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Some Tips For Indiana Receivers

On occasion I represent receivers in commercial mortgage foreclosure cases.  Last week, I gave a little “Do’s and Don’ts” presentation to one of our receiver clients.  I thought I’d share some of my tips here: 

1. Review and understand the proposed order appointing receiver before signing on.   Ask an attorney (like me) to review and help negotiate terms, as needed. 

2. Ensure your compensation is fair and profitable from the outset.  See #1.

3. Before the receivership hearing, eyeball the property – drive by and/or inspect if possible.  Understand the lay of the land.

4. Determine the plaintiff lender’s objectives with regard to the case and the property from the beginning:  babysit the property only, improve the property, sell the property, etc.?  Get a feel for the lender’s cost tolerance.  As a practical matter, the plaintiff lender is the captain of the ship. 

5. Once appointed:

    a. Secure rents ASAP.

    b. Ensure that hazard insurance is current.

    c. Determine the status of real estate taxes and confer with the lender regarding any delinquency.  Develop a plan with the lender as to how and when taxes should be paid, if at all.  Send a confirming email and record the status/plan in court-filed reports.

    d. Investigate the status of utilities and consider action.

    e. Evaluate whether there is any non-real estate (personal property) collateral of value and, if so, learn what the lender wants you to do with it.  Ensure that the action is covered by prior court order, or obtain order authorizing the action.

6. Hire an attorney unless (a) you have prior experience with, and trust in, lender’s counsel and (b) there is no apparent adversity with the lender.  Some lawyers have the view that receivers should always retain independent counsel.  I don’t necessarily share that opinion and tend to assess the issue on a case-by-case basis. 

7. Report, report, report.  Inundate the lender’s representative and/or lender’s counsel with emails regarding significant issues and action.  Timely file all reports required by the order appointing receiver.

8. As to major decisions affecting the property, including significant expenditures, obtain prior written approval from the lender or lender’s counsel.  See #7.  Emails are easy.  Use them.  Archive them for your file.

Potential receivers are free to call or email me with any questions.  And for more information on Indiana receiverships, please click on the category “Receiverships” to your right.

Indiana State Courts Cannot Modify (Cram Down) A Mortgage

Can a borrower convince an Indiana state court to modify or “cram down” a mortgage over the objection of the lender?  According to the Court of Appeals in Nationstar Mortgage v. Curatolo, 2013 Ind. App. LEXIS 284 (Ind. Ct. App. 2013), the answer is “no.” 

Framework.  Nationstar was a residential mortgage foreclosure case.  Five different settlement conferences occurred that, in part, led to the borrower’s allegations of bad faith and request for sanctions.  In the final settlement conference, the trial court issued an order finding that (a) the lender acted in bad faith and (b) the terms of the mortgage were to be modified so as to reduce the principal and interest owed.  This is commonly known as “cramming down” the mortgage.

Settlement conference.  The negotiations in Nationstar and resulting order arose out of a series of I.C. § 32-30-10.5 settlement conferences.  (See my May 19, 2011 post about the 2011 legislation.)  Indiana law mandates settlement conferences in residential foreclosures (but not in commercial cases).  Nationstar provides a nice discussion of the purpose of I.C. § 32-20-10.5:

• The statute is designed to “avoid unnecessary foreclosures” and to facilitate “the modification of residential mortgages in appropriate circumstances.” 
• The purpose of this statute is to “modify the foreclosure process to encourage mortgage modification alternatives.”
• A lender generally must give a defendant borrower notice of the right to participate in a settlement conference, and the borrower then has thirty days to notify the court if he or she intends to partake. 
• If the lender and borrower ultimately agree to enter into a “foreclosure prevention agreement,” the court may dismiss or stay the foreclosure action as long as the borrower complies with the terms of the agreement. 
• Even if the parties agree upon a final agreement, the foreclosure action shall be dismissed or stayed “at the election of” the lender. 
• Although the statute gives the court the right to stay the action pending the negotiation process, the statute does not give the trial court the authority to enter a final order modifying the mortgage agreement.
• Importantly, the statute does not mandate that lenders and borrowers enter into foreclosure prevention agreements.  A lender is under no obligation to enter into a foreclosure prevention agreement.

Some general mortgage law.  Nationstar identifies a couple important principles of Indiana mortgage law:

• Since mortgage agreements are based upon the parties’ mutual intent, those parties both must agree to any permanent modification. 
• When interpreting mortgage agreements, courts are bound to give effect to the plain meaning of the language of the mortgage.  Courts cannot make a new contract for the parties or ignore or eliminate provisions of such instruments.

Issue.  To my knowledge, Nationstar addressed for the first time in Indiana the question of “whether the trial court had the authority to modify the mortgage agreement without the consent of both parties.”  In other words, can an Indiana state court unilaterally change the terms of a mortgage? 

No authority.  The Court in Nationstar concluded that the trial court lacked authority to modify the mortgage.  “The trial court acted in excess of its authority when it ordered the modification.”  The Court remanded the case to the trial court with instructions to allow the foreclosure action to proceed.  Trial court judges cannot effectively rewrite the terms of a mortgage.  At most, they can force settlement discussions, but in the end “a lender is under no obligation to [settle], ill-advised as its refusal to do so may be.” 

(NOTE:  This post is not a comment upon whether, or to what extent, a federal bankruptcy court may or may not modify a mortgage or “cram down” payments.) 

Equitable Subrogation Not Limited To Lending Institutions

Indiana’s doctrine of equitable subrogation typically comes into play when secured lenders, during the foreclosure process, learn that a prior mortgage was not released as it should have been.  The title picture will unexpectedly show a lender’s mortgage to be subordinate to an older mortgage.  As such, a priority dispute may arise.  Equitable subrogation, if applicable, helps solve the title problem.  To learn more, please peruse my prior posts under the category of equitable subrogation to your right.

Scope.  Last year in Millikan v. Eifrid, 968 N.E.2d 243 (Ind. Ct. App. 2013), the Indiana Court of Appeals illustrated how the doctrine of equitable subrogation can prevent a windfall and protect senior lenders and BFPs.  As with many of these equitable subrogation cases, the facts of Millikan are very dense and, for purposes of this post, not terribly important.  The primary reason to discuss Millikan is because the Court held that the doctrine is not limited to banks or commercial lending institutions. 

Contention.  In Millikan, the prior lienholder contended that equitable subrogation applies only to lending institutions and should not have protected Mr. Eifrid, an individual.  The Court disagreed: 

We note that while Millikan suggests that the doctrine of equitable subrogation should not apply because Eifrid is not a lending institution, he directs us to no authority for that proposition, and we have found none.  Indeed, equitable subrogation is a highly favored doctrine that demands liberal application, and nothing in Nally commands that the doctrine should apply only to a lending institution.  Even more compelling, we must conclude that an innocent bona fide purchaser, such as Eifrid, should be afforded the same, if not greater, protection than is afforded to a lending institution such as Countrywide.

Statute.  The competing lienholder’s argument in Millikan may have stemmed from language in Indiana’s equitable subrogation statute, Ind. Code § 32-29-1-11(d), which states:

(d) Except for those instances involving liens defined in
IC 32-28-3-1, a mortgagee seeking equitable subrogation with respect to a lien may not be denied equitable subrogation solely because:
 (1) the mortgagee:
  (A) is engaged in the business of lending….

Perhaps one could argue that section (d)(1)(A) means that Indiana’s General Assembly intended for equitable subrogation to apply only to a party engaged in the business of lending (such as a bank), but Millikan definitively holds otherwise.  As such, private equity firms or other “average Joe” investors holding mortgages have the remedy available to them – as they should.