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Payoff Statements: Handle With Care

In Indiana, mortgage lenders and their servicers should be very careful when issuing payoff statements.  Inaccurate statements could lead to the unintentional release of a mortgage.  Sutton Funding v. Jaworski, 2011 Ind. App. LEXIS 228 (Ind. Ct. App. 2011) illustrates this point and discusses the pertinent statute, Ind. Code § 32-29-6 “Mortgage Release by Title Insurance Companies.” 

The mess.  In 2004, the borrower in Sutton Funding received a mortgage loan from the lender in the amount of $325,000.00.  In 2007, the borrower sought to refinance the loan through a mortgage broker, which sought, and obtained, a payoff statement from the lender.  The payoff statement identified a payoff of $268,000.00 and articulated no other conditions.  The borrower closed on a $292,050.00 loan with a new lender.  $268,000.00 of the funds went to the original lender purportedly to satisfy the 2004 loan.  The closing called for the new lender to hold a first mortgage and for the original lender’s mortgage to be released.  The original lender accepted the money but failed to record a release of its mortgage.  Instead, the original lender and the borrower somehow executed loan modification documents but did not notify the subsequent lender, its broker or the title agent of this post-refinance activity. 

Legal action.  The borrower defaulted on the 2007 mortgage loan, and the new lender filed a foreclosure action.  In the suit, the original lender contended that the 2004 loan (and the mortgage) still existed because the debt had not been fully satisfied by the $268,000.00 payment.  The new lender relied upon I.C. § 32-29-6-13 and asserted that, by virtue of the payoff statement, Indiana law required the original lender to release the 2004 mortgage.

I.C. § 32-29-6.  This statute has only been around since 2002, and Sutton Funding appears to be the sole Indiana appellate court opinion that has construed it.  The statute is not limited to residential or consumer cases, although it only applies to mortgages securing loans in the original principal amount of $1,000,000 or less.  The guts of the statute relate to the who, what, when, where, why and how of “certificates of release.”  Sutton Funding focused on Section 13, which states: 

A creditor or mortgage servicer may not withhold the release of a mortgage if the written mortgage payoff statement misstates the amount of the payoff and the written payoff is relied upon in good faith by an independent closing agent without knowledge of the misstatement . . ..

Release mandated.  In Sutton Funding, there was no question that the payoff statement misstated the payoff amount.  The Court walked through the pertinent factual and legal points and concluded as a matter of law that both the broker and the title agent relied upon the payoff statement in good faith and without knowledge of the misstatement.  The result was an order compelling the release of the 2004 mortgage.  Due to the mistake in its payoff statement, the original lender’s claim to its collateral vanished.

All not lost.  As an aside, the original lender still could collect the full amount owed from the borrower.  Pursuant to language in Section 13, the debt itself will not be extinguished - only the mortgage.  An unsecured claim will survive.

Wrap-up.  Again, Sutton Funding and Indiana’s “Mortgage Release by Title Insurance Companies” statute do not apply to loans over $1,000,000.  That said, it’s conceivable that a Court could reach a similar result, based on common law principles, in a larger commercial case.  Sutton Funding is a powerful reminder that any written representations to a borrower with regard to a payoff should be accurate and should identify any applicable conditions to a release.

Attorney Fee Awards in Indiana

Parties that foreclose commercial mortgages, and collect debts based upon promissory notes or guaranties, almost always seek to recover their attorney’s fees.  Today’s post sets out why such a claim can be made and how the fees should be calculated.

American rule – contract needed.  Indiana follows the so-called “American Rule,” which provides that, in the absence of statutory authority or an agreement between the parties to the contrary, a prevailing party has no right to recover attorney’s fees from the opposition.  (Under the “English Rule,” the losing party pays the fees to the winning.)  Loparex v. MPI Release, 964 N.E.2d 806 (Ind. 2011).  Indiana’s foreclosure and commercial collection statutes generally do not authorize the recovery of attorney’s fees.  That’s why virtually every loan document I’ve seen contains an attorney fee clause. 

40% flat fee.  Corvee, Inc. v. Mark French, 934 N.E.2d 844 (Ind. Ct. App. 2011) teaches litigants about the amount of attorney’s fees a trial court may award to the plaintiff in a successful collection action in Indiana.  Corvee did not involve a promissory note but a similar written agreement between the parties related to the collection of reasonable attorney’s fees in a suit to recover a debt.  The provision in Corvee stated that the defendant was responsible “for reasonable interest, collection fees, attorney fees of the greater of a) forty percent (40%) or b) $300 of the outstanding balance, and/or court costs incurred in connection with any attempt to collect amounts I may owe.”  There was no dispute that the contract unambiguously required the defendant to pay the 40% amount.  The question was whether such provision was enforceable.

Liquidated damages.  The Court in Corvee concluded that the attorney fee provision in the contract was in the nature of a liquidated damages clause, which means that the contract provided for the forfeiture of a stated sum of money without proof of damages.  In Indiana, courts will not enforce a liquidated damages provision that operates as a penalty.  Liquidated damages clauses generally are valid only if the nature of the contract is such that damages resulting from a breach “would be uncertain and difficult to ascertain.”  The calculation of attorney’s fees incurred in litigation is not difficult to ascertain.  The Court said:  “it strikes us as unnecessary to transform a standard attorney fee provision in a contract into, effectively, a liquidated damages provision that may or may not have any correlation to actually incurred attorney’s fees.” 

The right way.  In Indiana, even with specific contract language, “an award of attorney’s fees must be reasonable.”  Citing to a case involving promissory notes, the Court stated that provisions “for the payment of attorney’s fees ‘should not extend beyond reimbursing the holder of the note for the necessary attorney’s fees reasonably and actually incurred in vindicating the holder’s collection rights by obtaining judgment on the note.’”  In Corvee, there was no evidence of the amount of attorney’s fees that the plaintiff actually incurred in attempting to collect the debt.  Thus the 40% recovery could have given rise to a windfall at the defendant’s expense.  “Collection actions should permit creditors to recover that to which they are rightfully entitled to make themselves whole, and no more.”  As such, Corvee held the 40% attorney fee provision to be unenforceable.

Assuming the existence of an attorney fee provision, lenders in loan enforcement actions may recover fees that are reasonable and actually incurred.  According to Corvee, flat-fee or percentage-based attorney fee clauses may be difficult to enforce in Indiana. 

(See alsoUnsettled:  Recovery of Attorney's Fees for In-House Counsel.)

Forgery Defense Must Be Raised Immediately

Weinreb v. TR Developers, 943 N.E.2d 856 (Ind. Ct. Ap. 2011) dealt with a guarantor’s claim that he did not sign the guaranty upon which the judgment entered against him was based.  The Court’s opinion involves technicalities surrounding a couple rules of procedure, but there is a broader message for defendants in Indiana foreclosure cases:  denials of document execution should be raised right away.

Case history.  In September, 2008, the lender filed its complaint, including copies of the subject guaranty.  The guarantor filed an answer to the complaint and asserted a general denial to all of the allegations.  The lender subsequently filed a motion for summary judgment that resulted in the entry of judgment in May of 2009.  In June, 2009, after the period for filing an appeal had run, the guarantor filed a Rule 60(B) motion and submitted for the first time evidence suggesting that the guaranty had been forged.  The trial court denied the motion, and the guarantor filed a second Rule 60(B) motion on the same grounds, plus an allegation of negligence on the part of the guarantor’s original attorney.  The trial court denied the second motion as well, and the guarantor appealed.

Operative rule of procedure.  Indiana Trial Rule 9.2(B) provides that, when a complaint is founded on a written instrument (such as a guaranty) and such instrument is filed with the complaint, “execution . . . shall be deemed to be established and the instrument, if otherwise admissible, shall be deemed admitted into evidence in the action without proving its execution unless execution be denied under oath in the [answer] or by an affidavit filed therewith.”  In Weinreb, the Court noted that an attorney’s signature on a general denial does not constitute an oath by which the defendant denies execution of an instrument.  Because the guarantor failed to deny, under oath, that he executed the guaranty, “execution . . . was deemed established by operation of Trial Rule 9.2(B).” 

Summary judgment.  The Court hinted that the defect in the pleadings could have been cured during the summary judgment stage.  Nevertheless, in Weinreb, “the trial court properly presumed execution of [the guaranty] at summary judgment because [the guarantor] failed to introduce in a timely manner any evidence that would support a contrary finding.”  Ultimately:

[the guarantor] failed to respond to [the lender’s] motion for summary judgment within the time limits prescribed by Trial Rule 56(C).  Despite notice and two distinct opportunities to challenge [the lender’s] documentation, [the guarantor] failed to raise his forgery defense at any stage of the proceedings before final judgment was entered against him.

Explanation.  The Weinreb opinion discussed at length the principles and standards applicable to Trial Rule 60(B) motions.  In the final analysis, the Court concluded that “newly discovered” evidence did not exist.  Rather, the guarantor’s failure to use due diligence was the compelling factor.  The Court held:

With this equivocal evidence before it, distilling essentially to a swearing contest that should have been raised long before, the trial court was well within its discretion to reject [the guarantor’s] equitable demands that the trial court set aside the judgment entered against him under Trial Rule 60(B)(8).  [The guarantor’s] second Trial Rule 60(B) motion did not present any grounds that would entitle him to relief from judgment that were unknown or unknowable at the time he filed his first such motion.

Take away.  Borrowers and guarantors, and their counsel, should raise in their initial response to the lender’s complaint the defense of forgery, assuming there is evidence supporting such a defense.  Even if the guaranty was forged in Weinreb, the guarantor (or his lawyer) was too late in asserting the defense.  On the other hand, for lenders and their counsel, the Weinreb is a reminder to attach to the complaint any and all loan documents that form the basis of the action.