Commercial mortgage lenders should remain mindful that Indiana is a judicial foreclosure state. Essentially, this means that the foreclosure of a mortgage and corresponding sale of the real estate must occur within the court system, which includes the filing of a lawsuit, the rendering of a foreclosure decree by a judge and the auctioning of the property by a sheriff. In Winforge v. Coachmen, 2008 U.S. Dist. LEXIS 66250 (S.D. Ind. 2008) (Winforge.pdf), an Indiana court permitted a non-judicial foreclosure. How? The mortgaged property was in Tennessee.
Improper foreclosure? The Winforge suit surrounded “a botched business venture involving the development and construction of a hotel in Pigeon Forge, Tennessee.” The borrower defaulted on a promissory note and a security agreement, so the lender declared the note to be immediately due and payable and sought to sell the Tennessee property. The borrower filed suit in Indiana on a variety of claims, one of which was in essence to block the Tennessee foreclosure. The borrower claimed that the lender failed to properly commence foreclosure proceedings in accordance with Indiana law “when it scheduled the real estate for public sale without first filing a complaint commencing a foreclosure proceeding.”
Statutes. By Indiana statute, including specifically Ind. Code § 32-29-7-3, a party must judicially foreclose on a mortgage executed on real estate. The lender contended that it was not required to judicially foreclose on the property, despite I.C. § 32-29-7-3, because Tennessee law, not Indiana law, governed the foreclosure sale. Tennessee permits non-judicial foreclosures. T.C.A. § 35-5-501.
Loan documents. The loan documents stated that they were to be construed and enforced in accordance with Indiana law. They contained a forum selection clause, which stated that “any action or proceeding concerning this Agreement or the other Loan Documents or the enforcement thereof shall be commenced in the United States District Court for the Southern District of Indiana, and such court shall have the sole and exclusive jurisdiction over any such proceeding.” There was no question, therefore, that the case belonged in Indiana and that Indiana law applied to the litigation.
Parties’ positions. The borrower asserted that lender’s foreclosure was an “action or proceeding” as contemplated by the loan documents and therefore should have been pursued in Indiana. The lender claimed it was clear that the term “action or proceeding” referred solely to a “lawsuit or judicial proceeding” and not to a foreclosure sale. The lender argued it was not required to file any lawsuit or judicial proceeding in order to foreclose “because Tennessee law permits a non-judicial foreclosure.” In further support of its position, the lender cited to case law holding that the method for foreclosure of mortgages “is governed by the local law where the real estate is located, regardless of mortgage provisions choosing foreign law.”
Lender prevails. Judge Barker sided with the lender, concluding:
It is clear to us from the context of the clause that [the terms “action or proceeding”] denote only that any lawsuit or judicial complaint brought needs to be brought in the courts of this district. However, we do not, as [borrowers] do, read this language to create an obligation for [lender] to bring a complaint in this district prior to foreclosure if it is not otherwise required to bring such a complaint – and [borrowers] do not dispute that Tennessee law, which governs the foreclosure sale, does not so require.
While the lawsuit to litigate the terms and conditions of the loan documents had to be brought in Indiana, one of the remedies allowed by the loan documents (the foreclosure sale) was governed by Tennessee law. The fact that the property was in Tennessee seemed to be critical to the outcome. It makes sense to have Tennessee’s rules govern the conveyance of the property, not Indiana’s, so the rules and procedures could be enforced, as needed, by Tennessee officials.
Winforge limited. One of the points of this post is to remind readers that Indiana is a judicial foreclosure state and to provide a link to I.C. § 32-29-7-3, which in part outlines Indiana’s judicial sale process. The second point is to show that, with certain contract language and under very limited circumstances, an Indiana-based case could result in a non-judicial foreclosure sale in another state. Having said that, in my view, Winforge does not mean that lenders can contractually circumvent Indiana’s judicial process concerning property located in Indiana. I.C. § 32-29-7-3 should preempt any contract provision stating that a lender, upon default, can foreclose its mortgage on Indiana real estate outside of the court system. When I see such provisions in loan documents, I tell my lender clients that we still must proceed to suit and follow the process through a sheriff’s sale.