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Indiana Equitable Subrogation: Beyond Lien Priority

Equitable subrogation law, as it relates to mortgage foreclosure actions, continues to evolve in Indiana.  On April 28th, the Court of Appeals issued Neu v. Gibson, 2009 Ind. App. LEXIS 746 (Ind. Ct. App. 2009) (.pdf).  The 2009 opinion follows the May 30, 2007 opinion from the same case, about which I posted on June 21, 2007.  The latest decision educates secured lenders on the amount of, and ability to enforce, an equitable subrogation lien.  The case specifically addresses whether interest/attorney’s fees can be recovered as a part of the lien and whether the lien holder is entitled to a sheriff’s sale.

Who was involved and when. 

Irwin – In 2004, Irwin loaned $507k to Nowak, which loan was secured by a first mortgage on Nowak’s residence.

Nowak – Later in 2004, Nowak bought Gibson’s business with a $350k promissory note, secured by a second mortgage on Nowak’s residence. 

Gibson – Second mortgagee on Nowak’s residence. 

Neu – In 2005, Neu purchased Nowak’s residence, without Gibson’s knowledge, for $595k; Neu borrowed $200k from Wells Fargo, secured by a mortgage, and used $395K of Neu’s own money.  The transaction resulted in the pay off of the Irwin mortgage. 

Wells Fargo – Made a $200k mortgage loan to Neu used to buy Nowak’s residence and to pay off the Irwin mortgage.

The problem.  In 2005, Nowak defaulted on the promissory note and mortgage granted to Gibson.  A few months later, Nowak filed bankruptcy.  So, Gibson’s only source of recovery was the Nowak real estate.  But the title company, in connection with the 2005 Nowak/Neu closing, missed Gibson’s second mortgage.  My June 21, 2007 post talks about the Court’s previous ruling that Gibson’s mortgage was subordinate to the equitable lien of Neu and Wells Fargo.  While the 2007 Neu v. Gibson opinion dealt with priority, the 2009 appeal involved the remedies available to an equitable lien holder.  Neu and Wells Fargo filed a motion to establish the amount of their equitable lien and to sell the real estate by sheriff’s sale to satisfy their lien. 

Fees.  Neu and Wells Fargo contended that they should be able to recover, as part of their equitable subrogation lien, interest and attorney’s fees.  Remember the Irwin mortgage had been paid in full and discharged.  “Thus, any default under the Irwin mortgage by Nowak was cured when Nowak repaid the loan from Irwin in full in connection with the sale to [Neu].”  Wells Fargo, as the new lender, was subrogated to the lien of the Irwin mortgage “only as security for Wells Fargo’s debt owed by [Neu] and not as security for the debt owed by Nowak . . ..”  Because neither Neu nor Wells Fargo succeeded to the contractual rights of the Irwin mortgage, they were not entitled to interest or attorney’s fees stemming from the Irwin mortgage.  It stands to reason that late charges and other contractually-based damages also would not be recoverable.

Interest.  The Court denied the attorney’s fees claim and the claim for mortgage interest. Nevertheless, the Court concluded that some interest can be recovered, which should be calculated on the post-judgment statutory rate (generally, 8%) “from the date of their payoff of the Irwin Mortgage.”  See, 12/18/07 post

Sheriff’s Sale.  Neu and Wells Fargo asserted that they should be permitted to request a sheriff’s sale of the real estate, and they cited to Indiana’s quiet title statute, Ind. Code § 32-30-2-20.  The Court concluded that Neu and Wells Fargo were indeed permitted to request a sheriff’s sale to enforce their equitable lien.  A sheriff’s sale likely would extinguish Gibson’s mortgage lien and net no proceeds for Gibson.  Rightly or wrongly, the two Neu v. Gibson opinions cut severely against the financial interests of junior mortgagees overlooked by title companies upon refinancing or a subsequent sale. 

The Neu case helps teach us about the rights and remedies of a party holding an equitable subrogation lien.  Although issues involving equitable subrogation are relatively rare in the commercial foreclosure context, secured lenders and their counsel practicing in Indiana certainly should be aware that the doctrine exists. 

White Goes On Trial In Fraud Case

It's been over a year since I posted about the demise of local real estate developer Chris White.  Since then, Mr. White has filed a Chapter 7 bankrupcty case, and this week he's on trial for check kiting.  The alleged victim is locally-owned National Bank of Indianapolis.  Click here for a link to today's story in The Indianapolis Star, and click here for the article from the IBJ.

Guilty:  Star - IBJ.

New Marion County (Indianapolis) Sheriff's Sale Requirements

This post will supplement the following, prior posts related to Indiana sheriff's sales, including specifically sales in Indianapolis, Marion County:  "(Tax) Lessons Learned from Marion County, Indiana Sheriff's Sale" and "Recording Deeds in Indiana: Don't Forget the Sales Disclosure Form" (Part I and Part II.) 

Effective August 1, 2009, the Marion County Sheriff's Department has revised some of its sale requirements, which you can review by clicking here.  After speaking to the department's staff yesterday, in connection with a sale next week, the following appear to be the most significant changes:

  1. County Fees:  The winning bidder must tender checks payable to the county auditor and recorder for the fees associated with filing the sheriff's deed and the sales disclosure form.  It appears that, going forward, the sheriff's office will take the lead with processing these documents through the various county offices.  Before August 1st, lender's counsel would receive the deed and the sales disclosure form from the sheriff, after the sale, and then process those documents themselves.
  2. Taxes:  If the plaintiff/judgment holder (usually the senior mortgagee/lender) wants to bid, it must pay, in advance, any delinquent real estate taxes and submit written verification of such payment to the sheriff prior to bidding.  Before August 1st, bidders were only required to tender a check to the sheriff, which check would only be submitted to the treasurer if the bidder acquired the property.
  3. Assignments:  If the bidder received an assignment of the judgment, then a file-marked copy of the assignment of judgment (a/k/a notice of assignment of judgment) must be tendered to the sheriff before the assignee can bid.  (We attach the notice as an exhibit to the written bid form that we submit to the sheriff's staff the day before the sale.)  Before August 1st, the sheriff did not routinely or expressly require this documentation.

If you have any questions about items 1-3, I recommend that you call the sheriff's department at either 317-327-2450 or 317-327-2459.  Pam and Tammy can be reached at those numbers, and they have always been very helpful, patient and cooperative.  For more about Marion County sheriff's sales, you can click on its website here.  The sale rules identified on that website can be accessed by clicking here

Indiana Guaranties Enforced In Note/Renewal Context

As previously posted here, there can be obstacles, under Indiana law, to obtaining a quick and inexpensive judgment against a guarantor.  Fortunately for lenders, on April 30, 2009 the Indiana Court of Appeals decided TW General Contracting Services v. First Farmers Bank and Trust, 2009 Ind. App. LEXIS 735 (Ind. Ct. App. 2009) (.pdf), which should help in overcoming some of those obstacles.

The players.  TW General Contracting involved the standard cast of characters in a commercial loan:  a lender, a borrower and a handful of guarantors.  The guarantors argued that their initial personal guaranties should not apply to the subsequent promissory notes. 

The loans and renewals.  Here is a summary of the relevant loan transactions with the borrower:

 05/11/05 Note #1 delivered; guarantors each signed a guaranty

 06/13/06 Note #1 renewed by Note #2

 03/06/07 New Note (#3) delivered

 06/01/07 New Note (#4) delivered; Note #1 renewed by Note #5

 09/21/07 Note #1 renewed by Note #6

The lawsuit against the borrower and the guarantors concerned defaults on three notes – Note #6 (renewal of Note #1), Note #3 (new note) and Note #4 (another new note).  Guaranties were only signed in connection with Note #1, however, back on May 11, 2005.

Material alteration?  In the plaintiff lender’s motion for summary judgment, the defendant guarantors asserted that the execution of the three new notes materially altered the guaranties and, as such, the lender’s claims had no merit.  For more about the “material alteration” defense, please click on my prior posts of 01/10/09 and 03/23/07.  In support of their theory, the guarantors submitted an affidavit from one of the guarantors stating/contending:

 ● The guarantor did not intend to personally guarantee the new notes.
 ● The new notes were unrelated to the 2005 obligations.
 ● The guarantor informed the lender that the new notes were for an independen project and that he would not personally guarantee the 2007 loans.
 ● The guarantor did not intend or contemplate that the 2005 guaranties would be applicable to the subsequent notes.
 ● The loans of 2005 had been satisfied and the accounts closed.
 ● It was the guarantor’s understanding that personally guaranteeing further loans would require the signing of a new guaranty.
 ● The new notes were not within the scope of what was contemplated by the guaranties when they were executed.
 ● The guarantor never consented to guaranteeing the new notes and was never given any consideration for doing so.

In short, the guarantors argued that “material alterations as a result of [Notes #6, #3 and #4] were not within their contemplation when they executed the guaranties.”  The Court of Appeals, in a pro-lender opinion, slammed the door shut on the guarantors.

Language fatal.  In its detailed and thoughtful opinion, the Court sliced and diced the language in various provisions in the guaranties.  The terms showed the guarantors “entered into unmistakable, very expansive guaranties to ‘induce’ the Lender to make loans to [borrower], the S-Corporation in which they are sole shareholders.”  The subsequent notes were signed by at least one of the four guarantors, albeit in their corporate (not individual) capacity.  “As such, the additional obligations to [borrower], and in turn the Guarantors, could not have come as a complete surprise . . ..”  The Court of Appeals was emphatic in its decision: 

  pursuant to the clear, extremely global language of the Guaranties,
  these additional obligations could hardly be characterized as
  material alterations but rather as a logical continuation of the
  mutually beneficial lender-borrower-guarantor arrangement.

Bullet dodged.  The circumstances in TW General Contracting were not unique.  These renewal/new note scenarios, which rely on prior guaranties, are out there.  Fortunately for lenders, the Court of Appeals’ opinion in TW General Contracting establishes strong legal precedent enabling lenders to overcome the “material alteration” defense.  Perhaps not all guaranties will have such definitive language, but the case’s fundamental holding should be of great help to lenders in their motions for summary judgment.

Even though the Court of Appeals affirmed the trial court’s summary judgment in favor of the lender, it is still advisable, when renewing notes or making subsequent notes, to have a new guaranty signed or at least to have a signed document (our firm uses a “Consent and Confirmation of Guaranty”) acknowledging that the prior guaranty remains in force.