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Continuing Legal Education Opportunity

Here's a link to an electronic version of the brochure for a seminar at which I'm scheduled to present in Indianapolis on March 11, 2009:  http://www.nbi-sems.com/Enbi/Brochurepdfs/47948.pdf.  It's a National Business Institute program entitled "Real Estate Foreclosure:  A Step-By-Step Workshop." I'm providing a legislative and case law update, as well as a walk-through of the steps for an Indiana foreclosure.  Please join us if you're interested. 

I'm working on a new post and hope to have it up over the weekend or Monday. 

MSNBC: Potential Foreclosure Tactic

MSNBC picked up an AP story on February 17th - New Foreclosure Defense:  Prove I Owe You, which is similar my 2007 post From The New York Times: "Foreclosures Hit A Snag For Lenders".  The issue surrounds borrowers' challenges to the evidence, or lack thereof, submitted by lenders in support of their residential foreclosure cases. 

In commercial suits, the documentation hurdle addressed in the MSNBC article should rarely be an issue, but there can be lessons learned from the story.  As mentioned in my post The Commercial Lender's 8-Item Care Package For Its Foreclosure Attorney, all loan documents must be provided to counsel for submission to court:

   Loan documents.  Each and every piece of paper documenting the loan needs to be forwarded.  This would include all promissory notes, mortgages, security agreements, amendments, modifications, assignments, etc.  Not only will the law firm need these materials to analyze the case, but Indiana Trial Rule 9.2(A) requires written instruments, upon which a cause of action is based, to be filed as exhibits to the Complaint.

The MSNBC story seems to suggest that plaintiff/lenders need the original loan documents to proceed with foreclosure.  That's not my experience, but the MSNBC piece doesn't dig too deep into the legal technicalities or provide examples of the court filings being utilized by borrowers in these cases.  It's my understanding that true and accurate copies of loan documents will suffice.  See, Indiana Evidence Rule 1003, which generally permits duplicate documents in lieu of originals.  Also, Trial Rule 9.2(A), noted above, points out when copies are allowed. 

If you're familiar with the details of the strategies identified in the MSNBC article, please give me a call or email.  I'd be interested in learning about the techniques.  If I'm able to uncover more about the issue, I'll supplement this post.  Thanks to my colleague Jamie Young for steering me to the story.

IBJ: Indiana Foreclosure Bill "Stirring Controversy"

Chip Cutter of IBJ's "Real Estate Weekly" writes today:

Real estate industry interests are concerned about a bill making its way through the Indiana General Assembly that would give tenants of residential and commercial property the right to terminate their leases without penalty if a property goes into foreclosure.

The two bills referenced in the IBJ article Foreclosure Bill Stirring Controversy are Senate Bill 225, the source of much consternation for lenders and commercial real estate developers, and House Bill 1081, which may have less of an impact on the industry.  We'll see what happens....    

Indiana Land Contracts and Forfeiture

I understand that commercial lending institutions typically do not get involved in land contracts.  As such, today’s post addressing the Indiana Court of Appeals’ opinion in Hooker v. Norbu, 2008 Ind. App. LEXIS 2566 (Ind. Ct. App. 2008) (Hooker.pdf) is slightly off topic.  Nevertheless, land contracts are a form of real estate financing, and enforcing such contracts could trigger the remedy of foreclosure.  In Hooker, the default under the land contract resulted in a forfeiture.

Land contract, defined.  My trusty Black’s Law Dictionary defines “land contract” as follows:

Contract for the purchase and sale of land upon execution of which title is transferred.  Term commonly refers to an installment contract for the sale of land whereby purchaser (vendee) receives the deed from the owner (vendor) upon payment of final installment.  The vendor retains legal title to the property as security for payment of contract price, while the vendee is said to have equitable title during the term of the agreement.

Unlike the promissory note/mortgage scenario, in which a mortgage creates a lien on property but not title to it, vendors (sellers) in the land contract transaction are the property owners.  See, Indiana Follows The Lien Theory Of Mortgages.

Circumstances.  In Hooker, plaintiff (property owner) and defendants entered into an installment real estate contract for the purchase of restaurant property.  The sale price was $338,000 plus 11.5% interest, which translated to payments of about $3,600 per month.  The defendants had difficulty making payments and, after two years, abandoned the property and returned the keys to the plaintiff.  The plaintiff, in turn, filed a breach of contract claim.  The issue on appeal surrounded how to calculate the plaintiff’s damages.  The specific question was whether the plaintiff could keep the real estate and collect unpaid contract payments for the period that the defendants possessed the premises.

Forfeiture.  The Court in Hooker noted that forfeiture is “the divesture of property without compensation.”  In other words, “forfeiture terminates an existing contract without restitution, while rescission of such contract terminates it with restitution [compensation] and restores the parties to their original status.”  Indiana disfavors forfeitures “because a significant injustice can result.”  See, Land Contract Vendee Defeats Mortgagee’s Foreclosure Case.

The choice.  The Court held that the plaintiff had two options in light of the defendants’ contractual default.  First, he could have proceeded “as though he had a mortgage” by accelerating the land contract and foreclosing (if the defendants were unable to pay the full amount due).  The second option was to pursue the remedy of forfeiture, thereby cancelling the land contract and retaining the payments made by the defendants and the real estate (in addition to recouping any actual damages sustained as a result of the transaction).  Indeed it was undisputed in Hooker that the defendants themselves forfeited by abandoning the property and returning the keys to the plaintiff about two years after the execution of the contract.  By then, the defendants had paid less than one percent of the purchase price.  “Under these circumstances, the Contract and [Indiana Supreme Court] guidelines render forfeiture an appropriate remedy.”

Recovery limited.  The plaintiff sought an additional award of outstanding interest for the time in which the defendants occupied the real estate but neglected to make sufficient payments.  The problem was that the plaintiff “elected to have the Contract forfeited - - cancelled.”  Once he made that decision, he was no longer permitted to enforce the contract.  He was only entitled to receive the defendants’ payments made before their abandonment.  As an aside, the Court suggested that the plaintiff essentially sat on his rights for several months by allowing the defendants to remain in possession of the real estate while in default. The Court did, however, approve of plaintiff’s recovery for actual losses associated with tax payments he was forced to make, personal property taken by the defendants and his attorney’s fees and costs. 

Under the circumstances of Hooker, the Indiana Court of Appeals determined that the owner/vendor elected the remedy of forfeiture rather than foreclosure and therefore was prohibited from recovering the missed contract payments that he conceivably could have recovered had he elected the alternative remedy.  One other lesson from Hooker:  normally the contract language will control the outcome, so you or your lawyer must review the written agreement for additional insight into your remedies. 

No Signatures, No Promissory Notes, No Problem

Has your lending institution lost its promissory note?  Is the defaulting mortgagee claiming she did not sign the mortgage?  As explained in Bonilla v. Commercial Services, 2009 Ind. App. LEXIS 112 (Bonilla.pdf), all may not be lost.

History.  In the mid-1980’s, husband arranged for two loans that were secured by real estate upon which a gasoline service station operated.  The mortgages contained the signatures of both husband and wife as co-mortgagors.  Husband died in 1991.  The mortgagee filed a foreclosure action against wife in 2000.  Wife lost at trial, and appealed.  Her appeal centered on two arguments:  (1) she did not sign the subject mortgages and (2) the plaintiff (mortgagor) failed to produce the underlying promissory notes.

Signatures.  Wife claimed that she adequately established her non-participation in the mortgage executions.  She even submitted handwriting samples to contest the alleged signatures.  The trial court found the samples to “clearly show a distinct difference between the signatures of wife in the exemplars and the purported signature of wife on the mortgages.”  Wife’s purported signatures on the mortgages, however, were notarized, which created a presumption that wife signed them.  Ind. Code § 33-42-2-6 provides that the “official certificate of a notary public, attested by the notary’s seal, is presumptive evidence of the facts stated in cases where, by law, the notary public is authorized to certify the facts.”  The trial court concluded that wife’s evidence was inadequate to rebut the presumption, and the Indiana Court of Appeals affirmed.  Significantly, the trial court found that wife admitted she knew of the debts and of her husband’s unsuccessful attempts to settle them before his death.  Furthermore, she made no effort during any of the intervening twenty years to either set aside the mortgages, to quiet title to the property or to return any of the funds associated with the mortgages.  Finally, wife admitted at trial that she benefited from the funds received from the loans associated with the mortgages. 

Damages.  Wife’s second argument on appeal was that the trial court erred in determining the damages owed.  The mortgages had been submitted into evidence, but the promissory notes were not.  Based upon the Indiana Supreme Court’s decision in Yanoff v. Muncy, 688 N.E.2d 1259 (Ind. 1997) and I.C. § 26-1-3.1-309 "Enforcement of lost, destroyed, or stolen instrument", the notes’ absence was not a bar to recovery.  In Indiana, a plaintiff in a foreclosure action does not necessarily need to produce the promissory note to recover the debt.  The debtor in Yanoff provided testimony of the essential terms of the debt, such as the amount of the original debt, the interest rate, the existence of a mortgage securing the debt, and the schedule of payments.  Such evidence, according to Yanoff, was “enough to prove both the existence of the promissory note underlying the mortgage and its essential terms.” 

In Bonilla, the Court of Appeals found that the record contained undisputed evidence establishing the terms, dates, amounts of, and interest rates on the two mortgages.  Wife also conceded that no payments had been made on the mortgages since they were executed over twenty years ago.  Even though the Court did not have the precise terms of the notes, there was a reasonable inference to draw from the evidence submitted at trial “that the failure to make a single payment on the notes in over twenty years is an event of default.” 

Wife lost the case, even though she presented fairly strong evidence that she did not sign the mortgages and even though the plaintiff mortgagee was unable to produce the promissory notes.  In the end, Indiana law allowed the mortgagee in Bonilla to dodge a bullet.