Indiana UCC Internet Sale and Deficiency Judgment Upheld

If you are chasing a deficiency owed under a personal guaranty, and if the guarantor is contesting collection efforts based upon either a failure to conduct a UCC sale in a commercially reasonable fashion and/or a failure to provide adequate notice of the sale, then the Indiana Court of Appeals’ recent decision in Moore v. Wells Fargo Construction, 2009 Ind. App. LEXIS 732 (.pdf) may help tackle the issue.  In Moore, the Court affirmed the trial court’s judgment against a personal guarantor and ruled favorably for the creditor/secured lender on the UCC-related issues. 

Backdrop.  In 2000, a mining corporation received financing for an excavator through plaintiff lender for about $550,000.  In return for the financing, the principals of the mining corporation, including defendant Moore, personally guaranteed the indebtedness.  The written guaranty included the following waiver language:

Each of us waives . . . the failure to notify any of us of the disposition of any property securing the obligations of [mining corporation] the commercial reasonableness of such disposition or the impairment, however caused, of the value of such property. . . .

Mining corporation defaulted on the loan in 2003, and lender took possession of the excavator.  The lender ultimately disposed of the excavator through a sale, which left a balance (deficiency) of about $250,000.  The lawsuit surrounded the lender’s collection of the deficiency from Moore.  The parties tried the case to the judge, who ruled in favor of the lender.  The guarantor appealed.

Commercial reasonableness of sale.  Moore’s first contention on appeal was that the sale of the excavator was not conducted in a commercially reasonable fashion, as required by Indiana Code § 26-1-9.1-1-610(b).  The lender, in response, pointed to the above-quoted waiver language in the guaranty.  Without ever addressing whether the sale actually met the commercially reasonable standard, the Court concluded:

We agree with Moore that § 26-1-9.1-610 requires sales such as the instant one to be commercially reasonable.  But the plain language of the Guaranty shows that Moore intended to waive any claim regarding the commercial reasonableness of the sale of the Excavator.  Thus, under the Guaranty, Moore has waived that claim.

In this case, the written instrument trumped the statutory requirement. 

Notice of sale.  Moore’s second contention on appeal was that the lender failed to provide the appropriate notice.  The Court’s analysis concerned I.C. §§ 26-1-9.1-611 and 613, which govern the notification required before a secured creditor may sell certain loan collateral.  In Moore, the lender sold the excavator through an internet auction website, and Moore’s legal attacks focused on notice technicalities about the “location for the sale.”  Indeed, the operative statutes require that notices state the “time and place of a public disposition.”  The lender’s notification identified its intent to sell the excavator in a public auction over the internet, which notice listed the date and web address for the auction and the physical address of the auction company.  While the Court conceded that “an internet auction has no physical location and is not a situs in the traditional sense,” the notice in question “adequately apprised Moore where the auction would be held, allowing him to monitor or even participate in the auction.”  The Court concluded that the lender satisfied the location requirements of I.C. § 26-1-9.1-613(1)(E). 

The Moore case reminds us that clear and unambiguous waiver language in written contracts (in this case, a guaranty) can help control the outcome a secured lender seeks.  Moore offers nothing terribly new in that regard.  Moore is, however, fairly unique in its analysis of the notice issues surrounding internet-based disposition of the loan collateral.  The Indiana Court of Appeals took what appears to be a practical and appropriate approach to applying Indiana’s UCC to the realities of today’s world.

IndyStar: Receivers for Apartments

Today's Indianapolis Star has an insightful article about property manager Buckingham's recent involvement as a receiver in several lawsuits to foreclose on loans secured by apartment property.  Here's a link:  When apartments fail Buckingham Cos. gets a call.  The Star highlights some of the practical (and challenging) aspects associated with the job   

2009 Indiana State Legislation - One Foreclosure Bill

The June edition of Hoosier Banker, published by the Indiana Bankers Association, has a really good article entitled "Wrap-up of 2009 Legislative Session" written by Amber Van Til, VP-Governmental Relations, and Dax Denton, AVP-Governmental Relations.  In the article, they address the Indiana General Assembly's 2009 banking-related bills, and Indiana's passage of three bills dealing with depositories.  Despite all the recent negative publicity involving lenders and several legislators' efforts to pass multiple mortgage and foreclosure-related bills in 2009 (click for example), only one bill passed that directly affects mortgage foreclosures, Senate Bill 492:  click here for a digest of the bill and click here for a .pdf of the enacted statutory changes.   

SB 492 will be effective June 30, 2009.  The legislation is not unlike the mediation-related procedural rules recently adopted by the Marion County (Indianapolis) court system, about which I wrote on March 15, 2009.  SB 492 creates the opportunity for non-binding settlement conferences between lenders and borrowers, and various notices must be sent and filed before the lender can proceed with the foreclosure suit.  Significant to the primary readers of this site, lenders/plaintiffs are not required to send the notices mandated by the bill if "the loan is secured by a dwelling that is not the debtor's primary residence...."  In other words, like the Marion County scheme, commercial foreclosures are excluded from the new statute.  

Candidly, I'm not entirely clear at this time the full extent of the similarities and differences between the new Marion County procedural rules and the state-wide legislation.  For now, lawyers and parties involved in Marion County residential foreclosures, filed after June 30th, should study and remain mindful of the new rules/laws from both governing bodies.  If anyone reading this can shed light on the matter for us, please comment here or email me, thanks.    

Homeowner's Associations, Like Lenders, Can Foreclose Too

I was out last week with the family and will post on a recent Indiana commercial foreclosure case shortly.  In the meantime, though a bit off topic, I thought my readers might find this story from MSNBC interesting:  Strapped Owners Behind On Association Dues Face Losing Their Homes.  Incidentally, it's my understanding that, in Indiana, a lien generated out of delinquent HOA dues generally will be subordinate to a mortgage lien.  

BFP Defense Denied, And IRS Lien Prioritized

Last week’s post dealt with the successful application of the bona fide purchaser (“BFP”) doctrine in connection with the Kumar case.  This week’s post illustrates the opposite result, rendered by U.S. District Court Judge Barker in CitiMortgage, Inc. v. Sprigler, 2009 U.S. Dist LEXIS 27866 (S.D. Ind. 2009) (CitiMortgage.pdf).  Among other things, CitiMortgage shows secured lenders that, in Indiana, a recorded mortgage runs with the land and should be enforceable regardless of any subsequent transfers of the real estate.  The opinion also generally addresses the relative priorities of mortgage liens and IRS liens. 

What happened.  Borrowers signed a $300,000 promissory note and executed a mortgage on the subject real estate to secure the note.  The lender recorded the mortgage on April 2, 2002.  The borrowers later conveyed the property by warranty deed for “the sum of One Dollar ($1) and other good and valuable consideration” to Sprigler (a relative), who recorded the deed on November 30, 2005.  Sprigler did not assume the mortgage in the transaction.  The borrowers failed to make payments and therefore defaulted under the note and mortgage.  The default prompted the lender to initiate the mortgage foreclosure case. 

BFP?  My May 27 post outlines the elements of the bona fide purchaser doctrine, which Sprigler used to oppose the lender’s motion for summary judgment in CitiMortgage.  Sprigler contended that he “took in good faith believing that the real estate was being conveyed to him free and clear of all liens.” 

As the Indiana Court of Appeals did in Kumar, Judge Barker in CitiMortgage turned to Ind. Code § 32-21-4-1, which she labeled the “Race-Notice Statute.”  In Indiana, the question of priority as it relates to a good faith purchaser generally is governed by that statute.  Unlike in Kumar, the BFP defense didn’t fly in CitiMortgage.

“Race-Notice” statutes give all parties an incentive to record their interests in the subject property.  Under the Indiana statute, a subsequent purchaser (Sprigler) cannot obtain priority if he knew about the mortgage to the first mortgage holder (CitiMortgage), or if he lost the “race” to record his interest.  In the case at bar, Sprigler claims that he did not know about CitiMortgage’s mortgage.  While this may be true, the facts clearly demonstrate that he lost the race to record.  CitiMortgage recorded its mortgage on April 2, 2002.  Under Indiana’s Race-Notice statute, Sprigler was constructively on notice of CitiMortgage’s interest when he recorded his interest on November 30, 2005.  Thus, CitiMortgage’s interest has priority over Sprigler’s interest, and CitiMortgage is entitled to summary judgment.

Mortgagee protected.  In Kumar, there was no notice due the failure to timely record a tax deed.  In CitiMortgage, there was notice because the lender properly and timely recorded its mortgage.  One of Kumar’s lessons was “don’t forget to record the deed.”  One of CitiMortgage’s lessons is “don’t forget to record the mortgage.”  Although not expressed in the CitiMortgage opinion, clearly Sprigler failed to search title before acquiring the real estate.  The lender adequately protected itself by recording its mortgage.  Had it failed to do so, the BFP doctrine may have negated the mortgagee’s interest in the property. 

IRS lien.  As an aside, the United States of America had interests in the property arising out of IRS liens and thus was named as a defendant in the case.  The IRS filed notices of liens beginning on March 17, 2004, after the lender recorded its mortgage on April 2, 2002.  In response to the lender’s summary judgment motion, the United States sought the recognition of its liens and their priorities.  Specifically, a foreclosure decree must spell out the right of redemption of the United States contained in 28 U.S.C. § 2410(c).  Pursuant to Indiana’s recording statute, a/k/a the race-notice statute, the IRS lien interests have priority “according to the time of the filing thereof.”   Because the lender’s mortgage interest had first priority in the property, the liens of the United States were subordinate.  However, per § 2410(c), the United States retained a right of redemption for 120 days from the sheriff’s sale.  For more on liens of the United States, study 28 U.S.C. § 2410.