  Months later, mortgagee had the bankruptcy automatic stay lifted so it could foreclose on its mortgage on the property.  After the bankruptcy case concluded, and the mortgagor/debtor was discharged, the Marion County Tax Auditor issued a deed to the property to the assignee of the tax sale lien.  The assignee then conveyed its interests in the property to ATFH, the plaintiff in the current case.  ATFH filed an action to quiet title, essentially claiming that its interest in the property, which arose from the tax lien, was superior to the interests of the mortgage lender that foreclosed on the property. 

Property tax lien primer.  The Indiana Court of Appeals in ATFH Real Property set out the following general rules applicable to property tax liens in Indiana:

 When the owner of real property fails to pay property taxes, the property may be sold to satisfy the delinquent taxes. 

 The process by which property is sold to satisfy delinquent taxes is governed by statute, and a valid sale requires material compliance with those statutes.

 At such a “tax sale,” when a bid from a member of the public equals at least the amount of the delinquent taxes (plus some miscellaneous expenses), the buyer receives a certificate of sale and a lien against the property in the amount paid.  I.C. § 6-1.1-24-5 and 9.

 This lien is superior to all other liens that exist against the property.  I.C. § 6-1.1-24-5.

 Any person, however, may redeem (buy back) the real property in question by paying to the county treasurer an amount specified by I.C. § 6-1.1-25-2.  See, I.C. § 6-1.1-25-1.

 If no redemption is made within the specified period, the purchaser of the tax lien (or his assignee) may then petition the court in which the judgment of sale was entered to order the auditor to issue a tax deed, which, when issued, vests in the grantee an estate in fee simple absolute.  I.C. § 6-1.1-25-4.6.

Bankruptcy automatic stay.  The issue in ATFH Real Property was whether the purchase of the tax lien on the property at the tax sale violated the bankruptcy stay.  More specifically, did the purchase constitute an “act to obtain possession of property” under 11 U.S.C. § 362(a)(3)?  The Court concluded that it did, “even if the immediate result was not actual possession.”  The rationale was that one cannot obtain possession of property from a tax sale without first purchasing the tax lien.  The Court held that the tax sale and all proceedings flowing therefrom were therefore void as violative of the automatic stay.   

Bout Over An Indiana Warehouseman’s Lien

Although the Miller’s Turnkey v. Cybertek case from the Indiana Court of Appeals may not directly affect most commercial lenders, the case does speak to the enforcement of an Indiana lien under the Uniform Commercial Code.  If you happen to be involved in, or want to learn about, the foreclosure of a warehouseman’s lien in Indiana, you or your counsel should review Miller’s Turnkey, 878 N.E.2d 280 (Ind. Ct. App. 2007) (Miller'sOpinion.pdf). 

Punch.  Plaintiff Miller owned a warehouse and stored defendant Cybertek’s equipment for a fee.  Cybertek delivered the equipment to Miller but never paid rent.  Miller sued Cybertek and obtained a judgment for $23,600, presumably the amount owed for storage fees, and a decree authorizing the foreclosure of the possessory lien held by Miller.  To satisfy the judgment, Miller sold Cybertek’s equipment for $45,000 to a third party in a private sale.  (Miller put the proceeds in escrow.) 

Counterpunch.  Thereafter, Cybertek pursued a counterclaim against Miller for damages due to alleged non-compliance with Indiana’s Uniform Commercial Code in the sale of the equipment.  Cybertek’s action sought damages for what it claimed to be the fair market value of the goods - $93,500.  At issue was Indiana Code § 26-1-7-210, which deals with the enforcement of a warehouseman’s lien in Indiana. 

Knockdown.  The Indiana Court of Appeals concluded that defendant Cybertek was correct in that plaintiff Miller didn’t follow the rules when it disposed of the equipment.  First, the Court found Miller did not provide the appropriate notice to Cybertek with regard to the sale.  Second, the Court found that the sale was not “commercially reasonable” as required by statute.  Finally, the Court found that there was sufficient evidence to support the contention that the fair market value of the goods was $93,500, not the $45,000 received in the Miller’s private sale.  The opinion provides a road map for parties and their counsel who need to enforce a warehouseman’s lien, including how to establish a proper sale and sale price.  Please read the opinion for more details.

Split decision.  Although plaintiff/creditor Miller, the warehouse owner, ultimately was defeated by defendant Cybertek, the debtor who did not pay rent, all was not lost.  At the end of the day, Miller will forfeit about $25,000, not $93,500.  This is because Miller will get a credit for the initial $23,600 judgment it obtained against Cybertek.  Furthermore, Miller’s private sale of the equipment, albeit defective, netted $45,000, which will be used to pay Cybertek.  $93,500 – ($23,600 + $45,000) = $24,900, the net amount Miller will be out of pocket to Cybertek. 

Lest we forget the attorneys’ fees and litigation costs both parties incurred in fighting one another.  Neither the trial court nor the Court of Appeals awarded Cybertek attorney’s fees as a part of the judgment against Miller.  Cybertek, in the end, probably lost money because it likely spent more than $25,000 in defending Miller’s lien foreclosure claim and in prosecuting its counterclaim.  The same can be said for Miller –not only did it lose net $25,000, but it surely lost more when attorney’s fees and litigation costs were considered.  The result of this case brings to mind a quote from our sixteenth president, Abraham Lincoln:  “Discourage litigation.  Persuade your neighbors to compromise whenever you can.  As a peacemaker the lawyer has superior opportunity of being a good man.  There will still be business enough.”  Perhaps the lawyers followed Lincoln’s advice in Miller’s Turnkey.  Maybe the parties – the litigants themselves – just didn’t heed it. 

Allison Transmission Owner Receives Default Notices

Click for stories released today:  inside indiana and IBJ.

Click for March 10 AP story concerning Carlyle Capital's response.

March 13 press release from Allison owner:  click here. 

An Indiana Federal Court Discusses Strict Foreclosure

If you’re wondering what “strict foreclosure” means in Indiana, look no further than Judge Barker’s opinion in the CIT Group v. United States of America, 2007 U.S.Dist. LEXIS 96180 (S.D. Ind. 2007) (CITOpinion.pdf) case.  The opinion provides a straightforward discussion of strict foreclosure, with a federal tax lien twist. 

What happened.  Lender entered into a purchase money mortgage transaction with borrower.  Borrower defaulted, and lender foreclosed.  The real estate was sold at a sheriff’s sale, and the lender was the successful bidder.  Unbeknownst to the lender, a federal tax lien had been filed against the borrower and had been recorded before the filing of the foreclosure action, albeit after the recording of the lender’s mortgage.  Presumably due to inadvertence, the lender failed to name the United States in its foreclosure action, so the tax lien survived the foreclosure case.  The lender brought an action for strict foreclosure against the federal government with the goal of cutting off the federal tax lien.

Strict foreclosure, generally.  In Indiana, strict foreclosure is defined as “the means by which a party, who acquires title through or after a foreclosure sale (or by deed in lieu of foreclosure), may cut off the interests of any junior lienholders who, for some reason, were not parties to the foreclosure action.”  Strict foreclosure is a remedy that operates to cut off the right of junior lienholders to redeem.  In CIT, seemingly the lender (senior lien holder) should have been entitled to strict foreclosure because it purchased the property at the sheriff’s sale after foreclosure of the borrower’s/owner’s/mortgagor’s interests. 

The rub.  Only later did the lender discover that the United States had recorded a tax lien on the property.  Even though the lien undoubtedly was junior to the lender’s mortgage lien, the United States argued that its lien should not be extinguished in the strict foreclosure action given its unique, statutorily-protected nature.  The statue at issue was 26 U.S.C. § 7425(a) entitled “Discharge of Liens.”  The United States argued, based on the statute, that because the government was not joined as a party to the action, the judicial sale should be subject to the federal tax lien.  Judge Barker adopted this “defense” and concluded that the federal tax lien should survive and continue to encumber title to the property, no matter who holds title, until it is satisfied.  Judge Barker stated “but for the fact that, by federal statute, primacy is given to the federal tax lien, we believe strict foreclosure likely would be available to a mortgagee so as to extinguish any other junior lienholders’ interests.” 

Survival.  As explained in CIT, strict foreclosure normally provides a remedy to senior lienholders, after the sale of the property at a foreclosure sale, to bring an action for the purposes of clearing title and extinguishing any subordinate liens or interests.  But the CIT case illustrates a unique scenario involving the treatment of a federal tax lien.  Here is Judge Barker’s explanation of, in essence, the upshot of her decision:

Provided [lender] continues to hold title to the real estate it acquired by Sheriff’s Deed at the foreclosure sale, equity allows it to assert its mortgage lien position as against the United States even though the United States was not named in the foreclosure action.  If title to the property is thereafter conveyed to a third-party purchaser, however, that purchaser would no longer be able to assert [lender’s] mortgage lien priority so as to extinguish the federal tax lien.  So long as [lender] continues to hold legal title to the real estate, the United States’s lien remains in effect, but inchoate – dormant, as it were – because it is uncollectible against [lender].  Should the property be sold by [lender] to a third party, the government is entitled to execute on its lien and be paid, presumably from the proceeds of the sale.

Do due diligence.  This was a bad result for the lender because it acquired the property at the sheriff’s sale subject to a $10,200 lien, which will have to be satisfied when the lender liquidates the property.  It is my understanding the result could have been avoided had the United States been made a party to the foreclosure action, although rules and exceptions surrounding federal tax liens could be (and someday will be) the subject of their own blog post.  The failure to name the United States in CIT probably stemmed from a defective title insurance policy commitment (title search) or possibly the lender’s failure to order a title search to begin with.  Lenders and Indiana counsel should remain mindful to purchase a title insurance policy commitment before filing a complaint, with a “date down” thereafter, which commitment will help identify all parties, with interests in the property, that should be named in the suit.  If that was in fact done by the lender in CIT, and if the title company missed the federal tax lien, then the lender may have been indemnified by the title insurance company for the loss associated with the $10,200 tax lien. 

Time.com On The Potential Impact Of The Mortgage Crisis

As always, I keep my eyes peeled for significant news stories that touch upon secured lending, and in particular issues relating to defaults on commercial loans.  Here are a couple links to recent articles from Time:   

How Bad Will the Mortgage Crisis Get?

Is a Collapse in the Cards?

Termination Of Mortgages In Indiana

As promised, this post will speak to the second issue in the Bank of America case that was the subject of my February 15 post.  This discussion will help secured lenders who may struggle with knowing whether Indiana law permits the release of a prior mortgage when such mortgage secured a revolving line of credit that has been paid in full.

Contracts and performance.  Due to the importance of the language in the 1999 Bank One mortgage, I must outline it here:

[W]ithout limitation, this Mortgage secures a revolving line of credit, which obligates [Bank One] to make future obligations and advances to [borrower] up to a maximum amount of $ 80,000.00 so long as [borrower] complies with all the terms of the Credit Agreement.  . . .  It is the intention of [borrower] and [Bank One] that this Mortgage secures the balance outstanding under the Credit Agreement from time to time from zero up to the Credit Limit as provided above and any intermediate balance.  . . .

PAYMENT AND PERFORMANCE. Except as otherwise provided in this Mortgage, [borrower] shall pay to [Bank One] all amounts secured by this Mortgage as they become due, and shall strictly perform all of [borrower's] obligations under this Mortgage.  . . .

FULL PERFORMANCE.  If [borrower] pays all the indebtedness when due, terminates the Credit Agreement, and otherwise performs all the obligations imposed upon [borrower] under this Mortgage, [Bank One] shall execute and deliver to [borrower] a suitable satisfaction of this Mortgage and suitable statements of termination of any financing statement on file evidencing [Bank One's] security interest in the Rents and the Personal Property. [Borrower] will pay, if permitted by applicable law, any reasonable termination fee as determined by [Bank One] from time to time.  . . .

In 2001, when a portion of the proceeds from the Bank of America loan was used to pay the entire outstanding balance of the Bank One loan, Bank One did not send “correspondence or instructions” to Bank of America or the borrower.  In addition, neither the borrower nor Bank of America took action to terminate the Bank One credit agreement. 

The fight.  The litigation surrounded whether the prior Bank One mortgage had priority over the subsequent Bank of America mortgage.  Bank of America contended that, under I.C.§ 32-28-1-1(b), it was entitled to a release of the Bank One mortgage because Bank of America discharged the debt underlying that mortgage and, furthermore, because that mortgage was ambiguous as to whether written notice of termination by the mortgagor was required for the mortgage to be released.  I.C. § 32-28-1-1(b) states, in pertinent part:  “When the debt . . . on . . . the mortgage . . . has been fully paid, lawfully tendered, and discharged, the owner, holder, or custodian shall:  (1) release; (2) discharge; and (3) satisfy of record; the mortgage . . ..”  The Court concluded that the Bank One mortgage stated three requirements for “full performance:”  (1) borrower must pay all the indebtedness when due, (2) borrower must terminate the credit agreement and (3) borrower must perform all other obligations.  Each of those three was required of the borrower before Bank One was obligated to release the mortgage. 

Bank One the winner.  It was undisputed that, even though the indebtedness under the mortgage had been paid, the borrower took no affirmative action to terminate the credit agreement.  As a result, the Court held that Bank One was not required to release its lien on the real estate.  Bank of America complained that the Bank One mortgage did not require written notice of termination and that Bank One failed to notify the borrower or Bank of America what act was required to terminate the credit agreement.  The Court rejected the argument and reasoned that the Bank One mortgage “clearly require[ed] some affirmative act of termination.  . . .  The Bank One mortgage required [borrower] to terminate the Credit Agreement; Bank One did not need to reiterate to [borrower] her contractual obligations.”

Always follow-up.  The important court holding here is that “absent documentation to the contrary, we decline to hold that merely to pay off an outstanding balance is sufficient to terminate a revolving line of credit, as that would violate the very nature of the credit.”  Unlike a mortgage securing a term note, the Bank One mortgage secured a revolving line of credit that contemplated future advances, regardless of whether there was an occasional zero balance. 

Secured lenders operating in Indiana, particularly those involved in refinancing, need to be aware that, if confronted with facts similar to the Bank of America case, merely paying off a line of credit may be insufficient in itself to terminate a prior note/credit agreement/mortgage.  So, review and analyze the loan documents and ensure you jump through all the hoops to terminate the prior transaction and lien.  Otherwise, you may be faced with an unexpected subordinate lien position.

Signs Of The Times

I'm providing links to a couple news stories from today that reflect the current economic/commercial loan default climate and the continued problems arising out of the subprime lending crisis:

"Subprime Lawsuits Already Outpacing S&L Litigation" and "Sharper Image files for Chapter 11 Bankruptcy".

My follow-up post on the Bank of America case and the mortgage termination issue is coming soon.

Equitable Subrogation Denied

The January 29, 2008 decision by the Indiana Court of Appeals in Bank of America v. Ping, 2008 Ind. App. LEXIS 71 (BankAmericaOpinion.pdf) provides an interesting contrast to the JPMorgan Chase decision addressed in my February 9 post.  The Bank of America case shows how a refinancing lender’s mortgage failed to leapfrog the priority position of an earlier-recorded junior lender’s mortgage, which secured a line of credit.  The Bank of America result was the opposite of the JPMorgan Chase result, even though the facts were similar.   

Oops.  In 1999, borrower opened an $80,000 revolving line of credit, secured by a mortgage, with Bank One.  In 2001, Bank of America loaned the borrower $103,000, secured by a mortgage, and the borrower used a portion of the proceeds to pay the entire balance on the Bank One line of credit.  However, neither the borrower nor Bank of America took any action to terminate the Bank One credit agreement or to release the mortgage.  The borrower subsequently incurred more than $76,000 in additional debt under the Bank One line. 

Partial subrogation.  Similar to the refinancing lender in JPMorgan Chase, Bank of America argued that the doctrine of equitable subrogation entitled it to place its mortgage “into the shoes” of the prior Bank One mortgage.  Generally, subrogation requires the subrogee (here, Bank of America) to discharge the entire debt held by the original obligor (the borrower).  The Bank of America Court stated: 

  Partial subrogation to a mortgage is not permitted because it would
  have the effect of dividing the security between the original obligee
  (lender/prior mortgagee) and the subrogee (lender/refinancing mortgagee),
  imposing unexpected burdens and potential complexities of division
  of the security and marshalling upon the original mortgagee.

The Court focused on the nature of the loan (a revolving line of credit) and language in the Bank One mortgage regarding termination/release requirements.  (See subsequent post discussing this case.)  The Court also noted that Bank of America’s request for subrogation was for the amount of the “payoff” but not for the amount of the borrower’s subsequent withdraws.  The Court concluded that this constituted a partial subrogation, which is not permitted in Indiana.

Culpable negligence.  Unlike the earlier JPMorgan Chase case, the Court in Bank of America applied the “culpable negligence” exception in refusing to permit equitable subrogation.  Generally, “a volunteer or one charged with ‘culpable negligence’ may not be entitled to equitable subrogation.  . . .  ‘Culpable negligence’ focuses on the activity of the party asserting subrogation and ‘contemplates action or inaction which is more than mere inadvertence, mistake or ignorance’.”  Id.  Here, the Court held that Bank One was culpably negligent in failing to terminate the Bank One mortgage when the payoff funds were submitted. 

Lesson learned.  The Indiana Court of Appeals, in what may have been a close call considering the reasoning and opposite result in JPMorgan Chase, held:

  Bank of America failed to take any affirmative steps to terminate the
  Bank One mortgage after Bank of America had paid in full the line
  of credit.  And, as a result, Bank One held open [borrower’s] line
  of credit, and Bank One continued to advance [borrower] funds
  from the account.  Bank of America’s argument would result in an
  inequitable subrogation.  Indeed, Bank One did not enjoy a windfall
  but advanced additional funds under the line of credit and acted
  properly under its Credit Agreement and Mortgage.  Given the plain
  meaning of the Credit Agreement and the Mortgage that secured it,
  it was incumbent on Bank of America to secure a release of the Bank
  One Mortgage as a condition of its new loan to [borrower].  That
  Bank of America failed to do so should not be allowed to prejudice
  Bank One.  On these facts, Bank of America is not entitled to invoke
  the doctrine of equitable subrogation.

As will be alluded to more in my subsequent post about this case, the lesson for lenders is to obtain and review the loan documents applicable to the loan that is being paid off.  There may be, and usually is, language in the agreements mandating that measures be undertaken to secure a release of the prior mortgage and/or to terminate the prior loan agreement.  Lenders normally are aware that it’s in their best interests to ensure the prior mortgage has been released.  Why that didn’t happen in this case was not explained in the opinion.   

For My Indiana Lawyer Readers...

If you or your colleagues are interested, click here for a link to an electronic version of the brochure for a continuing legal education seminar at which I'm scheduled to present on March 18, 2008 in Indianapolis.  They've entitled the conference "Real Property Foreclosure:  A Step-by-Step Workshop."

Illustrating Indiana’s Doctrine Of Equitable Subrogation

On November 21, 2007, the Indiana Court of Appeals issued a decision that applied the rules of equitable subrogation.  JPMorgan Chase v. Howell, 2007 Ind. App. LEXIS 3055 (JPMorganOpinion.pdf) shows how a refinancing lender’s mortgage can leapfrog the priority position of an earlier-recorded junior lender’s mortgage.      

Chronology.  Defendant Bank One held a mortgage recorded in October of 1999 that secured a line of credit.  Plaintiff Equity One held a mortgage recorded in May of 2004 that secured a loan to pay off a prior senior mortgage lender and the Bank One line of credit.  For a variety of reasons, the $42,000+ payoff amount sent to Bank One was short by about $300.  Bank One did not close the borrower’s line of credit, and thereafter the borrower ran up a balance on the Bank One line of approximately $43,000.  The borrower defaulted on the notes and mortgages held by both Equity One and Bank One.  Equity One filed a foreclosure action seeking the foreclosure of its mortgage and a declaration that its mortgage was a first priority lien.  Bank One countered by asserting that its mortgage had priority.  The question, therefore, was whether Bank One’s October, 1999 mortgage had priority over Equity One’s May, 2004 mortgage. 

General rule.  Generally, in Indiana, a mortgage takes priority “according to the time of its filing.”  I.C. § 32-21-4-1(b).  Applying that general rule, Bank One’s mortgage would take priority over Equity One’s mortgage.

Exception.  The doctrine of equitable subrogation, however, can trump I.C. § 32-21-4-1(b).  The doctrine is recognized in I.C. § 32-29-1-11(d) and by the Indiana Supreme Court in Bank of New York v. Nally, 820 N.E.2d 644 (Ind. 2005).  Here are some of the principles: 

 Subrogation will arise from the discharge of a debt and will permit the party paying off a creditor to succeed to that creditor’s rights in relation to the debt. 

 “In the case of a purchaser of a note and mortgage for value, the classic formulation is that the purchaser’s right of subrogation to the mortgage he or she discharged includes its priority over junior liens of which he or she did not have actual knowledge, and where he or she was not culpably negligent in failing to learn of the junior lien.”  Nally, 820 N.E.2d at 651.

 A mortgagee (lender) refinancing an existing mortgage is entitled to equitable subrogation even if it had actual or constructive knowledge of an existing lien, unless (a) the junior lien holder is disadvantaged or (b) the mortgagee is culpably negligent.  Id. at 653-54.  (The rationale is that a lender that provides funds to pay off an existing mortgage expects to receive the same security (priority) as the loan being paid off.) 

Why Equity One prevailed.  Equity One paid off the prior senior mortgage, which mortgage was released.  Bank One only held a junior mortgage securing a line of credit.  The Court held there was no disadvantage to Bank One by the application of equitable subrogation.  To the extent Equity One was negligent for failing to confirm whether it had fully satisfied the Bank One mortgage, the Court concluded such negligence did not prejudice Bank One.  Indeed the payoff/refinancing funded by Equity One benefited Bank One “to the tune of over $42,000.”  Absent the application of equitable subrogation, Bank One would have received an unearned windfall, against which the doctrine is designed to protect.

Result.  The Court of Appeals held that plaintiff Equity One was entitled to foreclose its mortgage on the property to the extent of the funds paid to satisfy the prior, senior mortgage, plus interest.  The Equity One mortgage, despite being recorded long after the Bank One mortgage, had priority. 

If as a secured lender you are confronted with a situation in which a prior lien was not released as it should have been and thus an unexpected priority issue arises with regard to your lien position, then one of the first things you should do is put your title insurance company on notice of the problem.  The title insurance company may hire and pay for attorneys to litigate the priority dispute, as I’m virtually certain was the case in JPMorgan Chase.  In addition to incurring litigation costs, the title insurance policy may also provide indemnity (reimbursement for damages).  The reality is that many equitable subrogation cases are prosecuted by title insurance companies in the name of their insured to recoup indemnity payments.

Do Borrowers Have A Right Of Redemption In Indiana?

If a borrower defaults, and if a secured lender exercises its rights under a mortgage or security agreement to foreclose, the borrower still is able to avoid losing the collateral.  This is because, in Indiana, borrowers have a right of redemption.  “Redeem” means “to buy back.  To free property from mortgage . . . by paying the debt for which it stood as security.”  Black’s Law Dictionary.  Redemption (basically, a payoff) is the way for a borrower to keep the property, end the lien enforcement litigation and free itself of the plaintiff/lender’s mortgage or security interest.  In Indiana, two main statutes cover redemption. 

Real estate.  I.C. § 32-29-7-7 “Redemption by owner before sheriff’s sale” states:

  Before the [sheriff’s] sale under this chapter, any owner or part owner of the real
  estate may redeem the real estate from the judgment by payment to the:

   (1)  clerk before the issuance to the sheriff of the judgment and decree; or
   (2)  sheriff after the issuance to the sheriff of the judgment and decree;

  of the amount of the judgment, interest, and costs for the payment or satisfaction
  of which the sale was ordered.  If the owner or part own