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.


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.

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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:

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.