Indiana Does Not Have Commercial Usury Laws

Apologies for the lack of content the past 30 days.  Significant personal and business commitments have gotten in the way.  I'm alive and well, however.

Sometimes I'm asked whether Indiana has commercial interest rate caps or, in other words, whether there are usury laws applicable to business loans.  Black's Law Dictionary defines "usury" as "the laws of a jurisdiction regulating the charging of interest rates" or "an unconscionable and exorbitant rate or amount of interest." 

Based on my experience and understanding of Indiana law, there are no statutory caps on interest rates for commercial loans.  This is not to suggest that, for instance, a default interest rate of some massive amount (say, 90% per annum) would ultimately be enforceable, if challenged in court.  I'm only passing along that Indiana's legislature is "hands off" when it comes to regulating interest charged on business loans.    

(There are, however, so-called usury laws applicable to consumer loans, which are not the subject of today's post.)

To my knowledge the only statute that could possibly fall into the category of a commercial rate cap is Indiana Code 24-4.6-1-101, sometimes called the "Post-Judgment Interest Statute," which generally provides for a post-judgment interest rate of eight percent (8%) per annum.  The rate runs from the date of the Court finding (judgment) until the date the defendant (borrower/guarantor) satisfies the judgment.  Why could this be labeled a cap?  Because 8% could be less than the rate called for in the underlying promissory note, especially if the note provided for default interest.  

Prior Posts.

• What Is Indiana's Post-Judgment Interest Rate?
• Indiana Supreme Court’s COVID Order Interpreted: Post-Judgment Interest
• Indiana’s Post-Judgment Interest Statute Applies to Awards of Attorney’s Fees

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Part of my practice involves representing parties in disputes arising out of loans 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 X @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

       

Material Alteration Defense: Surety Held Liable Despite Undisclosed Loan Modifications And Misuse Of Proceeds

Lesson. Indiana courts respect language in mortgages and generally will uphold contractual waivers of defenses.

Case cite. Devlin v. Horizon Bank 235 N.E.3d 850 (Ind. Ct. App. 2024)

Legal issue. Whether a surety should be released from liability because the lender did not keep the surety informed of loan modifications or of the principal debtor’s alleged misconduct.

Vital facts. This is the second of two posts regarding the Devlin ag loan dispute. Please click here for the first post, and background. The mortgage that Father (the surety) granted to secure Son’s loan referred to a promissory note for the original amount of $800K “together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the promissory note….” A couple months after the closing of the loan, Bank and Son modified its terms to change payments from monthly to semi-annually. Then, Son exhausted the entire line of credit, and also misused some of the proceeds to purchase $200K of real property and farm equipment. Upon the original maturity of the loan, Bank and Son agreed to extend the maturity date, and converted the $200K in misused funds into a term loan. Bank did not inform Father of any of this. Bank’s loans matured again, and the two loans went into default.

Procedural history. The ensuing litigation involved, among other claims, Bank’s action to foreclose the mortgage on Father’s land. The trial court awarded Bank a $1,137,566.74 judgment and a decree of foreclosure, and Father appealed.

Key rules. Devlin applies Indiana suretyship law, which includes the below principles:

• “Generally, the nature and extent of a [surety's] liability depends upon the terms of the contract, and a [surety] cannot be made liable beyond the terms of the [contract]. Nevertheless, the terms of [the contract] should neither be so narrowly interpreted as to frustrate the obvious intent of the parties, nor so loosely interpreted as to relieve the [surety] of a liability fairly within their terms.”
• “When parties cause a material alteration of an underlying obligation without the consent of the surety, the surety is discharged from further liability regardless of whether the alteration is to the surety's injury or benefit.”
• “A material alteration that effects a discharge of the surety is one that alters the legal identity of the principal's contract, substantially increases the risk of loss to the surety, or places the surety in a different position.”

Indiana courts have relied on the Restatement (Third) of Suretyship and Guaranty § 47 as it relates to the “material alteration” defense:

If, pursuant to the terms of the contract creating the secondary obligation, the secondary obligor has the power, upon the occurrence of a specified event, to terminate the secondary obligation with respect to subsequent defaults of the principal obligor on the underlying obligation or subsequently incurred duties of the principal obligor, and:

    (a) such event occurs;
    (b) the obligee knows such event has occurred; and
    (c) the obligee has reason to know that the occurrence of such event is unknown to the secondary obligor;

the secondary obligor is discharged from the secondary obligation with respect to defaults of the principal obligor that occur, or duties of the principal obligor incurred, thereafter and before the secondary obligor obtains knowledge of the occurrence of the event.

Holding. The Indiana Court of Appeals side with Bank.

Policy/rationale. Father argued that the various loan modifications, as well as Son’s undisclosed misconduct leading to the $200K term loan, discharged Father from liability. The Court disagreed, pointing to the language in the mortgage. The “plain terms … anticipated that the original loan’s terms might be modified and captured those modifications accordingly.” In other words, Father, a sophisticated party, contractually and prospectively waived the “material alternation” defense.

Father also asserted that his suretyship had terminated based on post-closing misconduct by Son (the misuse of funds) that was not disclosed to Father. While there is Indiana case law to support the notion that “a creditor’s failure to notify a surety of a debtor’s misconduct discharges the surety,” such a discharge is not automatic. Citing to the Restatement above, the Court held that, because the mortgage did not reserve Father’s right to terminate the suretyship (the mortgage) for the specific misconduct in question, the right to terminate was not available to Father. The Court reasoned:

[Father] merely seeks to second-guess how [Son] and Bank managed their relationship following the initial issuance of the loan. We think [Father's] arguments, if adopted, would undermine good-faith dealings between lenders and debtors and would empower sureties to litigate any subsequent action of a debtor as ‘misconduct’ entitling the surety to discharge.

Related posts.

• Indiana Court of Appeals Denies Guarantor’s “Material Alteration” Defense
• Liability of Accommodation Parties When the Original Obligation Is Materially Altered
• Indiana Court Releases Mortgage On Parents' Farmland Based On Material Alteration Of Kids' Loan
• “Material Alteration” Defense Rejected In Indiana Guaranty Enforcement Action

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Part of my practice involves representing parties in disputes arising out of loans 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 X @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Surety, Who Pledged A Mortgage To Secure An Ag Loan, Failed To Establish Impairment Of Collateral Defense

Lesson. A surety (a form of guarantor) has a high burden to prove some "unjustified or unreasonable act” by a lender in order to establish the so-called “impairment of collateral” defense.

Case cite. Devlin v. Horizon Bank, 235 N.E.3d 850 (Ind. Ct. App. 2024)

Legal issue. Whether the bank impaired the collateral for its loan to the detriment of the surety.

Vital facts. This is the first of two posts about the Devlin case, which involved a farm operating loan entered into between Bank and borrower (Son). Son obtained an 800K line of credit, secured by Son’s crops, insurance proceeds, government payouts and farming inventory. The loan agreement controlled the flow of cash upon the sale of crops, and the Court’s opinion details the key provisions in the docs. (Review the case for the key language.)

Father, a CPA, agreed to be a surety for Son’s loan and granted Bank a mortgage on 85 acres of Father’s land as additional security for the debt. The mortgage provided, among other things, that Father had “adequate means,” on an ongoing basis, of obtaining financials from Son.

In practice, Son failed to insist on crop payments being made payable jointly to him and Bank (commonly known as joint checks). This enabled Son to take about $363K in sales proceeds and deposit them into his personal checking account. Thus, the funds were not used to pay down Bank’s loan (and to reduce Father’s exposure). Similarly, Son received government funds that he redirected into his checking account at another bank. Ultimately, Son defaulted.

Procedural history. Bank filed suit to enforce its loan. The action included a claim to foreclose the mortgage on Father’s land. After a trial, judgment was entered for Bank in the amount of $1,137,566.74, and the trial court ordered the foreclosure of the mortgage. Father appealed.

Key rules. The opinion in Devlin outlines some of Indiana’s suretyship laws:

• One who mortgages his land to secure the debt of another stands in the position of surety to the debtor.
• A surety may seek to avoid liability in a suit by a creditor by asserting an impairment-of-collateral defense, which provides that “a surety may avoid liability to the extent that a creditor unjustifiably impaired the collateral securing a guaranteed loan."
• As it relates to Devlin, “impairment of collateral means an injury to the value of the collateral or a deterioration of the interest securing the collateral.”

Holding. The Indiana Court of Appeals affirmed the trial court’s judgment.

Policy/rationale. Father contended that Bank failed to enforce its security interest in the crop proceeds by not taking “steps to insist on receiving jointly payable proceeds.” This, in turn, enabled buyers of the crops to take them free and clear of Bank’s liens, and the loan not being paid down. The Court held that, to prevail on this theory, Father had the burden to establish some "unjustified or unreasonable act by [Bank].”

The Court of Appeals concluded that the record supported the trial court’s rejection of the impairment of collateral defense. Bank “did not act unjustifiably or unreasonably either [it] Bank did not insist that [Son] provide information for potential buyers at the outset of his relationship with Bank or when Bank did not send written notices to potential buyers of its crop lien prior to [Son's] default.” Because this appeal followed a trial, not a summary judgment, there was a substantial amount of exhibits and testimony, including expert opinions, which formed the basis of the trial court’s decision. It appears the expert testimony on the relationship/loan management issues may have carried the day on what otherwise seemed like a close call.

Related posts.

• Impairment Of Collateral Defense Denied
• IRISH V. WOODS: Which Surety Was Left Holding the $500,000 Bag?

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Part of my practice involves representing parties in loan-related disputes, including ag loans. 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 X @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Sheriff's Sale Surplus Goes To Owner/Borrower

My news feed this week produced this article from Fox59:  Surplus Funds After Foreclosure: Key Facts and Recovery Options for Homeowners.  The article is not state-specific, so I thought I'd build on the piece by commenting on Indiana law.

In the event an Indiana sheriff's sale produces surplus (excess) proceeds (money), by statute those funds belong to the owner.  Indiana Code 32-30-10-14 "Application of proceeds of sale; disposition of excess proceeds" provides:

the surplus must be paid to the clerk of the court to be transferred, as the court directs, to the mortgage debtor, mortgage debtor's heirs, or other persons assigned by the mortgage debtor.

For more on this subject, click on my prior post:  Statutory Disposition of Foreclosure Sale Proceeds.

While we're on this topic, the result in an Indiana tax sale, albeit a much more complex process than a foreclosure sale, essentially is the same.  See:  Indiana Code 6-1.1-24.7(c).   

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Part of my practice involves representing parties at 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.

Affidavit From Subservicer Employee Passes Hearsay Test For Original Lender’s Records

Lesson. Loan records created by the originating lender can be admissible in an assignee lender’s lawsuit.

Case cite. King v. Nat'l Collegiate Student Loan Tr. 2006-4 232 N.E.3d 646 (Ind. Ct. App. 2024)

Legal issue. Whether Lender’s designated loan records, some of which were created by the prior holder or servicer of the loan, constituted admissible evidence.

Vital facts. JPMorgan Chase Bank (Chase) was the original lender of several loans, but later pooled and sold the loans to National Collegiate Funding, LLC, which in turn sold the loans to five National Collegiate Student Loan Trusts (collectively, Lender). Lender, the plaintiff in the suit, claimed Borrower defaulted on the loans and, accordingly, sought summary judgment.

Lender tendered an affidavit of an employee of the subservicer of the loans (Subservicer), which affidavit was the vehicle for Lender to prove up the loan documents, payment history and default. Notably, some of the records attached to the affidavit were not created by Lender or Subservicer, but by prior parties. Lender obtained the evidence upon acquisition.

The opinion in King articulated the supporting affidavit’s key testimony:

• The prior servicer of the loan was American Education Services ("AES"), which “began servicing the [Loans] upon the first disbursement and continued to service the [Loans] until [the debt] was charged-off."
• "Upon charge-off, the loan records were transmitted to and incorporated within the records of [Subservicer] as part of its regularly-conducted business practice," and [Subservicer] "began servicing the [Loans]." Further, it was "[Subservicer]’s regularly-conducted business practice to incorporate prior servicers' loan records into the system of record it maintains on [Lender's] behalf when [Subservicer] assumes [the] role of [s]ubservicer.”
• With respect to how AES created and maintained the loan records, the witness "‘ha[d] access to’—and "’training and experience using’—‘the system of record utilized by [AES] . . . to enter, maintain[,] and access the loan records during its role as servicer,’ and that he was ‘familiar with the transaction codes reflected in [AES] records.’"
• Regarding the way in which [Subservicer] obtained those records, the witness was "familiar with the process by which [Subservicer] receives access to loan records from [the] prior servicers and incorporates those records into [Subservicer] system of record." Moreover, the affidavit provided language that "the loan records were transmitted to and incorporated within the records of [Subservicer] as part of its regularly-conducted business practice" when it began servicing the Loans.The affidavit further stated that [Subservicer] "regularly relies upon these integrated loan records in performance of its services on behalf of [Lender]."

Although she could have, Borrower did not depose the affiant to vet, for instance, whether he had personal knowledge of the third-party recordkeeping.

Procedural history. The trial court granted Lender’s motion for summary judgment, and Borrower appealed on the basis that the affidavit did not lay the proper foundation for the business records and, as a result, the evidence should have been excluded as inadmissible hearsay.

Key Rules. Trial Rule 56(E) and Indiana Rules of Evidence 602 generally address admissibility and personal knowledge requirements, and IRE 802 is Indiana’s fundamental hearsay rule. IRE 803(6) is the business records exception to the hearsay rule. Those are the basics.

Borrower relied on Holmes v. Nat’l Collegiate Student Loan Tr., 94 N.E.3d 722 (Ind. Ct. App. 2018), about which I wrote here – Lender’s Summary Judgment Affidavit Flawed - Business Records Inadmissible – that held the lender did not sufficiently lay the foundation for the business records exception. The Court ruled that this case’s affidavit was sufficient, however, and relied on a subsequent, distinguishing opinion in Smith v. Nat’l Collegiate Student Loan Tr., 153 N.E.3d 222 (Ind. Ct. App. 2020). The King opinion thoroughly compares and contrasts the technical principles in the Holmes and Smith cases.

Holding. The Indiana Court of Appeals affirmed the trial court’s summary judgment.

Policy/rationale. Borrower’s attack centered on the witness’s lack of personal knowledge of the record keeping practices of the originator of the Loans. The Court’s opinion, which provides a road map for admissibility in such cases, provided:

[T]he Affidavit—like the affidavit in Smith—demonstrated, from a source and circumstances that did not indicate a lack of trustworthiness, that the loan records were ‘created, compiled[,] or recorded from information transmitted by a person with personal knowledge of such event who had a business duty to accurately report it, from information transmitted by a person with personal knowledge of such event’; and that "‘[s]uch records [were] created, kept, maintained, accessed[,] and relied upon in the course of ordinary and regularly conducted business activity.’ And this testimony maps onto the foundational requirements of Evidence Rule 803(6).

Related post.  Another Indiana Court Of Appeals Opinion Regarding Admissibility Of Lender’s Loan and Business Records
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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 X, @JohnDWaller, or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

In Indiana, Is “Piercing The Corporate Veil” An Independent Cause Of Action?

[Personal and professional commitments have prevented me from posting this past month. Rest assured that I and my beloved blog are alive and well. I wish you and your families a Happy Thanksgiving, and I appreciate you visiting this site, which turned 18 on November 1st.]   

Lesson. Piercing the corporate veil is an equitable remedy rather than an independent claim.

Case cite. Elpers Bros. Constr. & Supply Inc. v. Smith 230 N.E.3d 920 (Ind. Ct. App. 2024)

Legal issue. Whether the plaintiffs could proceed against the defendant purely to pierce the corporate veil without an underlying, independent cause of action against that defendant.

Vital facts. Husband and wife (Plaintiffs) sued a group of contractors (Builders) and a homeowners’ association (HOA) in a dispute related to the design and construction of a subdivision’s drainage system. The technical, construction-related facts, which are dense, are immaterial to this post. What matters is that Plaintiffs based one of the theories in their complaint on the idea that the HOA merely was operating as the Builders’ “alter ego,” such that Plaintiffs could “pierce the HOA's corporate veil.” Although not explicitly stated in the Court’s opinion, it seems that the goal of the Plaintiffs’ veil piercing theory was to hold the HOA liable for the damages caused by the Builders.

Procedural history. In connection with the HOA’s motion for summary judgment, the trial court essentially concluded that there were fact questions surrounding whether the HOA was the alter ego of the Builders such that the veil piercing theory must proceed to trial. The HOA appealed.

Key rules. The Court in Elpers Bros. identified the following common law rules:

• The corporate alter ego doctrine is a device by which a plaintiff attempts to demonstrate that two corporations are so closely connected that the plaintiff should be able to sue one for the actions of the other.
• A court "pierces the corporate veil" to furnish a means for a [plaintiff] to reach a second corporation … upon a claim that otherwise would have existed only against the first corporation.
• Courts will not provide the protection of limited liability to an entity "that is a mere instrumentality of another and engages in misconduct in the function or use of the corporate form."
• Courts invoke the equitable doctrine of piercing the corporate veil to "protect innocent third parties from fraud or injustice."

As it pertained to the theory in Elpers Bros., the Court proclaimed:

Although our courts have not had occasion to specifically address whether piercing the corporate veil under an alter ego theory constitutes an independent claim for substantive relief, the jurisdictions that have addressed this issue have determined that piercing the veil is not a theory of liability. Rather, such is a remedy and a means of imposing liability on an underlying cause of action like a tort or breach of contract. We adhere to that determination and conclude that piercing the corporate veil is an equitable remedy rather than an independent cause of action.

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

Policy/rationale.  The trial court granted summary judgment in favor of the HOA on Plaintiffs’ independent causes of action for breach of contract and negligence but denied summary judgment on the veil piercing issue. The Indiana Court of Appeals held that, because of the trial court’s dismissal of Plaintiffs’ contract and negligence claims, so too must the veil piercing theory. “Inasmuch as the alter ego theory is not an independent cause of action, the remedy of piercing the corporate veil would be futile, and the HOA must necessarily be dismissed as a named party.” Although not directly expressed in its opinion, it appears that the Court essentially followed the principle that veil-piercing is a post-judgment collection tool, not a pre-judgment cause of action. Stated differently, Plaintiffs prematurely sought a remedy against the HOA without first obtaining a judgment against the Builders.

Related posts.

• Indiana Claims To Pierce The Corporate Veil Should Be Post-Judgment
• Veil-Piercing Claim Better Left For Proceedings Supplemental
• Collecting From Related Companies - The Two Prongs Of Indiana’s Alter Ego Doctrine

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Part of my practice involves representing parties in commercial collection disputes. 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.