The Washington Post has an article today debunking the notion that it's better for lenders to modify distressed loans than to foreclose: Numbers Work Against Governmental Efforts To Help Homeowners. I'm not sure I agree, but the detailed story provides some interesting insights. Even though the article focuses on residential/consumer cases, the principles and analysis have at least some application to the commercial arena.
I recently posted three articles about Indiana's strict foreclosure remedy in the wake of the Court of Appeals' March 25, 2009 opinion in Deutche Bank v. Mark Dill Plumbing, 2009 Ind. App. LEXIS 524: Part I, Part II and Part III. On July 14th, the Court, on rehearing, clarified its earlier opinion and, by doing so, spelled out what should happen when a secured lender's title company or counsel misses a perfected junior lien in the process of foreclosing a senior mortgage. Here's a .pdf of the new opinion. We now know that, in most cases, the error will not be fatal.
Priority. With respect to the order of priority for payment among the parties on remand (when the case gets back to the trial court for further handling), the Court relied on the Brightwell decision about which I wrote in Part II. The Court agreed with Deutche Bank that a merger of the mortgage with title, which extinguishes the mortgage lien, did not occur upon the bank's purchase of the property at the prior foreclosure sale. Thus the bank's first lien is preserved, and there is no leapfrog in priority by the junior lienors, which is something that initially concerned me upon first reading the March 25th opinion. Significantly, the Court held that, "on remand, Deutsche Bank and the three junior lien holders remain in the priority positions they had before the first sheriff's sale."
Remedy. The second matter clarified by the Court concerned the trial court's options as to how to clear title to the real estate. The Court left to the trial court "the decision whether to order another sheriff's sale or provide another remedy equitable to the parties." As such, there could be a second sheriff's sale of the property, although that could prove to be costly, in terms of both time and expense. Deutche Bank wanted the Court to explain to the trial court that it could order the junior lienors to redeem the real estate from the bank rather than order another sheriff's sale. The Court granted Deutche Bank's wish: "The [trial court] could ... simply give the junior lien holders an opportunity to purchase the property from Deutche Bank...." Basically, there could be (and probably will be) a decree entered by the trial court requiring the junior lienors to either pay the bank to "redeem" the property or lose their liens. This seems to be the cheaper and faster way to solve the problem.
Payment amount. The Court stated that, if the trial court decides to offer the junior lienors an opportunity to redeem, "the amount a junior lien holder should be required to pay is the 'full amount payable under the mortgage,' not the amount of the foreclosure judgment and not the amount the mortgagee bid at the first sheriff's sale." This would include attorney fees, unpaid principal and interest. While I understand and agree that the redemption amount should not be the purchase price paid at the first sheriff's sale, I'm somewhat confused as to why the amount would not be the same as the foreclosure judgment, which includes such things as unpaid principal, interest and attorney fees. I suppose there could be situations when the judgment will not include all items recoverable under the mortgage, and perhaps the Court simply wanted to be clear. But in most cases, I think the amount of the foreclosure judgment and the redemption amount should be the same, unless I'm missing something. (Please email or comment.)
RIP, strict foreclosure. "With these clarifications," the Court ultimately affirmed its original opinion. The Court left no doubt that it was "denying Deutche Bank's request to simply remove the liens of the junior lien holders from Deutche Bank's title to the property." For that reason, my view is that the remedy of strict foreclosure as we knew it is dead. Senior (first) mortgagees still have a remedy, but labeling it "strict foreclosure" (to the extent labels matter) may be inaccurate, as the Court outlined in its original opinion. The two Deutche Bank opinions from the Indiana Court of Appeals seem to tell us that, if a junior lien was overlooked, then the remedy is to file a suit to quiet title, which will provide the junior lien holder an opportunity to redeem its lien and acquire the property. Only after the junior lien holder fails to redeem will its lien be extinguished from title.
But let us not forget the larger lesson of Deutche Bank: when secured lenders and their counsel foreclose a mortgage in Indiana, be sure to order a title insurance policy commitment, order a date down (update) of the commitment through the date of the filing of the complaint and purchase the owner's policy after acquiring title at the sheriff's sale. If you do these things, then the negative consequences associated with missing junior liens primarily will be the title company's problem, not yours.
(I'd like to thank Dean Leazenby, an attorney in Elkhart and periodic reader of my blog, who first alerted me to both Deutche Bank opinions shortly after the Court issued them. Indianapolis attorney John Carr also has contributed to the discussion, and I've appreciated his emails.)
"Owners of shopping malls, hotels and offices are defaulting on their loans at an alarming rate, and the commercial real estate market is not expected to hit bottom for three more years, industry experts warned Thursday." Click here for the rest of the article dated July 9.
If you're looking for an illustration of Indiana's fraudulent transfer laws in action, pull out a pen and a notepad, set aside thirty minutes and study Judge Miller's opinion in Boyer v. Crown Stock Distribution, 2009 U.S. LEXIS 12393 (N.D. Ind. 2009) (.pdf). The February 17, 2009 decision is too involved for me to summarize in a single post, or even two. Nevertheless, the case is worth mentioning, in this abbreviated fashion, in the event readers are contemplating the pursuit of an Indiana fraudulent transfer claim.
Boyer is a forty-page opinion that dissects a $3.3MM sale of Crown Stock's assets. Judge Miller, of Indiana's Northern District, affirms the bankruptcy court's October, 2006 decision, which avoided the transaction as fraudulent and required the defendant transferees to return the value of the property transferred. The opinion discusses Indiana's Uniform Fraudulent Transfer Act (UFTA), including specifically Ind. Code 32-18-2-14 and 15. The Court's analysis, in part, deals with whether the asset sale should have been treated as a leveraged buyout and collapsed. In addition, the Court evaluates the good faith transferee defense found in I.C. 32-18-2-18(b).
When (if) you read the opinion, you'll see how fact sensitive the dispute is, as may often be the case with fraudulent transfer claims. The litigation (a bankruptcy adversary proceeding), which began in March of 2004, resulted in a nine-day trial and an appeal to district court. Part of the case involved the assessment of expert testimony and related issues. It's my understanding Judge Miller's ruling is being appealed to the 7th Circuit Court of Appeals. The case is now in its sixth year. One of the things that struck me while reading the decision was just how complicated, expensive and time consuming these UFTA matters can be.