Wire Payment Received One Day Late Did Not Breach Forbearance Agreement

If a lender receives a loan payment one day late, is it an actionable default?  Singleton v. Fifth Third Bank, 2012 Ind. App. LEXIS 532 (Ind. Ct. App. 2012), decided in the context of a forbearance agreement, advises that the answer depends on the contract language. 

Forbearance terms.  In the forbearance agreement in Singleton, the lender agreed to forbear from its loan enforcement action from April 4, 2011 to the earlier of (i) June 30, 2011 or (ii) the occurrence of any “Termination Event.”  A “Termination event” was the occurrence of, among other things, a failure to perform any of the obligations contained in the agreement.  Upon the occurrence of a Termination Event, the lender was entitled to file an agreed judgment in its favor and against the borrower.

Payment terms.  The forbearance agreement contained an obligation that the borrower “shall make payments” to lender by certain dates set forth in a payment schedule.  The last payment, in the amount of $350,000.00, was due June 30, 2011.  The agreement did not expressly provide for a particular method of payment or whether certain methods would or would not be acceptable.  The agreement did not require the borrower to make the final payment using a wire and was silent as to the date a payment would be deemed made if made using a wire, or any other method of payment.

The payment.  On the afternoon of June 30, 2011, the borrower and his counsel contacted the lender’s representative about how to make the final payment.  The lender’s representative directed borrower’s counsel to make a wire transfer, as had been done with prior payments.  Borrower’s counsel sent a confirming email to the lender’s representative that the final payment “will be wired today,” and the lender’s representative replied by stating “thank you.”  At 3:39 p.m. the borrower initiated the final payment via a wire transfer from his bank to the lender.  The borrower obtained a wire transfer receipt stating the “effective date” and “entered date” was June 30, 2011.  The rub was that the wired funds were not received by the lender until the morning of July 1, 2011.

Paid vs. received.  The lender sought the entry of the agreed judgment, arguing that the final payment under the forbearance agreement was untimely because the lender received the funds on July 1, 2011, one day late.  The trial court agreed and entered judgment against the borrower.  On appeal, the borrower contended that the trial court improperly created terms in the forbearance agreement requiring that the June 30, 2011 payment had to be “received by” that date, when the agreement stated only that borrower “shall make payments” by that date.  In essence, the borrower’s argument was that the forbearance agreement was a payment contract and not a “received by” contract. 

Not untimely.  The Court of Appeals reversed the trial court’s decision based upon the terms, or lack thereof, in the forbearance agreement, together with the lender’s oral directive to wire the funds.  The borrower’s payment was not untimely and did not constitute a Termination Event under the agreement:

We are not at liberty to supply omitted terms while professing to construe a contract.  Accordingly, we decline to expand upon the general language in the Forbearance Agreement that [borrower] “shall make payments” . . . to include a more specific requirement that a payment, if made by a funds-transfer system as contemplated by Ind. Code §26-1-4.1, must be made by issuing a payment order at a time and with instructions calculated to ensure, taking into account any applicable statutory requirements or possible variations, that the funds would be received or otherwise deposited into [lender’s] account by the applicable due date.  The Forbearance Agreement does not include such a specific requirement. 

More than anything, Singleton is a lesson in contract drafting.  If, as a lender, you intend to strictly enforce payment defaults, then your loan documents or settlement agreements must be crystal clear.  If they are, Indiana courts typically will enforce them, likely even with a one-day breach.  If the forbearance agreement in Singleton contained language that the final payment must have been “received by” or “delivered to” the lender by June 30, 2011, then the lender may have prevailed. 

Proving You’re The Holder Of The Note

An assignee of a loan (purchaser of a promissory note and mortgage) must establish in any foreclosure action its status as the current holder (owner).  In a foreclosure action, a defendant borrower or guarantor sometimes will defend the case by asserting that the plaintiff assignee lacks standing to enforce the loan.  Collins v. HSBC Bank, 2012 Ind. App. LEXIS 452 (Ind. Ct. App. 2012) provides a road map for plaintiff assignees to defeat such arguments and to obtain summary judgment.

Set up.  In 2004, the borrower in Collins executed and delivered to his original lender a promissory note evidencing a loan for the purchase of real estate.  To secure repayment of the note, borrower executed a mortgage.  The original lender later sold/assigned the loan.  In 2007, borrower stopped making payments, at which time the plaintiff in Collins, as holder (owner) of the note at the time, filed a foreclosure complaint and obtained summary judgment in its favor.  Defendant borrower appealed the trial court’s grant of summary judgment.  The issue in Collins was whether the trial court erred in not concluding that there was a factual question regarding plaintiff’s status as the holder/owner of the promissory note.

Evidence.  The promissory note attached to the plaintiff’s complaint was not endorsed from the original lender to the plaintiff.  In connection with its summary judgment motion, the plaintiff tendered an affidavit, with a copy of the note, but failed to attach an endorsement, allonge or assignment.  However, the plaintiff later submitted an affidavit that attached a copy of the original note, which included an endorsement by the original lender to the plaintiff lender.  In addition, at the summary judgment hearing the plaintiff produced the original promissory note.  (Production of the original loan docs is not required to succeed on summary judgment, but in my view is the ultimate trump card to any standing defense.) 

Law.  Borrower maintained that, among other things, plaintiff’s complaint and first affidavit required the trial court to deny summary judgment and to weigh the evidence at trial as to whether the plaintiff was the owner of the note.  But the record on appeal disclosed that the plaintiff presented the original note, with borrower’s inked signature, together with the endorsement from the original lender to the plaintiff.  According to the Indiana Court of Appeals, that was enough to establish plaintiff’s right to enforce.  See, Ind. Code §§ 26-1-3.1-204(c) and 301(1), and 1- 201(20)(A).  The Court in Collins affirmed the trial court’s summary judgment accordingly: 

The evidence shows not only that [plaintiff] is in possession of the original note but also that the original note was endorsed to [plaintiff].  There exists no better evidence to establish that [plaintiff] is the present holder of the note entitled to enforce the note under Indiana law.

The Collins opinion is good law for assignees attempting to enforce their loans.  The case also highlights the importance for prospective assignees to obtain, in the loan purchase transaction, the original loan documents and assignments.  While that’s not always possible, presentation of the original note and mortgage can be definitive proof that you’re the holder/owner of the loan.

Claim For Contribution Against “Accommodation Party” Fails

In re Simpson, 2012 Bankr. LEXIS 3021 (S.D. Ind. 2012) (.pdf), decided by the United States Bankruptcy Court for the Southern District of Indiana, involved a Chapter 7 Trustee’s adversary proceeding seeking contribution from the debtor’s spouse.  The opinion is thorough and complicated.  My goal here merely is to touch upon the concepts of common law contribution  and accommodation parties, which are similar to guarantors but ultimately treated differently under the law. 

Loan basics.  In Simpson, the debtor, an individual, operated a farm on residential real estate that he and his spouse owned.  To help fund the business, the debtor borrowed money from a lender secured by a mortgage on the real estate.  Interestingly, the wife also signed the subject promissory note, but the opinion doesn’t specifically explain why.  The spouse was not a partner in the debtor’s business and did not directly benefit from the proceeds of the subject loan.  But, to make the loan, the lender needed the mortgage, which the debtor could not have granted without the signature of his spouse.

Contribution.  Within the Chapter 7 bankruptcy case, the Trustee sought a judgment against the debtor’s spouse to recover half the amount of the joint loan.  In cases like these, the Trustee stands in the shoes of the debtor.  The Trustee claimed that the spouse was liable to the bankruptcy estate pursuant to Indiana’s doctrine of contribution, about which I wrote on 2/1/12 and 10/10/08.   

Accommodation party defense.  Following a lengthy discussion, the Court concluded that Indiana law permits an action for contribution as between spouses.  The opinion next focused on the affirmative defense asserted by the spouse.  Specifically, Indiana’s UCC provides that an action for contribution may lie “except as provided in I.C. § 26-1-3.1-419(f) . . ..”  See, I.C. § 26-1-3.1-116(b).  Section 419(f) states that:

[a]n accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party . . . [but a]n accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party.

The legal question became whether the spouse was an “accommodation party” under I.C. § 26-1-3.1-419(a). 

Accommodation party defined.  Generally, an accommodation party “signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument.”  I.C.§ 26-1-3.1-419(a).  The Court addressed various cases regarding who qualifies as an accommodation party.  This included the Keesling case, which was the subject of my 2/23/07 post.  The Court concluded that any benefit to the spouse was “indirect within in the meaning of I.C. § 26-1-3.1-419(a) and Keesling.”  Because the debtor’s spouse was an accommodation party, the Court held that the Trustee’s claim for contribution failed.
 
Simpson tells us that, in Indiana, there isn’t a viable claim for contribution against an accommodation party.    

Federal Judiciary In Indiana To Continue Operations Through Shutdown

Last week, Indiana lawyers received the following notice from Laura A. Briggs, Clerk of the United States District Court for the Southern District of Indiana:

COURT OPERATIONS AFTER "SHUTDOWN"

The Federal Judiciary is likely to exhaust all available sources of funding some time during the week of October 14, 2013, unless a continuing resolution or other source of funding is passed by Congress and signed by the President before then.

Once all funds have been exhausted, the Judiciary enters a "shutdown" phase. However, even in this phase, the normal processing of all criminal and civil cases will continue. New cases can be filed.  Criminal and civil hearings and conferences will take place. Jury and bench trials will proceed.  CM/ECF will be operational, and Orders will be processed. The Courthouses of the Southern District will be open.

Customers should experience minimal disruption - unless they are involved in a civil case in which the United States Attorney's office has appeared.  Some of these cases are stayed pursuant to the Court's Order of October 7, 2013 (available on our website: www.insd.uscourts.gov).  The civil case docket should be reviewed to determine if the stay is in effect in a particular case. Questions about the presence or absence of a stay in a particular case should be directed to the Clerk's Office.

Any further information on this topic will be posted on the Court's website.

Indiana's Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures

We recently got a question from one of our firm's community bank clients that does a lot of small business lending.  The bank sometimes makes commercial loans that are guaranteed by the borrower’s principal.  The principal, in turn, secures his/her obligations under the guaranty with a mortgage on his/her primary residence.  The question was:

if the bank decides to foreclose on the mortgage in order to pay itself down under the guaranty of the commercial loan, do the pre-suit notice and settlement conference provisions of Ind. Code 32-30-10.5 apply?

The client believed that the answer was “no” because the subject loans were not made “primarily for personal, family or household purposes,” which in part defines the loans governed by the statute.  See I.C. 32-30-10.5-5(a)(2).

After consulting with my partner Tom Dinwiddie, who was involved in the creation of the 2009 legislation, we concluded that the client's understanding was correct.  (Click here for my 2009 post regarding the legislation.)  The process was never intended to apply to commercial loans.  The key is that the bank is foreclosing on property securing a business loan, not a consumer loan.  Even though the bank is targeting residential real estate, the protections afforded by the statute do not apply.  

Our conclusions with regard to the inapplicablity of Indiana's pre-suit notice and settlement conference statute - entitled "Foreclosure Prevention Agreements for Residential Mortgages" - are supported by case law interpreting the Fair Debt Collections Practices Act, which uses the identicle terminology "primarily for personal, family or household purposes...."  As noted by by 12/18/09 and 11/16/06 posts, the regulations of the FDCPA generally do not apply to commercial foreclosures or the collection of business debts.