Indiana’s UCC Financing Statement Termination Obligations

This follows-up my post: Indiana’s Mortgage Release Obligations. Today’s post relates, not to real property mortgage liens, but rather to personal property Uniform Commercial Code liens (security interests).

Duty to terminate.

Unlike mortgages, the applicable Indiana statutes do not automatically compel lenders/creditors to terminate (aka release) their UCC financing statements upon payment in full of the underlying commercial/business debt. Instead, the onus is on the debtor/borrower to ask. Indiana Code § 26-1-9.1-513(c) states:

[W]ithin twenty (20) days after a secured party [creditor] receives an authenticated demand from a debtor, the secured party shall cause the secured party of record for a financing statement to send to the debtor a termination statement for the financing statement or file the termination statement in the filing office if:

    (1) except in the case of a financing statement covering accounts or chattel paper that has been sold or goods that are the subject of a consignment, there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value….

Thus, if directed to do so by the borrower following the resolution of the underlying debt, the lender must tender a termination statement within twenty days. (Note: Subsections (a) and (b) deal with consumer goods and operate like Indiana’s mortgage release requirement.)

Official Comment 2 to the statute appears to provide a rationale for why the law treats UCC liens differently than mortgages. “Because most financing statements expire in five years … no compulsion is placed on the secured party to file a termination statement unless demanded by the debtor, except in the case of consumer goods.” My 6/6/13 post explains that Indiana mortgages do not expire in a tight, five-year window.

Consequences.

Indiana Code § 26-1-9.1-625 “Remedies for secured party’s failure to comply with chapter” outlines the repercussions associated with a lender’s failure to terminate its UCC financing statement under Section 513.

    First, injunction-like relief under subsection (a) is available:  "If it is established that a secured party is not proceeding in accordance with IC 26-1-9.1, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.”

    Second, damages may be awarded under subsection (b), which states: “[A] person is liable for damages in the amount of any loss caused by a failure to comply with IC 26-1-9.1. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.”

    Third, a $500 fine may be imposed under subsection (e), which provides: “In addition to any damages recoverable under subsection (b), the debtor … in a filed record … may recover five hundred dollars ($500) in each case from a person that: … (4) fails to cause the secured party of record to file or send a termination statement as required by … IC 26-1-9.1-513(c)…."

The upshot is that, upon a full payoff, it’s in the lender’s best interests to terminate its financing statement. This is especially true if the borrower demands it.

Settlements/Compromises. As with mortgages, the statutory scheme seems to be limited to situations involving a full and complete payoff – the entire debt including interest. The rules do not apply to settlements, compromises, short pays, etc. Hence the need, in settlement agreements arising out of loan disputes, to compel the lender/creditor to terminate its financing statement at closing.
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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 [email protected] 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's Mortgage Release Obligations

Duty to release.

Indiana’s General Assembly has made it clear that lenders/mortgagees must release their mortgages when the underlying debt has been paid in full, including interest. First, Indiana Code 32-29-1-6 provides:

After a mortgagee [lender] of property whose mortgage has been recorded has received full payment from the mortgagor [borrower] of the sum specified in the mortgage, the mortgagee [lender] shall, at the request of the mortgagor [borrower], enter in the record of the mortgage that the mortgage has been satisfied. An entry in the record showing that a mortgage has been satisfied operates as a complete release and discharge of the mortgage.

A virtually identical statutory requirement exists at Indiana Code 32-29-11-1: “... if the debt … and the interest on the debt … that a mortgage secures has been fully paid … [then] the [lender/mortgagee] … or custodian of the mortgage shall:

(1) release;
(2) discharge; and
(3) satisfy of record;

the mortgage as provided in IC 32-28-1.

Indiana Code 32-28-1-1 (for the third time) redundantly states, in pertinent part:

(b) When the debt … and the interest on the debt … that the mortgage … secures has been fully paid … the [lender/mortgagee] … or custodian shall:

(1) release;
(2) discharge; and
(3) satisfy of record;

the mortgage….

Consequences.

The General Assembly added teeth to the release obligation by assigning a deadline and financial repercussions in Indiana Code 32-28-1-2.

    15 days:

(a) This section applies if:

(1) the mortgagor [borrower]… makes a written demand, sent by registered or certified mail with return receipt requested, to the [lender/mortgagee] … or custodian to release, discharge, and satisfy of record the mortgage…; and

(2) the [lender/mortgagee] … or custodian fails, neglects, or refuses to release, discharge, and satisfy of record the mortgage … not later than fifteen (15) days after the date [of receipt of] the written demand.

    Fine and fees/costs:

(b) A [lender/mortgagee] or custodian shall forfeit and pay to the mortgagor [borrower] or other person having the right to demand the release of the mortgage or lien:

(1) a sum not to exceed five hundred dollars ($500) for the failure, neglect, or refusal of the [lender/mortgagee] … or custodian to:

(A) release;
(B) discharge; and
(C) satisfy of record the mortgage or lien; and

(2) costs and reasonable attorney’s fees incurred in enforcing the release, discharge, or satisfaction of record of the mortgage….

(c) If the court finds in favor of a plaintiff who files an action to recover damages under subsection (b), the court shall award the plaintiff the costs of the action and reasonable attorney’s fees as a part of the judgment.

(d) The court may appoint a commissioner and direct the commissioner to release and satisfy the mortgage….. The costs incurred in connection with releasing and satisfying the mortgage … shall be taxed as a part of the costs of the action.

Settlements/Compromises. The statutory scheme outlined above appears to be limited to situations involving a full and complete payoff – the entire debt including interest. The provisions do not seem to apply to settlements, compromises, short pays, etc. Hence the need, in settlement agreements arising out of loan disputes (commercial or residential), to compel the lender/mortgagee to release the mortgage and when it must be released.

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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 [email protected] 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.

Replevin Action To Repossess Model Of Picasso Sculpture Succeeds

Lesson. In Indiana auction sales of goods, the auction is final by the fall of the auctioneer’s hammer or other customary manner.

Case cite. Terrault v. Scheere, 200 N.E.3d 490 (Ind. Ct. App. 2022)

Legal issue. Whether a second auction of a good could be negated through a replevin action filed by the winning bidder in the first auction.

Vital facts. Auction Company sold a scaled model of a Picasso sculpture that had been donated to a school. A participant in the auction via telephone was the highest bidder at $20,000, and Auction Company announced the item as sold. The bidder then wired the necessary funds.

About a month later, a dispute arose in which certain city officials claimed there was inadequate or improper notice before the auction. The notice procedure is not pertinent to this post. The point is that the sale process was disputed, and the Auction Company held a second auction. A second individual placed a winning bid of $40,500 that he paid to the school. This second winning bidder then picked up the item.

Procedural history. The original bidder filed suit to obtain possession of the item. One of his claims was for replevin, and he filed a motion for summary judgment. The trial court granted the motion and ordered the subsequent bidder to relinquish possession of the model Picasso to the first bidder.

Key rules. Ind. Code § 26-1-2-328(2) provides in part that "[a] sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner." This statute is a UCC “Sales” (Article 2) provision applicable to the sale of a “good.”

Holding. The Indiana Court of Appeals affirmed the trial court.

Policy/rationale. At the heart of the dispute were statutory notice requirements applicable to a “distressed political subdivision” – an area of law far afield from my practice or this blog. What triggered my interest in Terrault was the replevin claim generally and the finality of the first auction specifically. The Court stated:

while the conditions to which (bidder 1) agreed when registering for the auction provided that the auctioneer may determine the successful bidder, continue bidding, cancel the sale, or reoffer an item, they do not provide that the School and [Auction Company] were able to take such actions after the winning bidder was determined. Indeed the terms provide that the highest bidder acknowledged by the auctioneer will be the purchaser and [Auction Company] acknowledged [bidder 1] as the highest bidder and received payment from him. Based on the designated evidence, the [city] and [Auction Company] had the authority to sell the model on behalf of the School, and the sale of the model on January 19, 2019, to [bidder 1] was valid.

The outcome here is consistent with sheriff’s sale case law in Indiana. As noted in my 11/15/19 post, In Re Collins, 2005 Bankr. LEXIS 1800 (S.D. Bankr. 2005) provided that: “[o]nce a sheriff’s sale takes place, a mortgage-debtor is no longer the title holder....” Judge Coachys concluded, in Collins, that a sheriff’s sale is complete when the hammer falls and that the actual delivery of the sheriff’s deed is purely ministerial.

Related posts.

• What Is A Replevin Action?
• Possessory Interest Key To Indiana Replevin (Repossession) Action

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I represent parties involved in connection with replevin actions and sheriff’s sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected] 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.

Apparent Windfall Not Enough to Set Aside Federal Foreclosure Sale or Negate Deficiency Judgment

Lesson. Judgment debtors (defendants) concerned about liability for a post-sheriff’s sale deficiency judgment should closely monitor the sale process and, if possible, take action to maximize the value of the real estate.

Case cite. United States v. Fozzard, 2022 U.S. Dist. LEXIS 226668 (N.D. Ind. Dec. 16 2022)

Legal issue. Whether an inequitable windfall resulted from a foreclosure sale.

Vital facts. This is my second post about Fozzard. To better understand it, please review my 3/9/23 post. The evidence indicated that GPOA, defendant Fozzard’s condo owner's association/junior secured creditor, and GRC, the developer of Fozzard’s condo complex, were related entities. Fozzard owed GPOA, not GRC, a debt. He focused much of his defense on the fact that the VP of the GPOA, who was also a principal of GRC, tendered the winning bid for GRC (not GPOA) at the sale. The Court captured the essence of Fozzard’s theory: “because GRC had won the property at an apparent discount, Fozzard should not have to pay the alleged debt to GPOA, which was supposed to come out of the sale proceeds.”

Procedural history. GPOA moved for an entry of judgment on its damages, and the Court found that Fozzard owed GPOA nearly $78k. Fozzard objected.

Key rules. Fozzard identified a number of defenses to support his theory, but the Court held that none of them applied. Indiana’s doctrine of “unclean hands” is not favored and is applied “with reluctance and scrutiny.” The defense of “equitable estoppel” requires, among other findings, a showing that the defendant relied on the plaintiff’s conduct “to act in a way that changed his position prejudicially.” Finally, “laches” does not focus only on timing - “prejudice or injury is necessary.”

Holding. The United States District Court for the Northern District of Indiana, over Fozzard’s objection, entered judgment in favor of GPOA and against Fozzard for $77,799.13.

Policy/rationale. Fozzard’s arguments centered on the notion that defendant/cross-claim plaintiff GPOA failed to obtain a judgment on its cross-claim before plaintiff SBA’s foreclosure sale. Fozzard’s thinking was (a) GPOA, a junior creditor, was required to proceed on the same track as senior creditor SBA; (b) GPOA then should have tendered a judgment/credit bid at the sale and obtain title to the property; and (c) GPOA ultimately should have sold the property to GRC for the amount GRC offered Fozzard two years earlier ($160k). Instead, according to Fozzard, GPOA received a windfall because GRC purchased the property at a severe discount while GPOA obtained a judgment against Fozzard for the full amount owed. Basically, Fozzard believed that GPOA was set up to receive a double recovery.

The following is a summary of the key points behind the Court’s rejection of Fozzard’s defenses:

    Delay in seeking judgment: “Certainly, GPOA did not move for entry of judgment according to Fozzard’s preferred (when viewed in retrospect) timeline, but the Court sees no misconduct here, much less intentional misconduct, so Fozzard does not prevail.”

    GPOA’s lack of bid: “Perhaps GPOA may have been able to realize a profit if it undertook these actions, but the Court sees no reason to find that GPOA had a duty to act in this manner. By not bidding on the property, GPOA accepted the risk that it may never recoup damages from Fozzard, as not all judgments that are entered are ultimately paid by the debtors. By bidding on the property, GPOA would have accepted the risk that it may not be able to find a buyer for the property or that the property would not yield a sale price sufficient to cover GPOA’s damages. The Court sees no reason to impose on GPOA the duty to accept one of these risks over the other.”

    Windfall to GPOA: “Though the evidence shows that GRC and GPOA have the same directors, the entities are not the same. GRC may be the beneficiary of buying (at a fairly conducted marshal’s sale) a piece of property at a discounted price, but this does not alter the fact that GPOA has incurred damages through Fozzard’s breach of the contract between him and GPOA. A judgment that awards damages to GPOA to make it whole is not a windfall. It is justice.”

Note: The decision has been appealed to the 7th Circuit. If and when an opinion results from the appeal, I will follow up here.

Related posts.

• What Is A Credit Bid?
• An Indiana Deficiency Judgment Arises Out Of The Foreclosure Judgment Itself, Not A Separate Action

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I represent parties involved in foreclosure sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected] 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.

Federal Foreclosure Sale Upheld – 15% Of Fair Market Value Did Not “Shock The Conscience”

Lesson. In Indiana, foreclosure sales are not designed, nor required, to net the fair market value of the real estate.

Case cite. United States v. Fozzard 2022 U.S. Dist. LEXIS 226668 (N.D. Ind. Dec. 16 2022)

Legal issue. Whether a foreclosure sale should have been set aside based on an inadequate sale price.

Vital facts. Fozzard purchased a condo to operate a business using a Small Business Administration (SBA) loan. The condo was subject to the regulations of The Galleria Property Owners Association, Inc. (GPOA), which required the property to be kept in a reasonable condition. Fozzard defaulted on his SBA loan and fell behind on the fees he owed to GPOA, which discovered the condo to be empty, leaking and growing mold. This led to GPOA taking possession of the condo and incurring expenses to clean the unit and stabilize the temperature. GPOA placed a lien on the condo for the unpaid expenses.

Meanwhile, the SBA filed suit to foreclose its mortgage. GPOA filed a cross-claim to foreclose its lien. Settlement discussions ensued. The condo had a fair market value between $155k and $170k. Galleria Realty Corporation (GRC), the developer of the condo complex, offered Fozzard $160k for the unit, but Fozzard declined.

The SBA and Fozzard entered into an agreed judgment for $172k that permitted the U.S. Marshals to auction the condo to satisfy the judgment. (In federal court foreclosures, the U.S. Marshals Service handles foreclosure sales – not county sheriffs.) The judgment was silent as to the interests of GPOA, however. By the sale, Fozzard’s debt to the SBA had been paid down to about 19k. At the sale, the VP of GPOA, who was also a principal of GRC, attended the sale for GRC (not GPOA) and tendered the winning bid of $19,697.46. Fozzard did not object to the SBA’s motion to confirm the sale.

Procedural history. After the sale, the Court found that Fozzard owed GPOA nearly $78k. Fozzard objected and requested that the sale be set aside.

Key rules. Under Indiana law, “[w]here it appears that the results of a sale are such that entry of a deficiency judgment is shocking to the court's sense of conscience and justice, the sale may be set aside or the request for a deficiency judgment denied."

The U.S. Supreme Court has held: "market value . . . has no applicability in the forced-sale context; indeed it is the very antithesis of forced-sale value. . . . '[F]air market value' presumes market conditions that, by definition, simply do not obtain in the context of a forced sale."

The Seventh Circuit has stated that “bidders should be able to rely on the results of judicial sales; if the auction is properly noticed and conducted, ‘[t]he sale, for all concerned, should be final.’"

Holding. The United States District Court for the Northern District of Indiana overruled Fozzard’s objection to the sale price of the condo.

Policy/rationale. One of Fozzard’s contentions was that the sale “shock[ed] the conscience” because the price was less than 15% of the appraised value. Indeed, the fair market value of the condo was sufficient to retire Fozzard’s debts to both the SBA and GPOA. Instead, GRC acquired title to a $160k condo for less than $20k, while Fozzard remained on the hook to GPOA for nearly $80,000. A tough pill for Fozzard to swallow, but the Court reasoned that a comparison of the sale price to the market value was “irrelevant” under the law. The Court also pointed to Fozzard’s failure to object to the motion to confirm the sale. Finally, the Court noted there was “no reason to doubt the integrity” of the public auction or the related notices leading up to it.

Fozzard waged a handful of additional attacks on the outcome that I will address in my next post about this case.

Note: The decision has been appealed to the 7th Circuit. If and when an opinion results from the appeal, I will follow up here.

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

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I represent parties involved in foreclosure sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected] 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 Court Discusses Test For Recovery Of Attorney's Fees In Action Against Guarantor

Lesson. An arbitrary “partial” award of attorney fees to a lender may be reversible error. Trial courts must assess what is a reasonable amount of attorney’s fees, taking into account all services rendered up to the entry of such an award.

Case cite. Shoaff v. First Merchs. Bank, 2022 Ind. App. LEXIS 395 (Ind. Ct. App. 2022)

Legal issue. Whether a trial court’s award of attorney’s fees was unreasonable (too low).

Vital facts. This is my third post about Shoaff. Please review my first and second posts for more information about the liability and damages issues in Lender’s suit against Guarantor.

Procedural history. The trial court granted summary judgment for Lender, but Lender cross-appealed the court’s award of attorney fees.

Key rules. Last week’s post dealt with non-discretionary contract damages. “Unlike the calculations of interest and late fees, the trial court's discretion with respect to attorney's fees is, generally speaking, unfettered by everything except for reasonableness.”

“The determination of reasonableness of an attorney's fee necessitates consideration of all relevant circumstances.” Indiana courts may, but are not required to, consider things like hourly rate, result achieved, and difficulty of the issues.

Holding. The Indiana Court of Appeals reversed the trial court and remanded the case for an assessment of a reasonable amount of fees for “all services rendered in pursuit of the debt” owed by Guarantor to and through the date of the order granting such fees.

Policy/rationale. Lender asserted that the trial court abused its discretion when it limited its award of attorney’s fees to the date of the initial summary judgment entry. Lender sought fees for the subsequent litigation that included additional motions and a second award of damages. The Court noted that “reasonable attorney's fees are guaranteed by the [guaranty].”

The Shoaff opinion stated that the trial court’s failing was its “unexplained” decision to limit fees up to a certain date. That decision was “arbitrary,” rendering the award of fees unreasonable. The Court threaded the discretionary/reasonableness needle as follows:

The trial court is free to evaluate [Lender’s] submissions for the fee amount and assess whether that amount itself is reasonable, and the trial court may, in its discretion, conclude that the amount either is or is not reasonable. But to award partial fees, reasonable or not, is to ignore the plain meaning of the [guaranty], and therefore constitutes an abuse of discretion.

As stated last week, the rules and outcome in Shoaff should apply to actions to enforce promissory notes as well as guaranties.  

Related posts.

• Attorney Fee Awards in Indiana
• Unsettled: Recoverability Of Attorney’s Fees For In-House Counsel
• Indiana Attorney Fee Liens In Commercial Cases

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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 [email protected] 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.