Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions

With bank mergers and takeovers, we sometimes see cases where the name of the plaintiff lender will not be the same as that reflected in the note and mortgage.  This is because, normally, there are not loan assignment documents like those we see when loans are bought and sold.  When lenders are bought or sold, generally speaking, the corporate existence of each bank, and ownership of assets like loans, automatically continue in the receiving entity.  Without the benefit of traditional assignment documents showing the chain of ownership of a loan, how can the successor bank prove that it holds the predecessor’s note and mortgage?  CFS v. Bank of America, 962 N.E.2d 151 (Ind. Ct. App. 2012), settles this question in Indiana. 

Procedural history.  CFS involved a borrower’s appeal of the trial court’s summary judgment in favor of a lender - Bank of America, successor-in-interest to LaSalle Bank Midwest National Association.  In 2007, the borrower executed a promissory note and mortgage in exchange for a loan from LaSalle.  In 2009, Bank of America filed a complaint to foreclose the mortgage, and then moved for summary judgment.  In an affidavit supporting the summary judgment motion, a Bank of America representative testified that Bank of America was the successor-in-interest to LaSalle.  But, Bank of America did not produce any documentation to support or verify that fact.  The borrower objected to the motion on the basis that Bank of America had failed to demonstrate its ownership of the LaSalle note and mortgage, but the borrower didn’t file any evidence to contradict the bank’s affidavit. 

Shift of burden of proof.  The borrower in CFS argued that Bank of America did not sufficiently prove it was entitled to enforce the loan originally held by LaSalle.  (I.C. § 26-1-3.1-301 defines a “person entitled to enforce.”)  The Court disagreed and reasoned that the borrower failed to identify an issue of fact or otherwise designate evidence to show that Bank of America was not the successor of LaSalle.  The law did not require the trial court to consider a certificate of merger or some other document supporting the LaSalle/Bank of America transaction.  “Whether the merger took place was not a disputed issue of material fact.” 

Legal issue.  As to the law regarding whether a successor bank surviving after merger can enforce a note and mortgage of the predecessor, the Court relied upon 12 U.S.C. § 215(a)(e), which states in part:

The corporate existence of each of the merging banks or banking associations participating in such merger shall be merged into and continued in the receiving association and such receiving association shall be deemed to be the same corporation as each bank or banking association participating in the merger.  All rights, franchises and interests of the individual merging banks or banking associations in and to every type of property (real, personal, and mixed) and choses in action shall be transferred to and vested in the receiving association by virtue of such merger without any deed or other transfer.  The receiving association, upon the merger and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property.

Bank of America, as the successor after merger, acquired the rights to LaSalle’s property (i.e. the subject loan) by operation of law. 

No assignment necessary.  CFS was a different scenario from one in which a loan had been sold, and thus assigned, from one existing lender to another existing lender.  As I noted in November of 2007 and again this past November, an institution filing a foreclosure suit must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint.  When loans are transferred, the plaintiff must produce chain of assignment documents linking the original lender/mortgagee to the holder of the debt at the time.  Without such documentation, the plaintiff lacks standing to file suit.  In CFS, the original lender merged into another lender.  Proof of standing did not involve loan assignment documents but rather testimony that there had been a merger.  CFS therefore supports the idea that a predecessor need not assign its loans to the successor.  Such a transfer occurs by virtue of the merger/acquisition itself pursuant to 12 U.S.C. § 215(a)(e).

Lenders faced with the problem of suing upon loan documents that identify a predecessor-in-interest need not worry in Indiana.  As long as there is testimony to show that the named plaintiff is indeed the successor-in-interest by merger, then the plaintiff should have the right to foreclose.  Absent evidence submitted by the defendant calling into question whether a merger occurred, certificates or other voluminous documents verifying the merger are not necessary.

Are Borrowers Entitled To Jury Trials On Their Counterclaims?

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.  

WSJ: "The States Of Foreclosure"

Today's Wall Street Journal contains an interesting opinion that "housing prices stabilize when lenders can enforce contracts" (in other words, foreclose).  Click here for the piece.  Although the article focuses upon residential real estate, its theme and theory apply with equal vigor to commercial properties.  As you read the opinion, you should remain mindful that Indiana is one of the country's 23 judicial foreclosure states.  Click here for a prior post about what that means.  The nature of Indiana foreclosure law rests, in part, upon the notion that Indiana follows the "lien theory" of mortgages.

Must Banks Provide Advice To Their Customers During Loan Transactions?

When making a commercial loan, do lenders have a fiduciary duty to their Indiana borrowers or guarantors?  The Indiana Court of Appeals, in Paul v. Home Bank, 953 N.E.2d 497 (Ind. Ct. App. 2011), said no.

The loans.  Paul dealt with two loans to a borrower for the development of a hotel.  The first loan involved a promissory note, assignment of leases, a mortgage and a set of guaranties signed by the individual investors, who were also physicians.  The second loan, executed the same date, was a line of credit and also involved a promissory note, a mortgage and a set of guaranties signed by the same individuals.  The borrower defaulted on both loans, and the bank obtained a summary judgment permitting a sheriff’s sale of the mortgaged property.  Since the sheriff’s sale satisfied only the first (larger) loan, the bank moved for summary judgment against the guarantors to collect the debt owed on the second loan. 

The “confusion defense.”  The guarantors filed their own summary judgment motion making all sorts of arguments, only one of which I will discuss today.  The guarantors asserted they should prevail because “they are not lawyers, and [the bank] failed to advise them as to the meaning of the [guaranties].”  The guarantors thought the guaranties executed for the first loan released the guaranties for the second loan.  The guarantors believed the documents meant one thing and faulted the bank for not advising them that the documents said something else.  I have labeled this the “confusion defense.”

No fiduciary duty.  The Court dismissed the guarantors’ argument and relied upon the following well-settled Indiana law applicable to the relationship between banks and customers:

[A] business or “arm’s length” contractual relationship does not give rise to a fiduciary relationship.  That is, the mere existence of a relationship between parties of bank and customer or depositor does not create a special relationship of trust and confidence.  In the context of mortgagor/mortgagee relationship, mortgages do not transform a traditional debtor-creditor relationship into a fiduciary relationship absent an intent by the parties to do so.  Absent special circumstances, a lender does not owe a fiduciary duty to a borrower. 

The “special circumstances” are “when one party has confidence in the other party and is ‘in a position of inequality, dependence, weakness, or lack of knowledge.’”  The evidence must show that the dominant party improperly influenced the weaker party so as to gain an “unconscionable advantage.” 

Big boys shouldn’t cry.  Applying Indiana law to the facts in Paul, the Court noted that the guarantors were physicians who “embarked upon a sophisticated business venture . . . [and] cannot now complain because they failed to read the [guaranty] or seek the advice of legal counsel before signing [it].”  In Indiana, one is presumed to understand the document he signs and cannot be released from its terms due to his failure to read it.  The Court affirmed the summary judgment in favor of the bank. 

Paul is another illustration of the enforceability of solid loan documents.  In Indiana, a well-written guaranty is tough to beat.  If you click on the “Guarantors” category to the left, you will see several posts that address a number of defenses that were roundly rejected in Indiana cases.  Certainly there are circumstances when a guaranty may not be enforceable or a guarantor may be released, but those cases are rare.