Presumption Of Ownership Through Tenants By The Entirety Can Be Rebutted By Contract

Lesson. Since ownership of real estate by a husband and wife creates a presumption of a tenancy by the entirety, typically a creditor cannot collect the debt of one spouse from the marital real estate. However, the presumption is rebuttable by a contract that states otherwise or that implies otherwise – potentially opening the door to collecting the debt from the debtor spouse’s interest in the real estate.

Case cite. Fund Recovery Servs. LLC v. Wolfe 2022 U.S. Dist. LEXIS 28754 (N.D. Ind. Feb. 17 2022)

Legal issue. Whether a fraudulent transfer case against husband and wife should be dismissed because they held the subject real estate jointly.

Vital facts. Creditor alleged that Husband transferred his interest in real estate that he held jointly with Wife such that Wife become the sole owner. The transfer occurred after entities for which Husband was a personal guarantor filed bankruptcy. The Court’s opinion does not mention anything about the language in any of the deeds, nor is there any discussion of why Husband transferred title to Wife.

Procedural history. Creditor filed suit against Husband and Wife seeking to collect the debt Husband owed to Creditor. Specifically, Creditor claimed the conveyance should be set aside because the real estate transfer violated Indiana’s Uniform Fraudulent Transfer Act (IFTA). Defendants filed a motion to dismiss the Complaint for a failure to state a claim for relief.

Key rules.

Certain transfers made by a debtor are voidable as to a creditor if the transfer was made with intent to hinder, delay, or defraud the creditor. Ind. Code. 32-18-2-14(a)(1).

A transfer can also be voidable “if the transferor did not receive reasonable value for the transfer and the debtor was engaged in a business for which his remaining assets were unreasonably small in relation to that business, or the transferor incurred debts beyond his ability to pay.” Ind. Code § 32-18-2-14(a)(2).

The IFTA also provides that a transfer is voidable if the claim arose before the transfer, if the debtor made it without “receiving reasonably equivalent value,” and if the debtor was insolvent at the time or became insolvent as a result of the transfer. Ind. Code. § 32-18-2-15.

Tenants by the entirety is a form of ownership of real estate in Indiana that is reserved for husband and wife “based on the legal fiction that a husband and wife are a single entity.” The nature of the ownership protects real estate from being seized to satisfy the debts of only one of the spouses.

In Indiana, ownership of real property by a husband and wife creates a presumption of a tenancy by the entirety that is rebuttable by either a contract hat states otherwise or that implies otherwise. Ind. Code § 32-17-3-1(d).

Holding. The Court denied the motion to dismiss.

Policy/rationale. Husband and Wife argued that, because the couple was married, the real estate was held as tenants in entirety and, as such, the real estate would not have been available to satisfy the debt of Husband. Further, Husband and Wife asserted that the Complaint did not allege facts necessary to overcome the presumption of an estate by the entireties. Creditor argued that it may be able to rebut the presumption by virtue of a contract for the purchase of the subject real estate. (The Court did not elaborate on the details of the contract, but clearly something did not sit well with the Court, which allowed the claims to proceed to the next phase of the case.)

Related posts.

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I represent parties involved 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@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.


Lender’s Redirection Of Rents Does Not Constitute “Unclean Hands” When Supported By Loan Documents

Note: This is the fourth post about the 410 case, cited below, that grants a lender’s motion for summary judgment against a borrower (and other defendants), despite the defendants’ assertions of multiple defenses and counterclaims. For background and context, here are links to the prior three posts: May 6, May 20 and May 27.

Lesson. A lender’s demand for a tenant to redirect rents from the landlord/borrower will not trigger a claim for “unclean hands” when the action is supported by a loan document.

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 doctrine of “unclean hands” precluded summary judgment for a lender in a commercial foreclosure action.

Vital facts. Following a loan default, Lender directed the commercial tenant of the mortgaged real estate to make rent payments directly to Lender instead of the borrower/landlord. The tenant evidently complied with the request. In turn, the absence of rental income apparently created a cash flow problem for the borrower that hampered Defendants’ ability to settle with Lender. The problem was that the borrower had previously entered into a Subordination, Non-Disturbance and Attornment Agreement (commonly called an SNDA) as part of the underlying loan documents. In the SNDA, the borrower consented to such direct payments and released the tenant from all liability to the borrower on account of any such payments. (Typically, an assignment of rents will contain similar rights in favor of a lender/mortgagee.)

Procedural history. In response to Lender’s motion for summary judgment, Defendants raised the “unclean hands” defense.

Key rules. The Court in 410 summarized Indiana state and federal court law regarding the doctrine of unclean hands:

The doctrine is designed to prevent a party that behaved inequitably or acted in bad faith from benefitting from that improper behavior. There is no exact formula for applying the doctrine and courts thus generally have discretion when determining whether to apply it. The doctrine is not favored under Indiana law "and must be applied with reluctance and scrutiny."

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For a defendant to successfully assert the doctrine in Indiana, the defendant generally must show that: 1) the plaintiff's misconduct was intentional; 2) the plaintiff's wrongdoing concerned the defendant and has an immediate and necessary relation to the matter in litigation; and 3) the defendant was injured because of the plaintiff's conduct.

Holding. The Court rejected the unclean hands defense and granted Lender’s motion for summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that Lender “exacerbated” the loan default by taking the rents. The Court easily rejected the theory. The borrower could not, on the one hand, grant Lender rights to the rents in an SNDA while, on the other hand, claim misconduct in asserting such rights.

Related posts.

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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.


Borrower’s Loan Reinstatement-Related Promissory Estoppel Defense Dismissed

Note: on 5/6/22 and 5/20/22, I wrote about the 410 case cited below. Today’s post addresses more issues from the same opinion. In particular, the 5/20/22 article provides context for today’s installment, which follows up on the “loan balance statement” at issue.

Lesson. A promissory estoppel theory in the defense of a foreclosure case often fails for the simple reason that there is no evidence the lender made an actual promise to the borrower (to reinstate or forbear).

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 a lender’s foreclosure action could be defeated on the basis of promissory estoppel, where the lender had tendered a “loan balance statement” during workout discussions that was arguably a commitment to reinstate a loan.

Vital facts. The “balance statement” (the subject of my May 20th post) was at the center of the Defendants’ promissory estoppel theory. The Defendants essentially claimed that they were “ready, willing and able” to reinstate the loan in reliance on the figures in the balance statement. The Defendants alleged that they took steps to obtain the necessary funds, but Lender “made an about face and refused to honor the Balance Statement, damaging Defendants.”

Procedural history. Lender filed a motion for summary judgment on the promissory estoppel claim/defense.

Key rules. The Court cited to an Indiana Supreme Court case for the five elements of promissory estoppel: “1) a promise by the promissor [here, Lender]; 2) that was made with the expectation that the promisee [here, Defendants] would rely on it; 3) and induces reasonable reliance by the promisee [Defendants]; 4) of a definite and substantial nature; 5) in a way where injustice can be avoided only be enforcement of the promise.”

Holding. The Court granted Lender’s motion summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale.

The Court reasoned that the balance statement simply did not create a promise to reinstate the loan and waive prior defaults. “Without a promise, promissory estoppel fails from the start.” Moreover, there was no evidence that Lender sent the balance statement with the expectation that Defendants would rely on it as they did. For good measure, the Court also noted that the Defendants did not meet the payment deadline in the balance statement anyway.

Related posts.

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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.


Loan Reinstatement Communication Did Not Bind Lender In Workout Negotiations

Note: on 5/6/22, I wrote about the 410 case cited below. Today’s post addresses additional subject matter from the same opinion. Please review my previous post for background.

Lesson. In workout negotiations, if banks wish to avoid communications that could unwittingly bind them to a deal, ensure the communications do not have these three elements: (a) a writing, (b) that sets forth all material terms and conditions of the workout/resolution, (c) that is signed by both parties. Also, to the extent lenders engage in written communications or issue reinstatement memos, consider including limiting language such as the following: "if your loan has matured, or is otherwise in default, neither your receipt of this statement nor acceptance of any partial payment, or any future partial payment, shall be deemed to amend or modify the terms of the loan documents, nor cure or waive the default existing under the loan. Lender reserves all of its rights and remedies under the loan documents, at law or in equity."

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 a “loan balance statement” tendered by a lender in connection with workout discussions constituted a binding contract to reinstate a loan and waive any prior events of default upon payment of the amount listed.

Vital facts. The standard loan documents were at issue in this commercial mortgage foreclosure case: a promissory note, a loan agreement, a mortgage, an assignment of rents and a guaranty. Borrower began missing monthly loan payments. Borrower also was in default because it “had also been involved in a variety of transfers and liens related to the real estate underlying the loan, none of which were disclosed to the Trustee and none of which were executed with the Trustee's prior written consent as the loan documents required.”

In an effort to resolve the loan default, one of the parties connected to the Borrower requested mortgage statements and received a “balance statement” identifying an amount owed. The statement seems to have been a kind of loan reinstatement memorandum. Please read the opinion for further details. The Defendants contended the balance statement was an agreement that, if the quoted amount was paid, then Lender would reinstate the loan and waive any past defaults. Lender viewed the balance statement as merely giving a snapshot of the amount owed on a particular day and nothing more.

As the payment defaults and improper transfers continued to mount, the Trust notified Defendants that it was accelerating the loan and that full payment was due in 30 days. Defendants did not meet the demand. Instead, they made a series of payments that nearly satisfied the amount articulated in the balance statement.

Procedural history. Lender filed suit to enforce the loan. Defendants asserted various defenses to Lender’s foreclosure action, and also filed counterclaims for breach of contract and negligent misrepresentation. The Trustee filed a motion for summary judgment on all claims and defenses.

Key rules. I’ve previously written about the Indiana Lender Liability Act at Indiana Code 26-2-9. See Related Posts below. 410 reminds us that:

under the ILLA, a “credit agreement,” which includes an agreement to forebear or make any other financial accommodation, is enforceable if: 1) it is in writing; 2) that writing sets forth all material terms and conditions, and; 3) that writing is signed by both parties. All material terms and conditions must be embodied by the singular, signed writing. A combination of multiple writings does not suffice to form a single agreement.

Under Indiana law, the fundamental requirements for a contract include “an offer, acceptance, consideration, and a meeting of the minds of the contracting parties.”

Holding. The Court granted Lender’s summary judgment. 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 balance statement was either a “credit agreement” under the ILLA or a binding common law contract. The Court disagreed. Despite the balance statement being in writing, it failed to satisfy the other elements of an enforceable credit agreement, namely an outline of all materials terms and conditions, together with signatures by both parties. Among other things, the balance statement contained no language promising any future action in the event the quoted amount was paid. Indeed the statement provided that it should not be read as promising anything. Further, the statement was not signed by the parties. The Court refused to adopt Defendants’ theory that signatures were incorporated by reference because the statement referred to the underlying loan documents.

As to the common loan contract theory, the Court stated that “the only ‘offer’ the Defendants have pointed to is the one to reinstate the Loan and cure the defaults that they unilaterally read into the Balance Statement despite the Balance Statement explicitly stating it did not amend, modify, cure, or waive any existing default under the Loan.”

Related posts.

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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.


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 citeWilmington 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.

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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.