In my post Contractual Waiver Of Right To Jury Trial, I explain why Indiana mortgage foreclosure actions are not tried to a jury but rather to a judge. But what about a borrower’s counterclaim? The Indiana Supreme Court in Lucas v. U.S. Bank, 953 N.E.2d 457 (Ind. 2011) examines that issue.
Legal claims. Lucas was a residential foreclosure action. Here is a list of the defenses and claims asserted by the borrowers against the lender and its servicer – some of which we might also see in a commercial foreclosure:
• Ineffective assignment of loan documents
• Violation of Truth in Lending Act
• Violation of Real Estate Settlement and Procedures Act
• Civil conversion
• Civil deception
• Breach of duty of good faith and fair dealing
• Breach of contract
• Promissory estoppel
• Violation of Fair Debt Collection Practices Act
The question in Lucas was whether the borrowers had a right to a jury trial on these claims (assuming they survived a motion for summary judgment).
Subsumed into equity? The Court in Lucas articulated the legal issue as: “[o]nce a foreclosure action invokes the equity jurisdiction of a trial court, when are the borrowers’ legal defenses and claims subsumed into equity?” Trial courts must determine whether a suit is “essentially equitable” and, in so doing, must engage in a multi-pronged inquiry:
If equitable and legal causes of action or defenses are present in the same lawsuit, the court must examine several factors of each joined claim – its substance and character, the rights and interests involved, and the relief requested. After that examination, the trial court must decide whether core questions presented in any of the joined legal claims significantly overlap with the subject matter that invokes the equitable jurisdiction of the court. If so, equity subsumes those particular legal claims to obtain more final and effectual relief for the parties despite the presence of peripheral questions of a legal nature. Conversely, the unrelated legal claims are entitled to a trial by jury.
Distilled to its essence. The basic theory of the borrowers in Lucas was that “but for the unlawful actions by [lender], the borrowers would not have suffered any money damages, their account would be considered current, and the foreclosure complaint would not have been filed.” The case fundamentally dealt with (1) the terms of the parties’ agreement, (2) the amount of the borrowers’ payments, (3) the application of those payments, and (4) whether the borrowers failed to pay as agreed. The Court said that “[w]hen comparing the core issues presented by the [borrowers’] legal defenses and claims to the core issues presented by the foreclosure action, it is evident that they are closely intertwined with one another.” Because the heart of the claims rested upon whether the borrowers were in default and, if so, what the amount of their debt was, Indiana’s equitable clean-up doctrine was properly invoked, and the legal claims were “subsumed into equity to obtain more final and effectual relief for the parties.”
Significant overlap. The Court, in a 3-2 decision, concluded that equity had taken jurisdiction over the essential features of the lawsuit, including the borrowers’ affirmative defenses, counterclaims and third-party claim, so as to negate the borrowers’ right to a jury trial. The following excerpt from Lucas sums up the Court’s ruling:
In this case, a mortgage holder filed a foreclosure action against the loan borrowers. In response, the borrowers asserted numerous legal defenses and claims against the mortgage holder and loan servicer. The borrowers asked for a jury trial on these defenses and claims, but the trial court denied the request. We affirm and hold that the borrowers’ claims and defenses shall be tried in equity because the core legal questions presented by the borrowers’ defenses and claims are significantly intertwined with the subject matter of the foreclosure action.
No jury. Lucas leaves a small window open for a trial by jury on totally unrelated legal claims, but it seems that most borrower counterclaims should be tried to a judge. The Court’s opinion is favorable to lenders, particularly those involved in the residential foreclosure world. The Lucas holding eliminates potential delays and uncertainties associated with the possibility of a jury trial on the laundry list of counterclaims that we sometimes see borrowers assert.