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In Indiana, Failure To Comply With HUD Servicing Regulations Can Be A Defense To A Foreclosure Action

While not directly applicable to commercial cases, Lacy-McKinney v. Taylor, Bean & Whitaker Mortgage, 937 N.E.2d 853 (Ind. Ct. App. 2010) is worth mentioning here. If you are involved in residential mortgage foreclosures in Indiana, you should be aware of the Lacy-McKinney decision. The case addressed the question of whether a lender/mortgagee’s lack of compliance with federal mortgage servicing responsibilities may be raised as an affirmative defense to the foreclosure of an FHA-insured mortgage.

HUD language. The Lacy-McKinney note and mortgage, which were in default for non-payment, referenced the applicability of HUD regulations to the loan. The terms of the loan documents clearly spelled out that regulations limited the lender’s right to accelerate and foreclose. For example, the borrower claimed that the lender did not satisfy a HUD regulation requiring a face-to-face meeting before the filing of a complaint for foreclosure.

The issue. The main issue in Lacy-McKinney was: are the HUD regulations binding conditions precedent that must be complied with before a lender has the right to foreclose on a HUD-insured mortgage? (Please note that the quarrel over the condition precedent did not affect the validity of the mortgage, but only whether the lender had a right at the time to foreclose on the mortgage.)

First impression. The issue was one of “first impression” in Indiana – meaning that the legal question was entirely novel and could not be governed by any existing Indiana precedent. The opinion thoroughly outlined the background of HUD-insured mortgages and some of the applicable regulations. (Read the opinion for more detail.) The case also discussed other states’ positions on the issue.

Defense recognized. The Court concluded that an affirmative defense should be recognized for non-compliance with HUD regulations under the circumstances:

The above precedents, the language of the HUD regulations, and the public policy of HUD persuade us that the HUD servicing responsibilities at issue in this case are binding conditions precedent that must be complied with before a [lender] has the right to foreclose on a HUD property. As such [borrower] can properly raise as an affirmative defense that [lender] failed to comply with the HUD servicing regulations prior to commencing this foreclosure action.

Summary judgment reversed. The Court went on to hold that the trial court’s summary judgment in favor of the lender should be reversed. “The trial court erred in granting summary judgment in favor of [lender] on its action to foreclose on [borrower’s] HUD-insured mortgage without first determining that [lender] had complied with Subpart C – the conditions precedent to foreclosure.” The Court therefore remanded the case to the trial court for further proceedings – likely a dismissal of the case. Ultimately, the lender in Lacy-McKinney may win the foreclosure war, but the borrower won this battle.

Those who deal in this area, whether they be lenders, borrower or counsel, should be familiar with this case. The loan document provisions and regulations appear to be consistent with 2009 Indiana state and local law developments requiring pre-suit settlement conferences, etc. about which I discussed on March 15, 2009 and June 19, 2009. Depending upon the contents of the loan documents, HUD-related “i’s” need to be dotted and “t’s” need to be crossed before suit can even be filed.

How Long Is Too Long To Wait Before Enforcing A Money Judgment In Indiana?

The question posed in the title of this post is exactly the question stated by the Indiana Court of Appeals in Wilson v. Steward, 937 N.E.2d 826 (Ind. Ct. App. 2010).

Oldie, but a goodie. On July 25, 1989, the Henry Circuit Court held that Father was in contempt for non-payment of child support and ordered that Father pay a lump sum for the arrearage, plus Mother’s attorney fees. Father died in 2009, and an estate was opened in Rush Superior Court. On September 10, 2009, Mother filed a claim against the estate based on the unpaid order from 1989. The estate filed a motion to dismiss and asserted that the claim was barred by statutes of limitations. The trial court denied the motion and awarded Mother the money to which she was entitled over twenty years earlier.

Not child support. The Court of Appeals rejected the idea that the 1989 order was an enforcement of child support obligations, which triggers its own statute of limitations (Ind. Code § 34-11-2-10). If you are a domestic relations lawyer who has stumbled on to my blog, please read the opinion for more on that subject.

Money judgment. The Court held that the Indiana code sections dealing with the enforcement of money judgments applied. “Mother’s claim against the estate is an attempt to enforce the 1989 judgment . . ..” The issue was whether I.C. § 34-11-2-12 barred Mother’s claim. I touched upon this matter in my 2008 post “Time Limitations Upon The Enforcement Of Non-Indiana Judgments In Indiana.” The statute reads: “Every judgment and decree of any court of record of the United States, of Indiana, or of any other state shall be considered satisfied after the expiration of twenty (20) years.”

Unique statute. The Wilson opinion noted that I.C. § 34-11-2-12 contains “unique phraseology” that “sets it apart from all other statutes of limitation listed in Indiana Code Chapter 34-11-2.” In reality, the twenty-year statute is not a statute of limitations but “a rule of evidence that creates a rebuttable presumption.” This means:

A judgment that is less than twenty years old constitutes prima facie proof of a valid and subsisting claim, whereas a judgment that is over twenty years old stands discredited, with the lapse of time constituting prima facie proof of payment. Thus, the party seeking to avail itself of the presumption of satisfaction of a judgment after twenty years have passed must plead payment.

(Prima facie is defined as “a fact presumed to be true unless disproved by some evidence to the contrary.”)

Applying the statute. In Wilson, Mother filed her claim to enforce the 1989 money judgment six weeks after the twenty-year period expired. At the trial court’s hearing in 2010, Mother provided testimony that the 1989 judgment had not been paid. Moreover, the record was devoid of any evidence from the estate asserting payment. The Court of Appeals concluded that “the evidence was sufficient to overcome the presumption of satisfaction of the judgment.” Accordingly, I.C. § 34-11-2-12 did not bar Mother’s claim against the estate.

No absolute bar. Wilson illustrates that Section 12 does not set an outer limit of twenty years on the validity and enforceability of a money judgment. In other words, Section 12 does not constitute an absolute bar to recovery. Rather, it is a rule of evidence creating a rebuttable presumption of satisfaction (payment) by the lapse of time (twenty years). If there is proof of non-payment, particularly in the absence of any proof of payment, then judgments can be enforced outside of the twenty-year period. How long is too long to wait before enforcing a money judgment in Indiana? According to Wilson, it may never be too late, even if the judgment debtor is dead!

Contempt Powers Unavailable To Enforce Payment Of A Civil Judgment In Indiana

In 2007, I wrote that “Jail Time Is Not An Available Remedy In Collection Actions In Indiana.” That principle is alive and well in Indiana as explained by the Indiana Court of Appeals in Carter v. Grace Whitney Properties, 2010 Ind. App. LEXIS 2172. Perhaps to the chagrin of lenders who want paid, when it comes to judgment enforcement, Indiana places certain limits on how far courts can go.

The history. The plaintiff obtained a money judgment against the defendant and filed proceedings supplemental. The court ordered the defendant to make periodic payments to satisfy the judgment. Presumably because the defendant failed to make payments, the plaintiff filed, on at least twelve occasions over a five-year period, “informations for contempt” against the defendant. At one point, the plaintiff convinced the court to sentence the defendant to thirty days in jail, although the court later expunged the sentence. After some procedural maneuvering by the parties and the court, the court entered a modified order – coined a “personal order of garnishment” – to compel the defendant to make payments. The defendant appealed that order.

“Personal order of garnishment.” The phrase “personal order of garnishment” is not a term of art in Indiana, but the Court of Appeals concluded that Ind. Code § 34-55-8-7 covers the concept. (Typically, “garnishment” relates to third parties, not the defendant/judgment debtor.) Trial courts may order income, not exempt from execution, to be applied to satisfy a judgment. As such, a “personal order of garnishment” (against a defendant) is an applicable and proper mechanism of collection under the right circumstances. In Carter, the order issued by the trial court was not proper because the defendant had no ability to pay. “The judgment creditor has the burden of showing that the debtor has property or income that is subject to execution.” No such evidence existed in Carter. Translation: courts can’t order defendants to pay money that they don’t have and then punish such defendants for not paying.

No contempt powers. Ind. Trial Rule 69(E) and a handful of statutes, including Ind. Code § 34-55-8, govern Indiana proceedings supplemental. Article 1, Section 22 of the Indiana Constitution provides the foundation upon which all Indiana collection laws are based:

The privilege of the debtor to enjoy the necessary comforts of life, shall be recognized by wholesome laws, exempting a reasonable amount of property from seizure or sale, for the payment of any debt or liability hereafter contracted; and there shall be no imprisonment for debt, except in case of fraud.

One issue in Carter was whether the use of contempt powers to force payment for a debt violates the Indiana Constitution. (Black’s defines “contempt power” as a court’s “inherent power to punish one for contempt of its judgments or decrees . . ..” One such form of punishment is jail time.) Money judgments generally are enforced by execution and various auxiliary remedies. As the Court noted in Carter, however, “contempt of court is not one of these.” The mere threat of imprisonment is improper too. Carter held that, to the extent Vanderburgh County’s local rules provided a basis for contempt proceedings for a defendant’s failure to pay a judgment, such rules are contrary to Indiana law.

Future proceedings? Another question in Carter was whether the trial court should limit future proceedings supplemental in the absence of a good faith belief that the defendant had property or income subject to court process. In Indiana, the general rule is that “a creditor cannot require a debtor to attend ongoing proceedings supplemental hearings and be reexamined continuously as to whether the debtor has acquired any new assets or income.” In other words, “future ‘fishing expeditions’ are improper.” The exception to that rule is if the plaintiff makes a showing that new facts justify a new order for examination. The Court held in Carter that any future proceedings supplemental against the defendant “must be supported by new facts justifying a new order or examination.”

The Carter decision, together with the recent Branham case addressed in my July 14 and September 23, 2011 posts, illustrates some of the boundaries to proceedings supplemental specifically and the collection of debts generally.

Indiana Guaranties: Right Of Contribution Clarified

My October 10, 2008 post discussed the right of contribution among guarantors and the Court of Appeals’ opinion in Balvich. In Small v. Rogers, 2010 Ind. App. LEXIS 2117 (Ind. Ct. App. 2010), a guarantor’s contribution effort failed. Why? If you are a co-guarantor or represent a co-guarantor, you’ll want to know the answer.

Guarantor payments. The Small case involved a dispute between Guarantor 1 and Guarantor 2, both of whom guaranteed two distressed commercial loans. In his workout dealings with the two lenders, Guarantor 1 decided to bring all of the accrued and unpaid interest current. In turn, he demanded that Guarantor 2 reimburse him for Guarantor 2’s pro-rata share of such payments. Since Guarantor 2 refused, Guarantor 1 filed suit seeking contribution.

Guarantor 2’s contention. Guarantor 2 asserted that Indiana’s right of contribution did not apply because (a) the payments that Guarantor 1 made were less than Guarantor 1’s pro rata portion of the full guaranteed debt and (b) the payments did not result in either guarantor’s release from liability.

Contribution law. Here are some well-settled Indiana rules set out in Small:

1. Contribution involves the partial reimbursement of one who has discharged a common liability. (“Discharge” means “any method by which a legal duty is extinguished; esp., the payment of a debt or satisfaction of some other obligation.”)
2. The right of contribution operates to make sure those who assume a common burden carry it in equal portions.
3. In order to be entitled to contribution, the claimant must have first paid the debt or more than his proportionate share of the debt.

Applying rule #3. The Court in Small noted that the two debts had a combined balance of $5.4MM and, furthermore, that Guarantor 1’s payments totaled only $88,000. Since Guarantor 1 “paid only a portion of the amounts due under the promissory notes and far less than his proportionate share of the debts owed . . . [the Court could not] say that the right of contribution [applied] in this case.”

Balvich distinguishable. The Small opinion addressed the Balvich case that I cited in my 2008 post. Guarantor 1 asserted that Balvich permitted him to recover his pro rata portion of the payments made in excess of his pro rata share. The Small Court noted a handful of distinguishing factors, one being that, in Balvich, unlike in Small, a judgment had been entered against all guarantors, jointly and severally. Further, the Court explained that, in Balvich, the plaintiff guarantor’s payment resulted in a satisfaction (resolution) of the judgment and thus a release of all guarantors:

In Balvich, the banks reduced the co-guarantors’ debt to two judgments. The [plaintiffs] subsequently paid more than their proportionate share of the judgments, thereby satisfying the judgments. Unlike in Balvich, the debt owed by [Guarantor 1 and Guarantor 2] has not been reduced to a judgment. Thus, there can be no satisfaction of the judgment, and therefore, no discharge of the debt. Rather, in this case, the debt still exists. [Guarantor 1] did not discharge the debt, either by paying the debt or a judgment on the debt. Furthermore, the amounts paid by [Guarantor 1] do not constitute more than his proportionate share of the more than $5,000,000.00 of debt incurred.

Timing. I understand why Guarantor 1 filed the contribution claim. He alone made sizeable payments that presumably benefitted Guarantor 2. Guarantor 1 simply wanted Guarantor 2 to pay his fair share. But according to Small, there is a difference between a payment and a payoff/settlement. The Court reasoned that to rule in Guarantor 1’s favor would be to sanction claims for contribution upon each and every payment made toward a debt until the debt is discharged. According to Small, contribution rights do not materialize until the debt goes away, but “this is not to say that the amounts paid toward a debt cannot, or will not be credited to the party asserting the right of contribution once the guaranteed debt is discharged." The opinion suggests that Guarantor 1's claim was, at best, premature.

The key appears to be that guaranty-based payments need to fund a final resolution of the defaulted loan, either through a prejudgment settlement/release or a post judgment satisfaction. Small’s lesson is that lawsuits for contribution can’t be made piecemeal, or, in other words, they can’t be based on partial debt-related payments. Guarantors beware.

(I’m left wondering whether the result in Small was fair. I see both points of view. Perhaps this is a topic for another day. Email or post a comment with your opinion.)