Credit Card's Summary Judgment Reversed Due To Flawed Affidavit

In Zelman v. Capital One, 133 N.E.3d 244 (Ind. Ct. App. 2019), the Indiana Court of Appeals reversed the trial court's summary judgment in favor of a credit card lender based upon the lender's failure to "lay a proper foundation to authenticate the Customer Agreement or credit card statements as business records admissible under Evidence Rule 803(6)'s hearsay exception." 

Respectfully, I don't entirely agree with the Court's analyis, but admittedly I don't handle credit card collection cases.  Nevertheless, the opinion is notable for parties and their counsel who seek summary judgments in debt collection cases.  The Court held:

To support its motion for summary judgment, Bank was required to show that Zelman had opened a credit card account with Bank and that Zelman owed Bank the amount alleged in the complaint.

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... the Affidavit of Debt did not lay a proper foundation to authenticate the Customer Agreement or credit card statements as business records admissible under [Rule 806].

For the technical details and related law upon which the Court made its decision, please review the opinion.  Key problems surrounded the fact that the affiant was an employee of a third party that had acquired the debt and had not personally examined all of the business records related to the loan.  Again, bear in mind this was not a mortgage foreclosure action or a suit based upon a promissory note.

Zelman is similar to Holmes v. National Collegiate Student Loan Trust, 94 N.E.3d 722 (Ind. Ct. App. 2018) , which dealt with school loan debt and which I discussed on 1/13/19.

Here are some other posts related to Indiana affidavits and summary judgment procedure:

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I represent parties in real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

 


Is The Label “Indiana Lender Liability Act” A Misnomer?

In the past, I’ve heard things from secured lenders like:  “you don’t see any exposure to our bank under the Lender Liability Act, do you?” or “surely the borrower won’t countersue us under Indiana’s lender liability statute.”  People are sometimes surprised to learn that the so-called “Indiana Lender Liability Act” (“ILLA”), Ind. Code § 26-2-9, doesn’t list claims or causes of action that can be asserted against a lender.  The ILLA primarily deals with the issue of evidence, specifically the inadmissibility of oral testimony about the terms of a loan.  (Interestingly, the statute’s official title in the Indiana Code is “Credit Agreements.”)  The definitive ILLA case is Sees v. Bank One, 839 N.E.2d 154 (Ind. 2005) (Sees.pdf).  Somewhat amusingly, the Indiana Supreme Court itself struggled with the label: 

In the first reported opinion discussing the statute since its 2002 re-codification, the Court of Appeals refers to it as the “Indiana Lender Liability Act.”  . . .  Sees refers to the statute alternatively as the “Indiana Lender Liability Act” and the “Credit Agreement Statute.”  . . .  Bank One refers to the statute as the “Credit Agreement Statute of Frauds.”  . . .  We agree with the Court of Appeals’ designation and thus refer to the statute as the Indiana Lender Liability Act.

Lender liability, generally.  It is true that “lender liability” is a common phrase used to describe a borrower’s potential claims against a lender due to the conduct of the lender with regard to a particular loan relationship.  Capello & Komoroke, Lender Liability Litigation: Undue Control, 42 Am. Jur. Trials 419 § 1 (2005).  This body of law comprises a wide variety of both statutory and common law causes of action.  One of many examples is the Fair Debt Collection Practices Act.  There are, in fact, a multitude of federal and state laws that could form the basis of a lawsuit against a lender.  The ILLA is not one of those laws, however. 

The ILLA rule.  The essence of the ILLA can be found in section 4, which provides that “a [borrower] may assert a claim . . . arising from a [loan document] only if the [loan document] . . . [1] is in writing; [2] sets forth all material terms and conditions of the [loan document] . . . ; and [3] is signed by the [lender] and the [borrower].”  The ILLA effectively protects lenders from certain kinds of liability.  That’s why the label “Lender Liability Act” seemingly is inconsistent with the law’s true nature. 

Statute of frauds.  Sees provides an excellent discussion of the statute, its history and its policies.  In a broad sense, the legislative intent behind the statute is to protect lenders from lawsuits by borrowers (or guarantors) asserting fraudulent claims.  Hence the “in writing” requirement in the ILLA.  As such, the ILLA actually is a “statute of frauds,” which at its core is a procedural law about the exclusion of certain testimony of a witness at trial.  Black’s Law Dictionary defines “statute of frauds” as “. . . no suit or action shall be maintained on certain classes of contracts or engagements unless there shall be a note or memorandum thereof in writing signed by the party to be charged . . ..”  As noted by Judge Posner in Consolidated Services, Inc. v. KeyBank, 185 F.3d 817 (7th Cir. 1999):

 [T]he principle purpose of the statute of frauds is evidentiary.  It is to protect contracting or negotiating parties from the vagaries of the trial process.  A trier of fact may easily be fooled by plausible but false testimony to the existence of an oral contract.  This is not because judgment or jurors are particularly gullible, but because it is extremely difficult to determine whether a witness is testifying truthfully.  Much pious lore to the contrary notwithstanding, ‘demeanor’ is an unreliable guide to truthfulness.

Be a wise guy.  Next time someone asks you whether your commercial lending institution may have exposure to a lawsuit or a counterclaim based on Indiana’s Lender Liability Act, you can explain to them that the ILLA does not really articulate any theories of liability.  Rather, the ILLA limits breach of contract actions to the terms of the loan that are memorialized.  Again, this is not to say that there is no “lender liability” in Indiana.  The generic term “lender liability” is proper when referring to the many possible claims of wrongdoing that exist.  In short, lenders can be exposed to liability, but they shouldn’t be held liable in Indiana for any alleged violations of loan terms unless such terms (promises or duties) are in writing, signed by all parties. 

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Part of my practice includes defending banks in lawsuits. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


Indiana Sheriff's Sale Update

The COVID-related impact upon Indiana sheriff's sales has had a few layers:

    1.    The first involved Governor Holcomb's moratorium on residential foreclosure activity. Click here for more on that subject. That ended July 31, 2020, and some sheriff’s sales occurred in August. For example, after cancelling its monthly sales from March through July, the Marion County (Indianapolis) civil sheriff held a sale on August 21st. Click here for more information on Marion County sales.

    2.    The second layer surrounded the federal mandate. Despite the expiration of the state suspension, there still is a moratorium on sales of (and, in fact, foreclosure actions involving) FHA-insured mortgages. This freeze extends to year-end. Click here for a press release and here for my 4/6/20 post about the CARES Act.

    3.    The third is that neither the federal nor the state orders impacted commercial (business) foreclosures or sales. Nevertheless, it does not appear that any commercial foreclosure sales occurred this Spring or early Summer. I could be wrong, but as a practical matter, my understanding is that sheriff’s sales simply stopped, even for commercial real estate.

    4.    The fourth and more subtle layer of COVID's impact upon Indiana sheriff’s sales relates, not to economic relief, but to safety and social distancing. (This might explain why no commercial sales happened.) As I’ve written here previously: local rules, customs, and practices control county sheriff’s sales. Thus, there is a certain degree of latitude that each county has, or is taking, with respect to whether to proceed with sales during the pandemic. A quick survey of the websites of SRI and Lieberman, two private companies that hold sheriff’s sales for select counties, shows that several sheriff’s offices in Indiana still are not having sales, despite the termination of the state and federal moratoria. My understanding is that these continued delays are based upon public health reasons and/or a county sheriff's interpretation of local social distincing guidelines.  

The upshot is to contact the county sheriff’s office, either by phone or via the internet, to determine exactly what’s going on with your particular case as the COVID situation continues to unfold.

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I represent parties in connection with foreclosure cases and sheriff’s sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


REAL ESTATE FINANCING TIDBITS: Consistency In Both the Form and Substance Of An Indiana Land Contract Is Essential To Post-Breach Enforcement

Standard Operating Procedure.  Traditional real estate financing involves a purchase evidenced by a deed, coupled with a promissory note secured by a mortgage.  The seller typically (but not always) is out of the picture because title transfers at closing.  The seller receives the full purchase price in exchange for delivering a deed to the buyer.  (The exception is when the seller takes back a note and mortgage and thus become the lender/mortgagee, but most transactions are financed by a third party.)  In a conventional sale, what remains post-closing is a lien on the real estate that serves as collateral for the loan.  If the new owner (borrower/mortgagor) defaults under the loan, the lender/mortgagee has the right to sue for the debt and foreclose its mortgage. 

Purchase Without A LoanA land contract is another, albeit less conventional, form of real estate financing.  The deal normally requires the buyer to make payments over time to the seller (the owner).  In many instances, the contract will require a down payment and/or a large balloon payment.  Only after the buyer fully pays the contract price does the buyer get a deed and become the owner.  In the interim, although the buyer gets to possess and occupy the real estate, legal title remains with the seller, although something called equitable title vests with the buyer.  See Skendzel v. Marshall, 261 Ind. 226, 234, 301 N.E.2d 641, 646 (1973) (“Legal title does not vest in the vendee [buyer] until the contract terms are satisfied, but equitable title vests in the vendee [buyer] at the time the contract is consummated.”)  One might say that the seller is a hybrid between a landlord and a bank.  Usually, but not always, these transactions apply to situations where the buyer is unable or unwilling to get a traditional loan, or to informal deals between family and friends.

Rights Upon Breach?  Indiana substantive law and the procedural rules related to mortgage foreclosures are fairly settled, which is to say that the parties’ rights and remedies are well established.  This is not the case with land contracts, which may seem simple to close yet can be complicated to enforce.  When there is a breach of the agreement, the dispute may look and feel like an eviction proceeding, a mortgage foreclosure action, or both.  Frankly, lawyers and judges struggle with how best to handle land contract disputes, and the parties themselves rarely understand what can or should happen if the deal goes bad.    

I attribute this potential complexity to the overlapping ownership and possessory rights of the parties.  Should the contract be treated like a lease (possession only) or like a mortgage (lien/ownership)?  Upon a default, should the seller/owner be permitted to simply evict the buyer, or should the seller be forced to obtain a foreclosure decree and have a sheriff’s sale?

Sale Or Lease?  When faced with a purported land contract enforcement action, one should examine whether the contract fits the mold of a sale versus a lease.  The answer to this question will control the remedies upon the default.  (By the way, these issues are not unique to real estate law.)  In a standard land contract dispute, the owner/seller will want the buyer out of the property asap with as little legal and practical hassle as possible.  In other words, the owner will want to evict the buyer, a remedy known as forfeiture in this context.  On the other hand, the buyer may want to protect its alleged equity in the real estate or, in other words, will want credit toward ownership for the payments made.  This is to say that the buyer may want the rights attendant to mortgage foreclosure actions (time, right of redemption, sheriff’s sale process, etc.).  

The Rainbow Realty Case

    The Issue.  This brings me to today’s topic, last year’s Indiana Supreme Court opinion in Rainbow Realty Group v. Carter, 131 N.E.3d 168 (Ind. 2019).  The decision is interesting and impactful on many levels for non-traditional lenders, real estate developers, and landlords.  For purposes of my blog and particularly today’s post, however, I’ll zero in on the Court’s discussion of whether the written agreement was a land contact or a lease.  Were the parties to the dispute sellers/buyers or landlords/tenants?  Unlike most land contract disputes, the buyers in Rainbow wanted the agreement to be a lease so they could countersue for damages.

    The Facts.  The contract in Rainbow was labeled a “Purchase Agreement (Rent to Buy Agreement).”  The language in the agreement clearly expressed an intent to be a thirty-year land contract as opposed to a lease, although the first two years of payments were in fact for “rent.”  If the buyer performed for the first two years, the parties would execute a separate “Conditional Sales Contract (Land Sale)” for the remaining 28 years.  The seller contended the agreement was a land contract, and the buyer asserted the agreement was a lease.  The heart of the dispute was whether the seller could be liable to the buyer for damages for failing to comply with Indiana’s residential landlord-tenant statutes, Ind. Code 32-31.  The seller contended it was exempt from those laws.

    The Holding.  The Court concluded that the agreement was not a land contract, even though wording in the document said things like “My intent is to purchase … [and] I am not renting the property….”  Indeed the Court conceded “that most of the transaction’s terms and formal structure suggest this was a sale … necessitated by the Couple’s inability to afford a down payment for the House.”  Sometimes, the label or title to a contract, or written stipulations in the contract, are immaterial.  Rarely does form prevail over substance.  The Court in Rainbow said:  “the transaction’s purported form and assigned label do not control its legal status.” 

    The Rationale.  The key appeared to be that the agreement operated as a lease for two years with a contingent commitment to sell, which sale would require a separate contract.  Importantly, “if the Couple defaulted before executing the subsequent ‘Land Contract’, or they failed to make payments or to close this latter transaction, they were subject to eviction and forfeiture of all payments made.”   The opinion reads:

During the Agreement's twenty-four-month term, [the seller] reserved for themselves a landlord's prerogative to enter the premises, restricted the Couple's use of the land, and, upon the Couple's default, evicted them as if they were tenants and kept their “rental payments”.  These features, taken together, are particular to a residential lease. Thus, the parties' Agreement—a purported rent-to-buy contract—is not a “contract of sale of a rental unit” and thus is not exempt from the Statutes' coverage under Section 32-31-2.9-4(2).

The Policy.  The seller’s structure in Rainbow backfired.  There is a lot more to story, so please read the opinion if you are interested in more detail.  There are consumer rights themes built into the Court’s findings.  In a nutshell, following a payment default by the buyer, the seller sued for damages and repossession, not unlike a land contract dispute.  To the chagrin of the seller, which appeared to be offering financing and housing to low income individuals, the seller ended up facing a judgment for money damages and attorney fees as a de facto landlord.  The Court held that the structure of the deal in Rainbow, namely an initial two-year rental term followed by a subsequent sale term, was not a land contract, at least for the first two years, making the seller a landlord.  Here is the Court’s policy statement:

If this case were simply about the parties' freedom of contract, the [buyers] would have no legal recourse. Plaintiffs disclaimed the warranty of habitability, informed the [buyers] that the House required significant renovation, and forbade them from taking up residence there before it was habitable. The [buyers] agreed to these terms but soon thereafter violated them. Were it not for the governing Statutes, Plaintiffs would be entitled to relief against the Couple for having breached their Agreement. But the Statutes are not about vindicating parties' freely bargained agreements. They are, rather, about protecting people from their own choices when the subject is residential property and their contract bears enough markers of a residential lease. Unless a statute is unconstitutional, the legislature is entitled to enact its policy choices. The disputed statutes at issue here reflect those choices.

Some Takeaways

    Can’t have it both ways.  The format of a “rent-to-buy” aka a land contract is often ambiguous and places the owner in a hybrid role as both a landlord and seller.  Seemingly, in Rainbow the development company drafted an agreement that was a combination of a lease and a land contract.  It wanted the document classified as a land contract so it did not have the responsibilities of a landlord.  At the same time, the developer wanted the benefit of a lease for the first couple of years so it could easily evict the buyer if he or she did not pay.  Parties entering into these types of agreements should be wary of how their contract will be characterized.  Both the format and substance of the agreement should be consistent to avoid any confusion regarding the parties’ rights and obligations.  Not often will the law allow one to have its cake and to eat it, too.

    Be clear.  If as a seller you want to be able to retain ownership and simply evict an occupant after he/she fails to make payment, then you should expect the court to treat the agreement as a landlord-tenant arrangement.  If on the other hand you want to sell the property through payments over time, the form and substance of the agreement should make it clear that the deal is to convey ownership, and you should recognize that equitable title and its associated rights vest with the buyer.

    My two cents.  Finally, in case you’re wondering, I personally would never recommend entering into a land contract, as either a seller or a buyer.  There are too many risks and uncertainties.  With leases or loans, everyone – including the courts – knows where the parties stand.  If traditional financing isn’t an option, seller financing in the form of a standard note and mortgage is, in my view, better than a land contract.

(Thanks to my colleague David Patton for his help with this article.)

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I represent parties in real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


Email Evidence Of Alleged Loan Modification And Promissory Estoppel Defeats Auto Dealer Lender’s Summary Judgment Motion

Lesson. Lenders, particularly those that are not conventional banks, should proceed carefully when entering into and executing upon loan modification or workout discussions. An innocent or well-intended email or phone call could come back to haunt you.

Case cite. SWL v. Nextgear, 131 N.E.3d 746 (Ind. Ct. App. 2019)

Legal issues. Whether a “floor plan” finance company was entitled to summary judgment on the borrower’s defenses, which were (1) that the lender modified its loan or (2) was otherwise barred from enforcing the default based upon promissory estoppel.

Vital facts. Plaintiff lender and defendant borrower, a car dealer, entered into a promissory note and security agreement in which the lender agreed to extend a revolving line of credit to the borrower. The borrower used the money to buy vehicles at auctions. As part of the financing arrangement, the parties agreed to a payment schedule detailing, among other things, the money the borrower was required to repay for each vehicle it purchased with the lender’s funds.

At some point, the borrower became delinquent on its payments, and the parties began discussing how to proceed. On the one hand, there was evidence that the borrower’s plan was to liquidate its inventory and pay off the loan. On the other hand, there was evidence, primarily in the form of an email exchange, in which a representative of the lender pushed for and stipulated to a plan to salvage the relationship. The borrower claimed that, in reliance on the email exchange, it made a couple more payments in an apparent effort to pay down the loan and continue the lending relationship. Something broke down, however, causing the lender to repossess the borrower’s remaining vehicles and file suit to collect the balance owed on the loan.

Procedural history. The lender filed a breach of contract action. The borrower asserted the defenses of modification and promissory estoppel. The trial court granted the lender’s motion for summary judgment, and the borrower appealed.

Key rules.

    Oral modification. Despite language in a contract expressing that it can only be modified by written consent, a contract “may nevertheless be modified orally.” Moreover, modification “can be implied from the conduct of the parties.” Intent is what matters – the parties’ “outward manifestations of it” or, in other words, “the final expression of that intent found in conduct” as opposed to one’s subjective intent.

    Promissory estoppel. The doctrine provides that, where parties believed they had a contract but in fact did not, equity applies to hold the parties to their representations to each other. To demonstrate that the doctrine of promissory estoppel applied in SWL, the borrower was required to show:

(1) a promise by the promissor; (2) made with the expectation that the promisee will rely thereon; (3) which induces reasonable reliance by the promisee; (4) of a definite and substantial nature; and (5) injustice can be avoided only by enforcement of the promise.

In SWL, the “promissor” was the lender, and the “promisee” was the borrower.

As an aside, please note that Indiana's Lender Liability Act did not apply to this case because the plaintiff lender in SWL was not a conventional bank.  For more, click on the Related Posts below.

Holding. The Indiana Court of Appeals reversed the summary judgment in favor of the lender and remanded the case for trial.

Policy/rationale. First, it’s important to remember that SWL was a summary judgment case, not a trial. Issues of fact, mainly surrounding the modification discussions and the parties’ intent, prevented a pretrial judgment for the lender. If the case were tried, the lender still could prevail.

With regard to the modification issue, the borrower designated evidence to raise a genuine issue of material fact concerning whether the lender intended to modify the terms of the promissory note when the lender’s rep spoke with the borrower’s rep and sent the email. “Because the parties' conduct is subject to more than one reasonable inference, we cannot say as a matter of law that the parties did not modify the Contract.”

As to the promissory estoppel matter, the lender keyed in on the legal requirement that the alleged promise must be of a “definite and substantial nature.” The borrower had in fact been in default on vehicles other than those addressed in the fateful email at the heart of the case. However, the borrower’s affidavit in opposition to the summary judgment motion raised questions surrounding the matter of default. The Court reasoned:

[The borrower’s] affidavit is sufficient evidence to create a genuine issue of material fact concerning whether [the borrower] was in default when [the lender sent] the February email. And even if [the borrower] were in default as of February 24, 2016, the designated evidence suggests that, because [the borrower] had a “lengthy impeccable history,” [the lender] proposed a course of action to cure any default and for [the borrower] to maintain its good standing. We therefore cannot say as a matter of law that [the lender] did not make a definite and substantial promise to [the borrower].

Related posts.

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I represent parties in disputes arising out of loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


Tax Deed Denied Because Redemption Notice Suggested The Amount To Redeem Included Surplus Funds

Lesson. A tax sale purchaser may not obtain a tax deed if the statutory redemption notice inflates the redemption amount. Such notices should not include any overbid/surplus funds as being required for redemption.

Case cite. Pinch-N-Post, LLC v. McIntosh, 132 N.E.3d 14 (Ind. Ct. App. 2019)

Legal issue. Whether tax sale purchaser’s post-sale statutory redemption notice substantially complied with Indiana law despite erroneously including purchaser’s overbid amount.

Vital facts. Tax sale purchaser (“Purchaser”) timely sent the post-sale statutory redemption notice to the owner/tax payer (“Owner”). This is sometimes referred to as the “4.5 Notice” based upon the relevant statute. Owner did not redeem the property from the tax sale.  The contents of the 4.5 Notice were at issue in McIntosh. Purchaser bought the tax sale certificate for $8752.00, which included an overbid (surplus) amount of $4679.29. The 4.5 Notice erroneously listed the overbid as a component of the redemption amount.

Procedural history. Purchaser filed a petition for tax deed, and Owner objected. After a hearing, the trial court denied the petition, and Purchaser appealed.

Key rules. The Indiana Court of Appeals summarized the tax sale process:

the sale proceeds first satisfy the property tax obligation for the property, then satisfy certain other qualifying tax obligations of the property owner, with any surplus going into the Surplus Fund. In other words, the Surplus Fund is comprised of the overbid. The Surplus Fund may also be used to satisfy taxes or assessments that become due during the redemption period. Finally, if the property is redeemed, the tax-sale purchaser has a claim on whatever is in the Surplus Fund, and, if a tax deed is issued, the original owner does.

A 4.5 Notice arises out of Indiana Code 6-1.1-25-4.5. The notice must include, among other things, “the components of the amount required to redeem” the property from the sale. Indiana Code 6-1.1-24-6.1(b) details those components. The overbid/surplus is not one of the components.

Holding. The Court affirmed the denial of the petition for tax deed but remanded the case with instructions for the trial court to order a new 120-day redemption period with a new 4.5 Notice.

Policy/rationale. The trial court found that the 4.5 Notice “greatly overstated” the redemption amount. The Court of Appeals agreed that the notice “would have led a reasonable person to conclude that the total redemption amount was far greater than it actually was….” The Purchaser made a number of arguments in support of its theory that the 4.5 Notice substantially complied with the applicable statutes and was not inaccurate. However, the Court rejected the Purchaser’s position and reasoned that the notice “asked [Owner] to jump through too many hoops to discover the true redemption amount, a situation that only existed because [Purchaser] - misleadingly and without justification – included the overbid in the first place.”

Related posts.

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I sometimes am engaged by mortgage loan servicers or title companies to represent lenders/mortgagees in real estate-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.