If your lending institution uses staff lawyers to prosecute mortgage foreclosure actions, you may be interested in the case In Re Waugh, 2009 Bankr. LEXIS 254 (N.D. Ind. 2009) (Waugh.pdf). Waugh touches upon the issue of whether, in Indiana, attorney’s fees can be awarded to a lender when that lender is represented by an in-house, salaried counsel. Unfortunately, the issue remains unresolved.
Lender’s contention. Waugh arises out of a Chapter 13 bankruptcy case, specifically the debtor’s objection to a claim filed by People’s Bank. People’s received a $3,000 attorney fee award in a state court residential foreclosure action. The debtor in the subsequent bankruptcy case objected to the inclusion of the fee award in the bankruptcy claim. People’s reasoned that, although it paid in-house counsel solely on a salary, “time expended in the prosecution of legal matters, and the fees collected, are not irrelevant in determining the salary paid to in-house counsel.” Furthermore, People’s could locate no Indiana cases or statutes prohibiting or limiting the collection of attorney’s fees paid by a mortgagee to salaried, in-house counsel.
Debtor’s contention. The debtor cited a single case, Crum v. AVCO Financial Services, 552 N.E.2d 823 (Ind. Ct. App. 1990), for the proposition that a real estate mortgagee can only collect attorney’s fees if they were actually incurred in the foreclosure proceeding. Bankruptcy judge Lindquist noted in his opinion, however, that Crum did not assist in resolving the Waugh matter because “Crum merely held that when awarding attorney’s fees, the trial court is empowered to exercise its sound discretion.”
Loan docs. As with most (if not all) loan documents, the mortgage in Waugh contained written provisions permitting the recovery of attorney’s fees and litigation costs upon the default by the mortgagor. None of the language, however, specifically referred to in-house counsel or fees/costs associated with salaried personnel. Certainly it was undisputed that the loan documents in Waugh provided for the recovery of reasonable attorney’s fees in the case.
Not this time. Ultimately, the Court in Waugh never reached the issue of whether the attorney fee claim was appropriate. This is because People’s based its claim upon a summary judgment previously entered in the state court foreclosure action, which judgment already provided for the recovery of $3,000 in attorney’s fees. As such, the issue in the bankruptcy case was not whether the attorney’s fee claim was viable, but whether the bankruptcy court should give preclusion effect to the state court summary judgment.
Too late. The Waugh opinion provides a lengthy, technical discussion of the legal doctrines of res judicata (claim preclusion) and collateral estoppel (issue preclusion) and whether a state court judgment entered before the date of the debtor’s petition has preclusive effect regarding issues subsequently raised by the parties in the bankruptcy court. The Court noted that, in Indiana, the entry of summary judgment is a judgment on the merits. The judgment thus barred the bankruptcy objection. The Court had no choice but to overrule the debtor’s objection to People’s claim for $3,000 in attorney’s fees. Although the lender in Waugh won on a technicality, Judge Lindquist expressed that the underlying issue is unsettled:
Without this Court so deciding, the State Court may or may not have erred in awarding attorney’s fees in the sum of $3,000 when counsel for People’s was in-house counsel on a salary….
It’s unclear to me whether, or to what extent, lenders utilize in-house counsel to prosecute commercial foreclosure actions. Those who do should remain mindful that there appears to be a gap in Indiana law as to whether the lender can recover attorney’s fees in a foreclosure case. Perhaps some day there will be a definitive Indiana appellate decision on this issue. If that happens, I will discuss it here.