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Alleged Oral Release Of Mortgage Rejected

In Yoost v. Zalcberg, 2010 Ind. App. LEXIS 632 (Ind. Ct. App. 2010) (.pdf) , the Indiana Court of Appeals addressed the issue of whether an alleged oral release of a mortgage was enforceable.  At issue was Indiana’s Statute of Frauds, a subject I covered on April 16, 2010.  There are a handful of exceptions to the Statute of Frauds, and the Court in Yoost discussed one of them – the doctrine of promissory estoppel.  As explained, oral releases from loan documents are very difficult to uphold.   

Backdrop.  In Yoost, the defendant (Yoost) was the plaintiff’s (Zalcberg’s) paid personal assistant.  Zalcberg agreed to lend money to Yoost to buy a house, and the parties executed a note and a mortgage.  Yoost defaulted but claimed Zalcberg had orally agreed to release Yoost from the mortgage.  Yoost continued to work for Zalcberg for another year in reliance on the alleged oral release. 

Statute of Frauds.  The first step in the Court’s analysis was to examine Indiana’s Statute of Frauds, specifically Ind. Code § 32-21-1-1(b):

A person may not bring any of the following actions unless the promise, contract, or agreement on which the action is based, or a memorandum or note describing the promises, contract, or agreement on which the action is based, is in writing and signed by the party against whom the action is brought or by the party’s authorized agent:

(4)  An action involving any contract for the sale of land.

Promissory estoppel exception.  Yoost conceded that the alleged promise (release) was in contravention of the Statute of Frauds.  The question was whether the doctrine of promissory estoppel removed the alleged release from the writing requirement.  A party seeking to preclude application of the Statute of Frauds based on this doctrine must establish:

1. a promise by the promisor;
2. made with the expectation that the promisee will rely on the promise;
3. that induces reasonable reliance by the promisee;
4. of a definite and substantial nature; and
5. that injustice can be avoided only by enforcement of the promise.

Yoost cited to an Indiana Supreme Court opinion expanding on this concept:

in order to establish an estoppel to remove the case from the operation of the Statute of Frauds, the party must show that the other party’s refusal to carry out the terms of the agreement has resulted not merely in a denial of the rights which the agreement was intended to confer, but the infliction of an unjust and unconscionable injury and loss.

Thus, to prevail on a claim of promissory estoppel, a party must establish that there is a genuine issue of material fact that his reliance injury is not only (1) independent from the benefit of the bargain and the resulting incidental expenses and inconvenience, but also (2) so substantial as to constitute an unjust and unconscionable injury.

No independent reliance injury.  Yoost asserted that he suffered the required “independent reliance injury” by continuing to work for over a year at an extremely low rate of pay in reliance on the alleged oral release of mortgage.  But the Court found “nothing about [Zalcberg’s] alleged oral promise substantially changed either party’s behavior.”  The Court saw no inconvenience to Yoost, much less any unjust and unconscionable injury. 

Borrowers in Indiana will have a difficult time overcoming the Statute of Frauds, as well as the Lender Liability Act about which I posted on October 29, 2010, December 31, 2008, and July 11, 2008Yoost is more good precedent for creditors.  Courts generally focus on the written terms of the agreement and do not unravel loan documents absent written, signed representations to the contrary. 

"Lease" Held To Be A Lease, Not Seller Financing

This follows-up my 11-5-09 post Indiana Court of Appeals Tackles True Lease Vs. Secured Loan Question.  Last year, the Court of Appeals addressed the same issue in a different context in Gibralter Financial v. Prestige Equipment, 2010 Ind. App. LEXIS 626 (Ind. Ct. App. 2010) (.pdf).  If you're an asset-based lender struggling with understanding your rights under a written agreement named a "lease," which may have been intended to be a secured loan, Gibralter is a nice Indiana opinion that outlines some of the key issues for consideration. 

Big picture.  The dispute in Gibralter boiled down to whether the subject transaction was a financed sale or a lease.  At stake was ownership of a quarter million dollar punch press.  If the Court deemed the transaction to be a lease, as opposed to a sale, then the lessor/alleged seller retained ownership of the punch press. 

Legal test.  The case actually involved Colorado law, but it appears Indiana's UCC provisions are similar to Colorado's, so the legal analysis essentially is the same.  The key statute is Ind. Code 26-1-1-210(37), including specifically subsection (b).  These cases involve a two-pronged test:

  1. whether the right to possession and use is subject to termination by the lessee;
  2. whether the lessee had an option to become the owner for "nominal additional consideration" once the lease was paid.

If the answer to question 1 is "yes," then the analysis ends because the subject document will be considered a lease.  If the answer is "no," then question 2 must also be answered.  If the answer to question 2 is "yes," then the document/transaction will be considered a security agreement/sale.  On the other hand, if the answer to question 2 is "no," then the document will be considered a lease

Test results.  Reading a legal test is one thing, but understanding it is another.  Illustrations help, which is why I always attach .pdf's of the legal opinions to my posts.  Gibralter explains in detail why the lessor (alleged seller) prevailed on its contention that this was a lease transaction.  As to question 1, the Court stated that, for a lease to be terminable, "the lessee must have the right to cease payments and walk away from the lease without further future financial responsibility to the lessor."  In Gibralter, no such right existed, so the Court turned to question 2.  The Court's discussion of question 2 was quite involved and dealt with an examination of such things as the lessee's costs and payments, as well as the value of the punch press.  There are a couple of sub-tests that deal with this issue, including the "FMV Standard" and the "Option Price/Performance Cost Test."  Read the decision for more.  In the end, the Court concluded that, given all the facts and circumstances, "Key retained a meaningful residuary interest and that the Lease was merely a lease." 

In the final analysis, the Court held that Key (the lessor/ alleged seller) was the owner of the punch press.  Any lenders reading this post should remain mindful of these tests and to structure their transactions accordingly, depending upon whether they intend for them to be a true lease versus a secured loan.    

Note:  The Indiana Supreme Court has reversed the Court of Appeals, as outlined in my July 1, 2011 post