Unsigned Cross-Collateralization Agreement Unenforceable In Recent Case
2010 Indiana State Foreclosure-Related Legislation: HB 1122

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subject loan (Loan 1) for ten years and was prepared to pay off Loan 1 until the lender, citing to the cross-guaranty, rescinded a previously-submitted payoff statement.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.