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.)