NOTICES OF DEFAULT: WHO SHOULD SEND THE LETTER?
February 13, 2007
Loan documents often require the commercial lending institution to provide written notice (a letter) to the borrower before initiating foreclosure or lien enforcement proceedings. Some of our clients have wondered whether, in Indiana, the default letter can come from outside counsel. In my view, an effective notice can come from counsel. But, if the borrower has its own lawyer, the letter probably should come directly from the lender.
Is notice required? To my knowledge, there is no common law rule or statutory requirement that the borrower receive notice and an opportunity to cure. (The UCC, Article 9.1, has a notice provision in Part 6 “Default,” but the notice requirements apply only to the disposition of collateral after default.) Indeed there are loan documents that do not contain notice provisions, in which case the lender can immediately file suit upon default. On the other hand, if there is a notice clause, basic contract law dictates that notice be sent. Usually, notice to the borrower must come from the lender and must be sent to a specific person at a specific address. The best way to ensure effective notice is to do exactly what the parties agreed to do in the written contract(s).
Problem #1 – effective notice. The common question is whether outside counsel can send the letter on the lender’s behalf. Sometimes it makes practical sense for outside counsel to do so, and I believe this is the routine practice for many Indiana lawyers. Default notice letters sent by outside counsel raise two potential problems, however. The first relates to the effectiveness of the letter. A literal reading of most loan documents state that notice must come from the lender, not from a lawyer on the lender’s behalf. A creative advocate for the defaulting party may argue such notice is invalid. To my knowledge, there is no Indiana case speaking to this specific question. But I think most if not all judges would conclude that notice from outside counsel is effective because the lawyer is a representative of the lender. More importantly, the borrower got the letter. Who sent the letter, it seems to me, is a distinction without a difference.
Problem #2 – ethics. The second and perhaps greater problem, at least for the lender’s attorney, surrounds the ethics of writing to the client of another attorney. The issue is governed by the Indiana Supreme Court’s Rules of Professional Conduct, which regulate the practices of Indiana attorneys. Rule 4.2 “Communication with person represented by counsel” states:
In representing a client, a lawyer shall not communicate about the
subject of the representation with a person the lawyer knows to be
represented by another lawyer in the matter, unless the lawyer has
the consent of the other lawyer or is authorized by law or a court order.
The purpose of Rule 4.2 relates to protections against “overreaching by other lawyers” . . . “interference by those lawyers with the client-lawyer relationship” . . . and “the uncounseled disclosure of information relating to the representation.” (See, Official Comments). Assuming the default notice letter is a standard, straight forward and to-the-point communication, the spirit of the rule, in my view, is not being violated. This is particularly true if lender’s counsel “carbon copies” the borrower’s attorney on the letter, so that the borrower’s attorney has actual knowledge that the letter has been sent and can counsel his or her client accordingly. Having said that, it’s my understanding that some Indiana lawyers disapprove of this practice and assert it is an ethical violation. I concede there is a decent argument the practice technically violates Rule 4.2.
Safety first. Despite what I understand to be a relatively common practice, the more prudent approach is for default letters to come from the lender, not lender’s counsel, unless the borrower is unrepresented. This technique will avoid conflict with the opposing party that could result in ill-will, which in turn could hamper settlement discussions or, more importantly, drive up legal fees associated with a fight. Keep in mind that the letter still can be drafted by outside counsel. It just needs to be signed in-house and on the lender’s stationery. I therefore recommend that, in Indiana, commercial lending institutions declaring a default should (1) follow the explicit notice instructions in the operative loan documents and (2) have any required default letter come from the lender, not outside counsel, in the event the borrower is represented by an attorney.