2010 Indiana State Foreclosure-Related Legislation: HB 1122

Unlike last year, Indiana's General Assembly was relatively inactive with regard to debating and enacting mortgage foreclosure-related laws.  It's my understanding that the only bill with any real significance that passed was HB 1122 - Abatement of Vacant or Abandoned Structures.  Here's a .pdf of the House Enrolled Act, signed by Governor Daniels on 3-17-10, that will be effective 7-1-10:  House Enrolled Act No. 1122. 

The legislation, which amends Ind. Code Sections 24-5.5-1-1, 32-29-7-3 and 36-7-9-12, deals mainly with residential/consumer matters.  For more detail, the Indiana Bankers Association provides a nice Bill Summary for your review.  The one development that appears to have some potential impact on commercial matters involves a governmental enforcement authority's ability to praecipe for a sheriff's sale if a judgment creditor has not done so for 180 days after the entry of judgment.  In such a case, the sheriff must then conduct a foreclosure sale within 120 days of the date of the praecipe. 

The primary purpose of this legislation was to combat problems associated with vacant or abandoned houses.  Although technically the rules appear to apply to non-residential cases, given the law's design, coupled with a commercial lender's inherent desire to push foreclosures to sale, as a practical matter the legislation should rarely if ever impact commercial foreclosures.  Please email or post a comment if you have a different take on the new law, thanks. 

Wells Fargo, Part III: Absence Of Loan Default Interferes With Appointment of Receiver

This is the third of three posts about the loan enforcement/receivership-related opinion in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  Today’s edition explores a rare scenario in Indiana when a defendant borrower defeated a plaintiff lender’s motion to appoint a receiver.  The Court of Appeals concluded that, technically, the trial court erred when it denied the receivership, but in the end the error was harmless.

Error.  The lender in Wells Fargo sought the immediate appointment of a receiver.  The trial court denied the motion, and the lender appealed.  On appeal, the lender asserted that it properly met the statutory requirements in I.C. § 32-30-5-1(4) as interpreted by Citizens v. Innsbrook, 833 N.E.2d 1045 (Ind. Ct. App. 2005).  The Court stated:  

Here, it is undisputed that (1) the [real estate] is not occupied by [borrower] as its  principal residence, (2)[borrower] agreed in the Mortgage to the appointment of a receiver in the event of foreclosure proceedings, (3) the [real estate] is a commercial retail complex occupied by tenants who are entitled to possess a portion of the property and who are not liable for the debt secured by the mortgage, and (4) all or any portion of the property is being leased to those tenants.  Pursuant to Subsection 4, therefore, the appointment of a receiver was mandatory.

(See July 25, 2008 post.)  The Court conceded that, pursuant to the receivership statute “the trial court should have granted [the lender’s] motion to appoint a receiver . . ..” 

But . . . The Court’s analysis did not end there.  Critical to the outcome was the unenforceability of the cross-guaranty I discussed last week.  The borrower had made timely payments on the subject loan (Loan 1) for ten years and was prepared to pay off Loan 1 until the lender, citing to the cross-guaranty, rescinded a previously-submitted payoff statement.  Evidently, the lender later refused to accept payment without an accompanying payoff of Loan 2, the alleged cross-collateralized loan that was in default and already had been accelerated. 

An out, maybe.  The Court remanded the case to the trial court with instructions that the lender “provide a reasonable payoff statement within a reasonable period of time to be determined by the trial court and that [the borrower] then be given a reasonable period of time to pay off the mortgage accordingly.”  If the borrower complies with the pay off, then the lender’s foreclosure action will be moot.  If, however, the borrower is unable to comply with the new payoff statement, “then at that point the loan undisputedly would be in default and the trial court would and should appropriately appoint a receiver.”  But at the current stage in the proceedings, “the trial court’s decision to deny the request for receiver was, at most, harmless error.”

Lack of cross-default the key.  The receivership issue in Wells Fargo was rather unique given the facts and circumstances in the case, including the problems with the loan documents and certain pre-suit negotiations.  The case rested on an unenforceable cross-collateral/default agreement, meaning that the loan at the center of the receivership dispute was not in default at the time the foreclosure suit began.  The Court gave the borrower a second chance to pay off the subject loan.  (By then, the loan had matured.)  Assuming a payoff, the lender will not be permitted to foreclose, much less have a receiver appointed.  

Although, in general, appointments of receivers in Indiana commercial mortgage foreclosure cases are mandatory, Wells Fargo provides insight into one of the only ways around that mandatory requirement - if the borrower can convince the trial court that the subject loan is not in default.  Normally, of course, that is a difficult proposition, given that the basic premise of all mortgage foreclosure cases is that the loan is in default.

Unsigned Cross-Collateralization Agreement Unenforceable In Recent Case

This will supplement my April 5, 2010 post regarding Wells Fargo v. Midland.  If you’re a secured lender struggling with cross-defaulted and cross-collateralized loans, hopefully you have fully-signed agreements clearly capturing the intent of the deal.  Wells Fargo shows what might happen if you don’t. 

Cross-collateralization problems.  One of the two loans at issue in Wells Fargo was not in default.  The borrower thus fought the foreclosure action related to the loan that was current.  The question became whether a non-executed draft of a cross-guaranty, which contained cross-default and cross-collateralization provisions, should have been incorporated into the executed loan documents memorializing two loans.  The subject borrower never executed the cross-guaranty.  Despite that fact, the lender sought to establish that an executed mortgage incorporated the cross-guaranty so as to permit the lender to enforce defaults on both loans.   

Statute of Frauds.  If you have ever heard the term “Statute of Frauds” and wondered what it meant in the foreclosure context, Wells Fargo provides guidance.  The applicable statute in this case is I.C. § 32-21-1-1(b).  Generally, contracts subject to this statute “must be in writing and signed by the party against whom enforcement is sought.”  In Wells Fargo, the cross-guaranty in question was subject to the Statute of Frauds because it was “a promise to answer for the debt of another.” 

Exception to statute?  In Indiana, there are limited circumstances in which an unsigned document can satisfy the Statute of Frauds.  A memorandum satisfying the statute may consist of several writings even though only one writing is signed.  The test is:

The signed instrument must so clearly and definitely refer to the unsigned one that by force of the reference the unsigned one becomes a part of the signed instrument.

Thus the question in Wells Fargo was whether the signed mortgage “so clearly and definitely [referred] to the unsigned cross-guaranty that by force of that reference, the cross-guaranty became a part of the mortgage.”  The Court examined the loan documents and ultimately concluded that they did not satisfy the test. 

Lender Liability Act.  The lender in Wells Fargo got creative with a second theory around the Statute of Frauds that focused on Indiana’s Lender Liability Act, about which I wrote on July 11, 2008.  The lender argued that the conclusion not to enforce the cross-guaranty necessarily meant that the original mortgage had been amended.  Because the ILLA provides that a credit agreement may not be amended without a written agreement, the lender asserted that the signed mortgage must control all the material terms and conditions of the loan, including the alleged cross-collateralization term.  (See I.C. § 26-2-9-5).  But the Court rejected the premise that there was a change and/or revision to the mortgage, stating “that the cross-guaranty provision in the mortgage was, essentially, meaningless” from the start:

When the parties either failed to agree upon the terms of a cross-guaranty, or failed to ensure that the final version was executed, their own conduct resulted in a document that contained a provision referring to a document that did not exist.

Get signatures.  The Court stood firm that the unexecuted cross-guaranty did not survive the Statute of Frauds and that the result did not run afoul of the ILLA.  The obvious lesson here is to make sure all the relevant papers memorializing the terms and conditions of a loan are signed by the appropriate parties.  The absence in Wells Fargo of a signed cross-collateralization agreement, which may have been a simple oversight, prevented the lender from fully enforcing rights that even the borrower may have intended to be a part of the deal.

Next week’s post will explain how the lender’s cross-default/cross-collateralization problem complicated its efforts to have a receiver appointed.

WSJ: Foreclosures Hit Rich And Famous

Here's an article of some interest from today's on-line Wall Street Journal:  some Friday reading .  My follow-up post on the Wells Fargo case should be up early next week.

Receiver Not Authorized To Sell Property Without Mortgagor’s Consent

On January 11 and January 20, 2010, I discussed issues related to Indiana receiver sales and some of the unresolved questions under Indiana law.  Shortly thereafter, the Indiana Court of Appeals definitively answered one of those questions in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  The opinion provides that the trial court erred in a mortgage foreclosure case when it gave the receiver the authority to sell the subject real estate at a private sale without the mortgagor’s consent.

Backdrop.  Lender/mortgagee Wells Fargo filed a commercial mortgage foreclosure suit against borrower/mortgagee Tippecanoe.  Wells Fargo promptly filed a motion for the appointment of a receiver, and the order granting the motion provided that the receiver had the power to sell the subject real estate at a private sale without Tippecanoe’s consent. 

Operative statutes.  The Court first noted that the general receivership statute provides “a non-exhaustive list of the powers” a court may grant to a receiver at Ind. Code § 32-30-5-7(5).  Among other things, “the receiver may, under the control of the court or the judge:  (5) sell property . . . in the receiver’s own name . . ..”  The Court next cited to a “more specific statute” governing receiverships in mortgage foreclosure actions that articulates the receiver’s role more narrowly and, significantly, “does not include the right to sell the mortgaged property at a private sale.”  See, I.C. § 32-29-7-11(a).  The Court concluded that the latter statute carried more weight because it was a more specific statute pertaining to the subject of mortgage foreclosures. 

Stripping the right of redemption.  The Court then considered Indiana’s statutory right of redemption at I.C. § 32-29-7-7.  The Court proclaimed that “every defendant in a mortgage foreclosure action has the right to redeem its property by paying off the amount due at any time before the property is sold at a sheriff’s sale.”  Tippecanoe asserted that the trial court’s authorization of the receiver to sell the subject real estate at a private sale, without Tippecanoe’s consent and before the sheriff’s sale, “stripped Tippecanoe of its statutory right of redemption.”  The Court agreed.

The only “sale” contemplated by the statutes governing receiverships over mortgage[d] property is a sheriff’s sale.  I.C. § § 32-29-7-3, -4, -7, -8, -9, -10.  Thus, all property owners are entitled to redeem their property up to the date on which their property is sold by the sheriff.  See also I.C. § 32-29-1-3 (prohibiting a mortgage instrument from authorizing the mortgagee—i.e., the bank—from selling the mortgaged property); Ellsworth v. Homemakers Fin. Serv., Inc., 424 N.E.2d 166, 169 (Ind. Ct. App. 1981) (holding that “[a] mortgagee is not permitted to sell mortgaged premises, but such sale shall be made by judicial proceeding” and that “[t]he judgment of foreclosure shall order the mortgaged premises sold by the sheriff”).  It must be true, therefore, that any receiver charged with preserving and maintaining mortgaged property must do so through the date of the sheriff’s sale and may not sell the real property prior to that time without the owner’s consent.  By giving the receiver herein the authority to sell the Tippecanoe property prior to a sheriff’s sale and without Tippecanoe’s consent, the trial court stripped Tippecanoe of its statutory right of redemption.

Waiver?  The primary contention of Wells Fargo on appeal was that Tippecanoe previously waived its right of redemption in the mortgage, which indeed contained a waiver clause.  The argument failed, however, because Tippecanoe executed the waiver before the default occurred.  Pursuant to Indiana cases, the waiver could not be enforced. 

Going forward.  The Wells Fargo opinion definitively answers the question of whether the receiver, in a mortgage foreclosure case and at the request of the plaintiff mortgagee, can sell the property if the owner/borrower/mortgagor contests the sale.  The decision does not, however, conclusively resolve the issue of whether the receiver can sell the property when other parties, such as junior mortgagees or mechanic’s lien holders, object.  One could argue that the Court’s rationale supports the notion that the consent of all parties may be required for a receiver’s sale to happen.  I’ll continue to monitor the cases to see whether anything else develops in this area. 

Wells Fargo addresses a handful of other important issues that are useful for commercial mortgage lenders and their foreclosure counsel.  Next week’s post will discuss those points.  This week’s lesson is that a lender cannot force a receiver’s sale over the objection of a borrower.  Mortgagees and receivers need the mortgagor’s consent.