Indiana Court Orders Release of Mortgage

This is another post about a situation in which an older mortgage had not been released at a prior closing when it should have been.  Tennant v. Fifth Third Bank, 2012 Bankr. LEXIS 4026 (S.D. Ind. 2012) (.pdf) teaches us that the subsequent foreclosing lender may not need to invoke the doctrine of equitable subrogation.  The facts may require that the prior mortgage simply be released. 

Common problem.  Tennant was a battle between Fifth Third, which held a 2002 HELOC mortgage, and Chase, which held a 2007 mortgage loan used to refinance senior debt.  The facts were undisputed that the Fifth Third loan had been paid off in 2005 but that the mortgage remained on title.  The borrower continued to obtain advancements on the line of credit.  The Court teed-up the issues as, first, whether Fifth Third had a valid mortgage lien against the subject property and, second, whether the doctrine of equitable subrogation rendered Chase’s mortgage lien superior to that of Fifth Third.  In the end, the issue of equitable subrogation was “overshadowed” by the matter of whether Fifth Third held a valid mortgage lien.

Two keys.  Fifth Third’s mortgage stated “upon payment of all Indebtedness, Obligations and Future Advances secured by this Mortgage, Lender shall discharge this Mortgage with any costs paid by Borrower.”  Also, Indiana Code § 32-28-1-1(b) provides, in pertinent part, that:  “when the debt . . . that the mortgage . . . secures has been fully paid . . . the holder . . . shall (1) release; (2) discharge; and (3) satisfy of record; the mortgage . . ..”  Chase contended that Fifth Third was obligated to release its mortgage when the 2005 closing fully satisfied the HELOC balance. 

Instructions?  Fifth Third asserted that it was not required to release its mortgage absent explicit instructions from its borrower to do so, which instructions Fifth Third never received.  But unlike in Ping, which was the subject of my 02/15/08 post on a similar issue, there was nothing in the Fifth Third mortgage requiring the borrower to request closure or to release its mortgage.  On the contrary, the mortgage unambiguously stated that Fifth Third “shall discharge” its mortgage on full payment. 

Lien negated.  The Court in Tennant concluded that “Fifth Third was clearly required to discharge its mortgage on or about August 8, 2005, upon full satisfaction of the then outstanding loan balance.”  The Court specifically addressed the Seeley decision, about which I wrote on 09/22/12, and the quandary that, by their nature, lines of credit are not automatically terminated upon a zero balance.  The Court dismissed the problem by suggesting that loan documents should be drafted accordingly.  Pursuant to the mortgage and I.C. § 32-28-1-1(b), Chase was entitled to a release of the Fifth Third mortgage.  The Court did not need to determine whether Chase was entitled to equitable subrogation. 

Keep I.C. 32-28-1-1(b) in mind.  The Tennant predicament essentially was the same as that discussed in my 08/20/13 post that the doctrine of equitable subrogation resolved.  Tennant provides a more powerful argument based on I.C. § 32-28-1-1(b), assuming the prior, unreleased mortgage contains language mandating the release of its mortgage upon payoff.  The prior mortgage is not subordinated -- it’s gone.

If, as a secured lender, you find yourself in the pickle of needing to foreclose over a mortgage that was not released at a closing despite a payoff, study the loan docs for any payoff-related language that might assist.  Even in the absence of language requiring the lender to release its mortgage, I.C. § 32-28-1-1(b) and Tennant suggest that you may be able to obtain a court order terminating the old mortgage.

This Time, Lender Did Not Relinquish Its Right To A Receiver In Subordination Agreement

What if, as a foreclosing lender/mortgagee, you want a receiver, but you entered into a subordination agreement with a de facto senior lender/mortgagee who does not?  As the subordinated lender, can you still obtain one?  According to PNC Bank v. LA Development, 2012 Ind. App. LEXIS 368 (Ind. Ct. App. 2012), it depends upon the language in the subordination agreement.

Subordination circumstances.  In 2004, PNC entered into a mortgage loan with LA Development concerning residential developments called Harrison Crossings and Kingston Village.  In each mortgage, LA Development, as the borrower/mortgagor, stipulated to the appointment of a receiver in the event of a default.  In 2008, the subject promissory notes had matured, but INTA agreed to advance $705,000 to LA Development to complete the Harrison Crossings project.  What resulted was a closing involving PNC, INTA and LA Development in which (a) PNC and LA Development entered into a forbearance agreement, (b) INTA and LA Development entered into a promissory note secured by a mortgage on Harrison Crossings and (c) PNC and INTA entered into a subordination agreement, which essentially provided for the subordination of PNC’s mortgage in favor of INTA’s.  (For more on the specific language in the subordination agreement, please read the opinion.) 

Legal proceedings.  In 2011, PNC filed a lawsuit to foreclose based on LA Development’s default under the 2008 forbearance agreement.  PNC simultaneously sought the appointment of a receiver to complete the Harrison Crossings development.  INTA filed a cross-claim/counter-claim for foreclosure of its mortgage, but for reasons not specified in the PNC opinion, INTA objected to PNC’s request for a receiver. 

PNC’s contentions.  PNC alleged that the appointment of a receiver was mandatory under Indiana law, as detailed by my July 25, 2008 post.  See also, Ind. Code § 32-30-5-1(4)(C).  Indeed INTA did not dispute that, given LA Development’s default and written stipulation in the subject mortgage, PNC satisfied Indiana’s receivership statute.

INTA’s contentions.  INTA instead argued that PNC “relinquished its right to the mandatory appointment of a receiver in the subordination agreement.”  INTA’s position was that the subordination agreement deprived PNC of its rights and remedies derived from its loan documents. 

Lien rights vs. enforcement rights.  PNC asserted that, although the PNC/INTA agreement contemplated the subordination of “liens” and “priorities,” it did not subordinate all of PNC’s rights.  The Court agreed.  PNC did not relinquish its enforcement rights and remedies.  For example, PNC elected to foreclose on Harrison Crossings, and INTA conceded that the subordination agreement authorized such action. 

If [PNC] waived all of its enforcement rights and remedies under the mortgages by executing the subordination agreement, then the right to foreclose on Harrison Crossing would be included.  Either [PNC] subordinated all of its enforcement rights and remedies in the mortgages or it did not.  INTA cannot pick and choose which rights and remedies [PNC] subordinated to support its argument.

Different result?  Neither PNC nor this post stands for the proposition that a subordinate lender will always get a receiver over the senior lender’s objection.  The language of the subordination agreement is critical.  The Court in PNC emphasized the necessity of using specific language to limit rights and remedies of junior mortgagees.  Citing to legal commentator Patrick E. Mears, the Court suggested that senior mortgagees should require junior mortgagees, in subordination agreements, to waive their rights to marshal assets and to postpone any enforcement rights that they may have.  If the subordination agreement in PNC had done that, then I think the result would have been different. 

Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment

A motion for summary judgment is a pre-trial mechanism to reduce a lender’s mortgage foreclosure complaint to a judgment and decree.  McEntee v. Wells Fargo Bank, 970 N.E.2d 178 (Ind. Ct. App. 2012) illustrates how such a motion can be defeated if the plaintiff lender does not, in its supporting affidavit, explain how the borrower defaulted on the promissory note.

Payment dispute.  McEntee involved a borrower and a national bank.  The disagreement began when the borrower submitted a check to the lender for his monthly payment that he post-dated to the due date.  The lender negotiated the check before that date, and payment of the check resulted in a checking account overdraft fee to the borrower of $112.50.  The borrower then deducted that amount from his next loan payment.  Things escalated into a mortgage foreclosure suit and a counterclaim for emotional distress damages. 

Defense.  The lender filed a motion for summary judgment, and the trial court granted the motion.  On appeal, the borrower argued, among other things, that the lender improperly deposited post-dated checks before the due date for each payment.  The borrower designated as evidence in response to the motion for summary judgment several letters he sent to the bank regarding the payment dispute.  The borrower’s theory was that the lender improperly handled his payments and that, if his mortgage was in default, such default was the result of lender’s conduct.

Basic law.  McEntee provided: 

if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee or the mortgagee’s assign may proceed in the circuit court of the county where the real estate is located to foreclose the equity of redemption contained in the mortgage.  Ind. Code § 32-30-10-3(a).  To establish a prima facie case that it is entitled to foreclose upon the mortgage, the mortgagee or its assign must enter into evidence the demand note and the mortgage, and must prove the mortgagor’s default.  Once the mortgagee establishes its prima facie case, the burden shifts to the mortgagor to show that the note has been paid in full or to establish any other defenses to the foreclosure. 

“Not enough.”  With its summary judgment motion, the bank submitted an affidavit to prove, among other things, the borrower’s default.  According to the Court, the affidavit stated only that “the conclusory averment . . . that ‘according to [the lender’s] records, the [borrower is] in default and that said default has not been cured.’”  In Indiana “conclusory statements are generally disregarded in determining whether to grant or deny a motion for summary judgment.”  The Court held that this conclusory statement was “not enough” to support the lender’s motion.  The lender did not show that the borrower defaulted in his performance under the note, but instead established only that the borrower and the lender were engaged in an ongoing payment dispute. The lender’s “designated evidentiary materials [did] not establish that [borrower] failed to pay the amounts due on the note.”

Provide some detail.  The cliché that “the devil is in the details” applies here.  The Court in McEntee reversed the trial court’s summary judgment and never had to address the merits of the payment dispute.  This is because the only evidence supporting summary judgment was the lender’s conclusory allegation that there was a default.  The lesson is that there should be some detail concerning the nature of the payment default and the timing of it.  At least some of the key facts, beyond parroting the default language in the promissory note, must be given so as to establish that there has been a breach under the loan document.