No Answer To Complaint = No Lien On Property

My June 18 post theorized that summary judgment may be preferable to a default judgment in commercial foreclosure proceedings.  The May 23 decision by the Court of Appeals in Irmscher Suppliers v. Capital Crossing, 887 N.E.2d 97 (Ind. Ct. App. 2008) (Irmscher.pdf) supports the notion that an Ind. Trial Rule 56 motion for summary judgment is appropriate against a party eligible to be defaulted.  Specifically, Irmscher illustrates how a competing lien holder’s failure to answer another lien holder’s complaint can result in a summary judgment that negates the competing lien. 

Capital Crossing’s complaint.  Irmscher, a contractor, recorded a mechanic’s lien on the subject property on September 25, 2006.  Capital Crossing, a mortgage lender, recorded a mortgage lien on the subject property on March 6, 2006.  Part of the Court’s opinion deals with the fact that Irmscher and Capital Crossing had each filed their own foreclosure lawsuits within a few weeks of one another.  That procedural wrangling is not particularly relevant to this blog, however.  What is relevant is that, in the suit filed by Capital Crossing, Capital Crossing named Irmscher as a defendant to answer as to its interest in the real estate.  Because Capital Crossing recorded its mortgage before Irmscher recorded its mechanic’s lien, Capital Crossing alleged that the mechanic’s lien was subject and subordinate to the mortgage.  (That may or may not be true – see my July 3, 2007 post “Construction Mortgage vs. Mechanic’s Lien:  Win, Lose or Draw?” and my follow-up post “Lien Priority Follow-up:  The Operative Statutes.”  As you’ll see, we’ll never know who was right in Irmscher.) 

Irmscher’s response, or lack thereof.  Counsel for Irmscher appeared in Capital Crossing’s foreclosure case, but Irmscher never filed an answer to the complaint.  Capital Crossing filed a motion for summary judgment seeking, among other things, a determination that its mortgage lien was a first lien on the subject real estate.  (This is the tactic discussed in my June 18 post.)  Although Irmscher filed a brief in opposition to the motion and a designation of evidence, the Court did not address any evidence in the opinion.  The Court merely mentioned Irmscher’s statement in its brief that the case should be decided in the separate foreclosure action filed by Irmscher.  In any event, counsel for Irmscher did not appear at the hearing on Capital Crossing’s summary judgment motion.  The trial court entered a judgment of foreclosure and decree of sale, finding that Irmscher had no interest in the subject property.  Irmscher appealed. 

Silence equals admission.  On appeal, Irmscher contended that the trial court erred when it found Irmscher had no interest in the real estate.  No so fast, said the Court of Appeals:  “Irmscher did not file an answer to Capital Crossing’s amended complaint and therefore admitted, at the very least, to the superiority of Capital Crossing’s mortgage.”  The Court cited an Indiana Supreme Court decision from 1886:

As applicable however, to a suit to foreclose a mortgage, and other kindred suits in the nature of a proceeding in rem, where a party is made a defendant to answer as to his supposed or possible, but unknown or undefined, interest in the property, we think that, as against him, a default ought to be construed as an admission that, at the time he failed to appear as required, he had no interest in the property in question, and hence as conclusive of any prior claim of interest or title adverse to the plaintiff. 

Ouch.  When a plaintiff lien holder files an action and asserts facts placing the validity, priority and amount of a mortgage lien in issue, a named defendant must file an answer to assert whatever interest it has in the property.  If it fails to do so, the lien of the defendant will be extinguished as a matter of law.  In Irmscher, the Court of Appeals held “in this case, although Irmscher’s counsel entered an appearance, Irmscher failed to file an answer asserting whatever interest it had in the property.  As such, we conclude that the trial court did not err in finding that Irmscher had no interest in the property.” 

Today’s lesson.  The Irmscher opinion is useful to both junior and senior lenders.  If you have a junior lien and are named as a defendant in a senior lien holder’s lawsuit, you need to appear in the action and answer the complaint to assert your interest in the subject real estate.  If you don’t, you can kiss your lien goodbye.  On the flip side, in instances where a defendant has not answered the complaint, senior lien holders involved in Indiana enforcement actions can cite to Irmscher in their summary judgment briefs to persuade the trial court that the defendant’s lien should be extinguished as a matter of law.

Comments Now Welcomed

I've decided after over 1 1/2 years of publishing this blog to try the "Comments" option TypePad offers.  Starting with the recent Premier Properties/Chris White post, readers can click on the "Comments" link at the bottom and provide feedback, etc. on the subject at hand.  I'm hopeful this will be interesting for secured lenders and counsel who regularly read my blog or others who stumble upon it through an internet search.  I'll test this for a period of time and see how it goes.  As always, I welcome your emails, and now look forward to reader's comments....   

In Indiana, A Summary Judgment Is Preferable To A Default Judgment

There are occasions when a defendant does not appear in a lien enforcement lawsuit or otherwise timely respond to the complaint.  Many of us intuitively consider the next step to be an application for default judgment pursuant to Indiana Trial Rule 55.  Recently, my colleague Chris Jacobson and I discussed the benefits of foregoing a T.R. 55 motion and proceeding directly with a T.R. 56 motion for summary judgment.  Secured lenders and their counsel should consider this approach in Indiana matters.

Is it proper?  The first question is whether a plaintiff can file a motion for summary judgment before an answer, or even an appearance, has been filed by a defendant.  The answer appears to be yes.  T.R. 56(A) states that “a  party seeking to recover upon a claim . . . may, at any time after the expiration of twenty (20) days from the commencement of the action . . . move . . . for summary judgment in his favor upon all or any part thereof.”  (Under T.R. 3, an action is commenced by the filing of a complaint, by paying the filing fee and by furnishing the clerk with the required copies of the complaint and summons.)  Nothing in T.R. 56 (or T.R. 55) suggests that a motion for summary judgment cannot be utilized when an application for default judgment could be.  Case law supports the notion that a T.R. 56 motion is appropriate against a party eligible to be defaulted.  Anderson v. The Broadmoor Corporation, 363 N.E.2d 1042 (Ind. Ct. App. 1977); see also, Royalty Vans v. Hill Brothers, 605 N.E.2d 1217, 1219 (Ind. Ct. App. 1993):

[Defendant] very well might have been vulnerable to the entry of a default judgment in this case . . . ..  However, the court clearly acted pursuant to [Plaintiff’s] motion for summary judgment and entered judgment only after [Plaintiff] had met its burden of demonstrating that there was no genuine issue of material fact for trial.

Is it better?  Applying for a default judgment is fairly quick and easy, and courts essentially focus only on whether there has been good service of process and whether the defendant has failed to timely respond to the complaint.  It’s sort of a technical knockout.  (See my post, “What If A Borrower Ignores A Lender’s Foreclosure Suit?”)  A summary judgment, while a bit more labor intensive to obtain, provides a more definitive result.  The court’s decision is on the merits.  The court in Anderson, 363 N.E.2d at 294-95 noted, for example:

A summary judgment qualifies as a final judgment and a trial court may award “the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in his pleadings.”  A T.R. 55 judgment is limited to the amount prayed for in the pleadings.   

In addition, Indiana courts are geared toward setting aside default judgments.  T.R. 55 has a specific subsection about setting aside a default and specifically refers to T.R. 60(B).  T.R. 60(B) also applies to summary judgments, but the cases we’ve reviewed show quite clearly that setting aside a summary judgment is a more difficult proposition.  Furthermore, Indiana has specific legal policies stating that default judgments are not favored.  There is a strong judicial preference for deciding cases on their merits and for giving litigants their day in court.  Summary judgments tend to meet those standards.  Default judgments tend not to.

Is notice documented?  An important matter, implicit in the Anderson opinion, is to prove that the defendant had notice of the summary judgment proceedings.  In instances of unrepresented parties, one way to do this is to provide the party, by certified mail, with copies of the motion and any order setting the matter for hearing.  (A hearing is not mandated by T.R. 56, unless a party requests one, but it is fairly common for Indiana trial courts to hold a hearing.)  Lender’s counsel then can attach the letter(s), with the certified mail return receipt(s), to an affidavit for submission to the court.  If the plaintiff can show that the defendant had actual notice of the proceedings, but failed to take any action, then such proof reduces dramatically the chances of setting aside the judgment in the trial court or overturning the judgment on appeal.  Conversely, the easiest way for a defendant to get a second chance is to convince a court that it did not know about a motion or a hearing. 

Think MSJ.  There is no right or wrong answer to the question of whether to pursue relief through a default judgment or a summary judgment.  The circumstances of the particular case should guide the decision.  A T.R. 55 default judgment arguably can occur more quickly and with less expense.  Having said that, a summary judgment, as opposed to default judgment, should result in more conclusive, definitive relief that is less prone to being set aside on technical grounds.  In such cases, the defendant’s recourse may be limited to an appeal, which should be futile if the undisputed facts and the law support the judgment.  Ultimately, my advice for secured lenders and their counsel is to bypass a default and to seek a summary judgment.  (For more on summary judgments in the foreclosure context, please see my post, “Motion For Summary What?”)

I would like to thank my colleague Chris Jacobson for her thoughts on this issue, and I would like to credit our summer associate, Julia Bochnowski, for assisting me with the research for this post, particularly while I was on vacation last week. 

Indiana Banks, As Garnishee Defendants, Need Not Restrict Withdrawal Of Subsequently-Deposited Funds

From time to time, the enforcement of secured loans will evolve into the collection of  deficiency judgments.  One of the available collection tools is a garnishment order.  The Indiana Court of Appeals in JPMorgan Chase v. Brown, 2008 Ind. App. LEXIS 1029 (Ind. Ct. App. 2008) (Chase.pdf) recently interpreted Ind. Code § 28-9-4-2 and addressed the question of whether a depository financial institution, which has received notice of garnishment proceedings, is required to restrict withdrawal of funds that are subsequently deposited into the account.  Surprisingly, the answer is no.

What happened.  Collection agency filed a motion for proceedings supplemental naming Chase as a garnishee defendant and asserting that Chase possessed deposit accounts in which the defendant/judgment debtor had an interest.  (A “garnishee” essentially is an entity, like a bank, that has money in its possession belonging to a defendant.)  In answers to interrogatories, Chase confirmed that the judgment debtor maintained an account with the bank that had a balance, as of March 5, 2007, of $20.61.  Furthermore, the bank confirmed that it immediately restricted the withdrawal of those funds.  Later, the judgment debtor made four deposits totaling over $1,000 to the account.  Because the collection agency sought about $2,200, the court signed an order requiring Chase to pay over to the clerk approximately $2,200 from the account.  Chase did not do so, however, and only restricted the account balance of $20.61.  The trial court thereafter found Chase in contempt and entered a judgment against Chase for $1,045.99, the balance of the account that included the subsequent deposits.  

Chase’s position.  On appeal, Chase argued that it only was required to restrict withdrawal of funds “in an amount equal to the balance of  [judgment debtor’s] account at the time [Chase] received notice of the garnishment proceedings.”  Chase based its contention on a 1998 amendment to the operative statute.

The statute.  I.C. § 28-9-4-2 provides in part that a depository financial institution shall restrict deposit account withdrawals in an amount equal to “the balance in the account at the time of receipt of the documents in process . . ..”  I.C. § 28-9-4-2(a)(2)(B).  The pre-1998 version of the statute specifically provided for restriction of additional funds “subsequently deposited into” the account.  When the legislature amended the statute, it deleted those words. 

When courts interpret statutes, their goal is to determine and give effect to the intent of the legislature.  In this case, the Court would “not simply re-read language into a statute that the legislature has deleted.”  The Court therefore held:

In light of the legislature’s amendment to I.C. § 28-9-4-2, we agree with [Chase] that the statute only required it to restrict withdrawal of the balance in [judgment debtor’s] account at the time it received the documents and process required by I.C. § 28-9-3-4(d).  The legislature’s decision to omit the words “or subsequently deposited into” from I.C. § 28-9-4-2 is irrefutable and, as required by the rules of statutory construction, we will not reinsert the omitted language into the statute when construing the statute.  Thus, we agree with [Chase] that the trial court erred by finding it in contempt for failing to restrict withdrawal of funds that were subsequently deposited into [judgment debtor’s] account. 

Odd result.  The Indiana Court of Appeals clearly did the right thing in this case.  The question for me is whether Indiana’s General Assembly did the right thing when, in 1998, it deleted from the operative statutory section the words “or subsequently deposited into” from the law.  The statutory amendment means that lenders attempting to collect deficiency judgments through the garnishment of judgment debtors’ bank accounts may need to issue multiple garnishment requests to the same bank.  Otherwise, the bank only is compelled to restrict the withdrawal of funds in the account at the time of a particular request.  While there may have been good reasons for the 1998 statutory amendment, the consequences for debt collectors – whether intended or not – appear to be unfavorable and impractical.