With Affidavits Of Debt, Remain Mindful Of The Evidentiary Requirements

Yesterday's MarketWatch.com had an article concerning "the growing controversy about so-called 'robo-signers' in the foreclosure process, during which staffers sign thousands of mortgage-related documents a month."  Here's a link to the story:   "Robo-signer" controversy spreads . 

One lesson here for secured lenders and their lawyers is to follow the rules of procedure and ensure, among other things, that those who sign affidavits in support of motions for summary judgment have the requisite personal knowledge of the facts and/or that they have reviewed and, as needed, attached records of regularly-conducted business activities in support of the facts.  See, Indiana Rules of Evidence 602 and 803(6).

WSJ.Com: Banks Keep Failing, No End In Sight

From yesterday's online Wall Street Journal:  Since WaMu fell, 279 lenders have collapsed; lost jobs, curtailed lending and the big get bigger.

Credit Card Debt's 6-Year Statute Of Limitations Held To Commence When Account Due

Quickly, and noting this is off topic, I wanted to post about the Indiana Court of Appeals' decision in Smithner v. Asset Acceptance, 2010 Ind. App. LEXIS 4 (.pdf) in which the Court granted summary judgment in favor of the defendant/borrower based upon the running of the six-year statute of limitations.  As outlined here, promissory notes also involve a six-year limitations period, but the Court in Smithner concluded that a credit card account is an "open account" governed by Ind. Code 34-11-2-7(1) that deals with "actions on accounts and contracts not in writing."  This distinction affects the date upon which the statute is triggered. 

Generally, "the date the account is due" is when the statute of limitations commences for an action on an open account.  In Smithner, the borrower last made a payment on 2-9-2000, and the plaintiff/lender requested a minimum payment on the account by 3-11-2000.  The borrower never made another payment.  Because the Court considered the statute to have begun running either on the date of the last payment or the date the next payment was due, the lender's suit filed 5-30-2006 was beyond the six-year deadline and thus time-barred.  Please review the decision for possible exceptions to the rule or facts that could affect the relevant dates, however.     

Strict Foreclosure Unavailable Once Foreclosing Mortgagee Transfers Property To Third Party

Last year, in the wake of the Indiana Court of Appeals’ opinions in Deutsche Bank v. Mark Dill Plumbing, I described in four separate posts on April 17, April 24, May 4 and July 20, 2009 what happens if your title company or your foreclosure lawyer misses a junior lien in the lawsuit to enforce your mortgage.  Deutsche Bank did not definitively answer the question raised in my April 24th post, namely what happens if the foreclosing lender conveys the property before clearing title.  The federal court decision in Brightwell v. United States of America, 805 F.Supp. 1464 (S.D. Ind. 1992) dealt with that very issue, but not until the 2010 decision in Citizens State Bank of New Castle v. Countrywide Home Loans, 922 N.E.2d 655 (Ind. Ct. App. 2010) (.pdf) did Indiana formally adopted the Brightwell analysis. 

Order of events.  Here’s what happened in Citizens State Bank:

04/27/05: Lender obtained mortgage.
06/09/06: Money judgment entered against owners; Judgment Creditor perfected judgment lien on property.
08/28/06: Lender filed complaint to foreclose mortgage but did not name Judgment Creditor in action.
10/30/06: Lender obtained foreclosure judgment without terminating Judgment Creditor’s lien.
02/22/07: Lender obtained title to property at sheriff’s sale.
03/15/07: Lender recorded sheriff’s deed.
05/03/07: Lender transferred title to property to Federal National Mortgage Association (FNMA).
10/02/07: Upon learning of prior judgment lien, Lender filed complaint against Judgment Creditor for strict foreclosure.

Initially, no merger.  Citing to and following Deutsche Bank, the Court in Citizens State Bank concluded that Lender’s mortgage lien and title to the property did not merge when Lender acquired the property through the sheriff’s sale.  At that point, Lender’s mortgage lien had been preserved.  Unlike Deutsche Bank, however, Lender took the additional step, before clearing title, of transferring the property to FNMA, a third party. 

Applying Brightwell.  Indiana’s anti-merger rule benefits only the foreclosing mortgagee:   

By transferring the property to FNMA, [Lender] has already had “first crack” at a full recovery ahead of any junior lien holders . . . and the purpose of the anti-merger rule has been satisfied.  After the transfer to FNMA, [Lender] no longer had any interest in the property to protect, and there was no basis for its mortgage-assertion right to pass to FNMA.

The Court declared that Lender’s right to assert the mortgage against the Judgment Creditor was extinguished upon subsequent transfer of the property to FNMA.  As such, the third party, FNMA, took the property subject to the valid judgment lien. 

Message.  The Court, in footnote 4, echoed a theme from all of my 2009 posts on Deutsche Bank regarding the importance of obtaining appropriate title work before, during and after the foreclosure process:

We feel compelled to state the obvious.  All of this could have been avoided had [Lender] conducted a thorough title search of the property prior to the original foreclosure or had FNMA done the same prior to purchasing the property from [Lender], as such searches surely would have revealed [Judgment Creditor’s] properly recorded judgment lien.  While [Lender] and FNMA fancy these mistakes as “technicalities,” they are significant when applying principles of equity.

NOTE:  On June 29, 2011, the Indiana Supreme Court issued its opinion on transfer in  Citizens State Bank.  Accordingly, please refer to my October 7, 2011 post. 

To Be Enforceable, Promissory Notes Must Be Endorsed And Delivered

As articulated in FH Partners v. Cajbin, 2009 U.S. Dist. LEXIS 109986 (N.D. Ind. 2009) (.pdf), under Indiana law to be an enforceable negotiable instrument, such as a promissory note, it must be validly negotiated.  Representatives of commercial lending institutions and their counsel need to know that both endorsement and delivery must occur for a promissory note to be enforceable. 

The situation.  The loan at issue in FH Partners was pretty standard.  It involved a 1999 promissory note, a mortgage and personal guaranties.  The twist surrounded a Chapter 11 bankruptcy filing by the borrower/mortgagor and specifically an effort to renegotiate the underlying promissory note in 2007, after approval of the bankruptcy reorganization plan.  Counsel for the lender sent a new promissory note and mortgage to counsel for the borrower, and requested that the documents be executed and delivered back.  Evidently the borrower may have signed the promissory note, but the note was never delivered back to the lender.  The lender/mortgagee ultimately sued to enforce the original (1999) loan.  

The defense.  In response to the lender’s motion for summary judgment, the defendants (borrower/mortgagor and guarantors) contended that the suit was based upon the wrong debt instrument.  Specifically, the defendants asserted that the 2007 proposed promissory note served to extinguish the 1999 promissory note, as well as the individual guaranties of that note. 

Enforceability of note.  Magistrate Judge Nuechterlein of the Northern District of Indiana found the defendants’ arguments to be “unpersuasive.”  In Indiana, to have an enforceable negotiable instrument, “there must be a valid negotiation.”  The Court noted that a valid negotiation is a “two-step process” that “requires the endorsement and the delivery of the instrument.”  Ind. Code § 26-1-3.1-201. 

Applying the legal principles.  It was undisputed in FH Partners that the 2007 promissory note was never returned to the lender/mortgagee.  “This undisputed fact is fatal to the defendants’ argument.”  Although the 2007 proposed promissory note may have been signed and thus validly endorsed, the defendants offered no evidence to establish that the note was transferred to the lender/mortgagee.  As such, the note was not properly negotiated between the parties and thus was not enforceable.

Novation.  A similar, alternative legal theory asserted by the defendants surrounded the defense of “novation.”  The defendants claimed that the failed attempt to renegotiate the original promissory note amounted to a novation.  But, “to have a novation there must be a valid new contract which extinguishes the old contract.”  In FH Partners, the Court found that there was no new contract between the parties, so “obviously [there] could be no novation.”  The defendants failed to complete the necessary conditions of the proposed new note, and those failures “precluded the formation of a new contract.” 

Judgment for lender.  The defendants in FH Partners argued that they entered into a subsequent, valid and enforceable promissory note that resulted in their release from the original loan obligations.  Normally cases like these surround the lender’s contention that a particular promissory note is valid and enforceable.  Here, the lender succeeded by taking the opposite position for purposes of enforcing a prior loan.  The Court granted the lender/mortgagee’s motion for summary judgment on all counts.

One thing secured lenders can take away from the FH Partners case is to be careful when entering into negotiations to restructure debt.  For example, as I’ve posted here before, certain steps must be undertaken to avoid unwittingly releasing a guarantor from his or her obligations.  In FH Partners, the lender/mortgagee helped to protect itself by utilizing a transmittal letter of the 2007 proposed promissory note, which letter requested that the documents be executed, notarized and delivered back to it.  Those preconditions were not met.  For those and other reasons, the alleged replacement promissory note was neither valid nor enforceable.

Judgment Lien And Mortgage Lien Governed By Different Statutes Of Limitations

In Welch v. Heavelin, 2009 Ind. App. LEXIS 2518 (Ind. Ct. App. 2009) (.pdf) , mortgagor tried to defeat mortgagees’ foreclosure action by asserting the ten-year judgment lien statute of limitations defense.  The Indiana Court of Appeals rejected the mortgagor’s position and explained that the mortgagees sought to enforce a mortgage lien not a judgment lien.   

Creation of lien.  Husband and Wife were divorced in 1993.  In the divorce decree, the court awarded Husband certain real estate but required Husband to pay Wife money.  Husband’s payment obligation was secured by a mortgage on the real estate.  Husband/mortgagor did not pay the monetary obligation called for under the divorce decree, but Wife never enforced the mortgage.  She passed away in 2003, and her heirs were assigned the mortgage and therefore became the mortgagees.  They filed a foreclosure action in 2008, fifteen years after the creation of the mortgage. 

Mortgagor’s defense.  Husband/mortgagor, based upon Ind. Code § 34-55-9-2, claimed that the foreclosure action was time-barred because the lien expired after ten years, or in 2003.  The Court noted, however, that I.C. § 34-55-9-2 applies only to judgment liens or, more specifically, lien created by judgments for the recovery of money.  I wrote about this ten-year judgment lien statute on November 13, 2008. The mortgagees did not sue to foreclose a judgment lien.  They sued to foreclose the mortgage lien.   The statute upon which Husband/mortgagor relied therefore did not apply. 

Mortgage lien statute of limitations.  The Court concluded that the mortgagees’ foreclosure action was not time-barred because the mortgage was filed within twenty years of the creation of the mortgage lien.  The Court cited to I.C. § 32-28-4-1 for the proposition that an action to foreclose a mortgage made to secure payment of money is controlled by a twenty-year statute:

(b)  An action may not be brought or maintained in the courts of Indiana to foreclose a mortgage . . . if the last installment of the debt secured by the mortgage . . . as shown by the record of the mortgage . . . has been due more than ten (10) years.  However, a lien or mortgage described in this section that was created before September 1, 1982, expires twenty (20) years after the time the last installment becomes due, and an action may not be brought to foreclose the mortgage . . . when the last installment has been due more than twenty (20) years.

20 years?  Given the nature of the lien, the Court correctly relied upon I.C. § 32-28-4-1.  But, I’ve been unable to reconcile the Court’s conclusion with the statute’s clear language regarding a ten-year limitations period.  The mortgage in Welch was created after September 1, 1982 (December, 1993 to be exact).  The twenty-year limitations period is limited to mortgages created before September 1, 1982.   

What’s missing?  I do not intend to be critical or otherwise disrespectful to the Court.  Perhaps the opinion does not fully articulate all of the relevant facts, which is not unusual.  For example, the specific terms of the subject mortgage, including when (or whether) the last installment of the debt secured by the mortgage was due, are variables in I.C. § 32-28-4-1(b) not addressed in the opinion.  With the help of my colleague Blaire Henley, the only explanation I’ve been able to come up with relates to Section 2 of I.C. § 32-28-4, which states in relevant part:

if the record of a mortgage or lien . . . does not show when the debt or the last installment of the debt secured by the mortgage or lien becomes due, the mortgage or vendor’s lien expires twenty (20) years after the date on which the mortgage or lien is executed.

Application of I.C.§ 32-28-4-2 gets the Court to the twenty-year limitations period and thus justifies the Court’s ruling in favor of the mortgagees.  (Section 2 was not cited in the opinion, however.)  Please post a comment, e-mail me or call me if you have any knowledge about the Welch case specifically or the Court’s treatment of these statutes generally.  Also, for more on statutes of limitations, please refer to my March 9, 2009 post.  

For purposes of this post, it is important to understand that Indiana has statutes of limitation applicable to many different causes of action, and the limitation periods can be different.  In Welch, the Court properly articulated that the statute of limitations for a mortgage lien suit may be different than a suit based upon a judgment lien.  Although matters like those in Welch will rarely arise in a commercial mortgage foreclosures, secured lenders and their counsel still need to be acquainted with some of these issues, particularly to the extent priority disputes may arise.