Pooling And Servicing Agreement Did Not Divest Trustee Of Ability To Foreclose

Lesson. With securitized loans, the trustee on behalf of the trust (the lender) is a “real party in interest” for purposes of filing a foreclosure suit, despite the existence of a special servicer appointed by a pooling and servicing agreement.

Case cite.  Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether the special servicer of securitized loan is the only party that can bring a suit to enforce that loan.

Vital facts. The 410 opinion arises out of a $3.0 million commercial loan transaction related to a single tenant retail building, and efforts by the lender to collect on the loan after default. As is typical with securitized debt, the original lender assigned the loan to a trust (the “Trust”), which entered into a Pooling and Servicing Agreement (“PSA”) with a company to service the loan (the “Servicer”). The PSA conveyed the interests in the loan to a bank that acted as the trustee for the Trust (the “Trustee”), thereby putting the Trustee “in the standard role” of a party that could sue. After the loan went into default, the Trustee filed suit to enforce the loan.

Procedural history. This is an Indiana federal district (trial) court decision.  One of the defenses asserted in the action was that the court lacked jurisdiction because the Servicer, not the Trustee, was the “real party in interest.” In other words, the Servicer should have been the named plaintiff. Because the Servicer shared New York citizenship with several defendants, the so-called “diversity of citizenship” requirement for federal court cases of this type was absent. If applicable, the defense would compel dismissal (although the case could be re-filed in state court).

Key rules. Under Rule 17, a "real party in interest" is the “person or entity that possesses the right or interest to be enforced through litigation.” The Court noted further that “the purpose of Rule 17 is to protect the defendant against a subsequent action by the party actually entitled to recover.”

Case law provides that “the terms of a PSA can permit a special servicer to sue in its own name if the special servicer chooses to do so, . . . [but the terms of the PSA do not] divest the trustee for whom that special servicer acts from bringing suit when it is the one that chooses to do so.” The Court relied on law stating that the Trustee, as the holder of the loan for the Trust, could “sue to enforce and collect on those interests.” The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that the Trustee did not have standing to sue because the “true party in interest” was the Servicer by virtue of the PSA’s provisions giving the Servicer discretion to pursue litigation. The Court disagreed because, even if the Servicer was the party that filed the lawsuit, it would be litigating as the Trustee’s representative under the PSA. The Servicer’s role, “no matter how many duties it may be given,” was to act as an agent for the Trustee related to its interest in the loan. Ultimately, the Trustee had “the true stake in the litigation. . . .”

The Court did not buy the argument that the PSA “dispossessed” the Trustee of the power to initiate suit. The PSA as a whole suggested that the Servicer’s “powers … are only the result of delegated authority from the Trust, not separate authority given solely to [the Servicer]….” 410 suggests that a special servicer under a PSA can be the named plaintiff in a mortgage foreclosure lawsuit. While I’ve seen that approach, the more common practice is for the trustee to bring the case. The 410 opinion supports this approach.

Related posts.

• Trustees Have Authority To Foreclose For Trusts
• Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.

ATTOM: U.S. Foreclosure Activity Sets Post Pandemic Highs in First Quarter of 2022

The following article by ATTOM from 4/21/22 shows that foreclosure starts, bank repossessions are at the highest levels in two years but still well below normal:  LINK.  

Indiana’s COVID Orders Interpreted: Interest-Tolling Provisions Not Applicable To Mortgage Loans

Lesson. COVID did not provide a defense to the accrual of interest on mortgage loans in 2020.

Case cite. PNC v. Page, 2022 Ind. App. LEXIS 92 (Ind. Ct. App. 2022).

Legal issue. Whether certain provisions in Indiana’s COVID-related Emergency Orders (defined below) apply to promissory notes and mortgages such that prejudgment interest could be tolled for five months.

Vital facts. Borrower and lender entered into a mortgage loan. The promissory note contained fairly standard language that interest shall accrue after default until the loan balance is paid in full. Borrower defaulted on the loan in November 2017.

In the wake of the COVID pandemic, Indiana’s Governor and Supreme Court entered a series of orders (the “Emergency Orders”) related to the handling of the public health emergency. I wrote about some of these orders in 2020: link. In one of the orders, the Indiana Supreme Court stated:

The Court authorizes the tolling, beginning March 16[, 2020] and until April 6, 2020, of all laws, rules, and procedures setting time limits for speedy trials in criminal and juvenile proceedings, public health, and mental health matters; all judgments, support, and other orders; and in all other civil and criminal matters before the courts of Marion County. Further, no interest shall be due or charged during this tolled period.

Procedural history. Lender filed a mortgage foreclosure action in November 2018. While the case was pending, the pandemic occurred. It was not until June 2021 that the lender sought a default judgment seeking the balance due of principal and interest, which included accrued interest from the date of default through the date of the entry of the judgment. The trial court entered the judgment requested by Lender except that it specifically excluded “interest accruing 3/16/20 – 8/14/20” based on the Emergency Orders, including specifically the provision quoted above. Lender appealed the interest reduction.

Key rules. The well-written PNC opinion cites to plenty of constitutional and statutory support for its decision. The Court also referred to and relied upon its 2021 case, Denman v. St. Vincent Med. Grp., Inc., 176 N.E.3d 480 (Ind. Ct. App. 2021), about which I wrote on 11/24/21 (see related post below). In a nutshell, and in an interesting twist, the Indiana Court of Appeals (the lower court) stated: “because our Supreme Court [the higher court] could not, by rule, change substantive law, the Emergency Orders instruction … cannot be construed to suspend automatic accrual on non-discretionary interest provided by the terms of a private loan instrument and as permitted by statute.”

Holding. The Indiana Court of Appeals reversed the trial court with instructions to award Lender interest from the date of default to the date of the judgment at the rate specified in the promissory note, including the period from 3/16/20 to 8/14/20.

Policy/rationale. The Court’s conclusion is consistent with the practice “of presuming that each branch of our government acts within their constitutionally prescribed boundaries.” PNC, with Denman, settled once and for all the question of whether the accrual of contractual interest was suspended by the Emergency Orders. The decisions were, in my view, the correct ones, and they are great results for lenders. Imagine if all borrowers of any type (consumers or businesses) were free from interest obligations for five months.

Related posts.

• Indiana Supreme Court’s COVID Order Interpreted: Post-Judgment Interest
• Force Majeure And The COVID-19 Pandemic: Impact On Indiana Notes and Mortgages 

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.

Upcoming Changes To Indiana Sheriff's Sales

In this year’s Indiana legislative session, the General Assembly enacted House Bill 1048, which becomes effective July 1, 2022. Here are some of the changes that will impact Indiana foreclosure law.

Electronic sales. HB 1048 amended I.C. 32-29-7-3 to provide that sheriff’s sales may be conducted electronically as long as they comply with all other sale requirements under the statute. Electronic sales include the ability for sheriffs to receive electronic payments for the real estate. The amended statute says nothing further about the electronic sale process. Thus, the local sheriff’s offices will set up their own rules and regulations related to such things as bidding procedures and closing on the sales. The new law would appear to open the door for an online auction to be conducted by a private auctioneer in conjunction with I.C. 32-30-10-9.

Fees. I.C. 32-29-7-3(j) increases the sheriff’s sale administrative fee from $200 to $300 “for actual costs directly attributable to the administration of the sale….” The fee is payable by the plaintiff and is due before the sale.

Bad actors. HB 1048 added I.C. 29-7-4.5. This is the so-called “bad actor” or “slum lord” measure that caught the attention of the media this year. The language of the new law is quite dense and does not apply to plaintiffs or lenders foreclosing on mortgages but only to third-party bidders. Essentially, the act attempts to exclude certain third parties from participating in sheriff’s sales who, for example, are delinquent in the payment of real estate taxes on other property they own.

    Affirmation. To that end, the new I.C. 32-29-7-4.6 provides that any person bidding at a sheriff’s sale must sign a statement that says:

Indiana law prohibits a person who owes delinquent taxes, special assessments, penalties, interest, or costs directly attributable to real property under IC 6-1.1 from bidding on or purchasing property at a sheriff's sale. I hereby affirm under the penalties for perjury that I am not prohibited from bidding under IC 32-29-7-4.5 and that I do not owe delinquent taxes, special assessments, penalties, interest, costs directly attributable to real property under IC 6-1.1, amounts from a final adjudication in favor of a political subdivision, any civil penalties imposed for the violation of a building code or county ordinance, or any civil penalties imposed by a county health department. I also affirm that I am not purchasing property on behalf of or as an agent for a person who is prohibited from bidding under IC 32-29-7-4.5. I further acknowledge that a person who knowingly or intentionally provides false information on this affidavit commits perjury, a Level 6 felony.

    Foreign Businesses. Moreover, the new I.C. 32-29-7-4.7 prohibits non-Indiana businesses from bidding at an Indiana sheriff’s sale. This rule does not apply to a party foreclosing on a mortgage, however, such as a plaintiff lender or a defendant mortgagee.
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Part of my practice includes representing parties in connection with sheriff’s sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.

Criminal Restitution Order Is Like A Tax Lien

United States v. Ervin 2022 U.S. Dist. LEXIS 7344 (N.D. Ind. 2022) dealt with a criminal conviction and resulting order to pay restitution.

Why is a criminal case the subject of a post on Indiana Commercial Foreclosure Law? Because the Court’s opinion reminds us that a "restitution order is a lien in favor of the government on 'all property and rights to property' of the defendant and is treated as if it were a tax lien." United States v. Sayyed, 862 F.3d 615, 618 (7th Cir. 2017) (quoting 18 U.S.C. § 3613(c)).

The Court further stated that “while there is certain property that is exempt, the statutory language applies broadly and is intended to reach every interest in property that a taxpayer might have.” Thus, a restitution order permits the government to "step[] into the defendant's shoes" and acquire his or her rights to property.

Who enforces the lien arising out of a restitution order? Federal law empowers the United States Attorney’s Office to do so. 18 U.S.C. § 3613.

I’ve written about tax liens on several occasions. Here are links to a few of those posts:

• Reinstated Federal Tax Liens On Property Owned Pre-Bankruptcy
• Subsequent Federal And State Income Tax Liens: Priority And Redemption
• Lender And IRS Battle Over Rental Income

Happy St. Patrick’s Day,

John
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I represent parties involved 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@dinsmore.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 Legislation Proposed To Shut Bad Acting Landlords Out Of Foreclosure Sales

Indiana House Bill 1048 proposes to some adjustments to the sheriff's sale process.  Here is the latest synopsis of the bill:

Allows the sheriff to conduct a public auction electronically. Prohibits certain persons and entities from purchasing a tract at a sheriff's sale. Requires each person bidding at a sheriff's sale to sign a statement containing a notice of the law and certain affirmations. Raises the amount that a sheriff can charge for administrative fees from $200 to $300.

Click here for the latest version of the bill.  

The bill has been in the news because it targets "slum lords," in the words of the Indianapolis Star (article for subscribers only).  Here is a link to a free article from WFYI: Lawmakers make move to shut bad acting landlords out of online foreclosure sales. 

I'll keep my eye on this bill and summarize the enacted version after the 2021 legislative session.

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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@dinsmore.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.