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Lender’s Acceptance Of Partial Payments Did Not Waive Default

A situation may arise in which, post-default, a borrower will make, and a lender will accept, partial payments on the debt.  For instance, the borrower may be buying time until it can either bring the promissory note current or pay it off.  The question becomes – what are the consequences of accepting such payments?  Mark Line Industries, Inc. v. Murillo Modular Group, Ltd., 2013 U.S. Dist. LEXIS 13434 (N.D. Ind. 2013) (rtclick, save target as for .pdf) addresses this set of circumstances. 

The payments.  The parties to the Mark Line litigation entered into a promissory note in the principal amount of $743,000, with a maturity date (due date) of November 15, 2009.  The Maker/Payor did not pay the balance of the promissory note by the maturity date.  However, the Payee/Holder received a partial payment of nearly $80,000 in January, 2010 and applied that payment to the principal and interest due.  In April, 2010, via a third party, a second payment in the amount of $317,000 was made to the Holder/Payee.  Despite accepting the payments, the Holder/Payee proceeded with its collection case against the Maker/Payor. 

The defense.  The Maker/Payor’s only argument in the case was that, by accepting the partial payments, the parties modified their agreement to allow the Maker/Payor to continue to make partial payments.  Essentially, the Maker/Payor contended that the promissory note had not actually matured and that the Holder/Payee could not claim a default.

Modification rules.  In Indiana, a contract modification may be implied from the parties’ conduct.  As such, a modification need not be in writing.  For a finding of a contract modification, however, the conduct must have differed in some way from the terms of the original contract. 

No modification.  Importantly, the promissory note in Mark Line contained language in which the parties explicitly agreed that the Holder/Payee could accept partial payments without impacting its ability to demand full payment.  The note stated “[a]cceptance of partial payments by Payee will not alter the rights for the remaining balance due under this Note.”  By keeping partial payments, the Holder/Payee “was doing exactly what it had negotiated to do in the promissory note.”  The Court granted summary judgment to the Holder/Payee accordingly. 

One of the takeaways from Mark Line is to check the language of the promissory note when there are questions about a particular party’s rights.  I think most promissory notes contain anti-waiver language similar to that in the Mark Line note, but before accepting any partial or post-default payments, check to be sure.  Without such language, lenders may open the door for an argument that they have waived the prior payment default.

Tim Durham Sheriff's Sale

The Indianapolis Star and the Indianapolis Business Journal recently reported on the March 6th sheriff's sale of Tim Durham's $5.5MM, 10,700 sq. ft. mansion in Hamilton County.  The mortgaged debt appears to be about $4.5MM.  Mr. Durham is serving a 50-year prison sentence for a $200MM Ponzi scheme. 

Here is a link to the Star's article:  Durham.  The IBJ article is premium content, so if you're a subscriber go to IBJ.com for the February 15th piece written by Greg Andrews. 

If you're interested in bidding at the sale, here is a link to the relevant Hamilton County Sheriff's website, and here is a link to the listing, which is on page 86 of 111.   

Indiana No-Nos: Confessions Of Judgment And Cognovit Notes

An out-of-state client recently asked whether Indiana allows “confessions of judgment.”  Some states permit these, but Indiana is not one of them.

Definition.  Black’s Law Dictionary defines a “confession of judgment,” in part, as:

The act of a debtor [borrower] in permitting judgment to be entered against him by his creditor [lender], for a stipulated sum, by a written statement to that effect . . . without the institution of legal proceedings of any kind . . ..

These essentially allow a judgment to be entered without a lawsuit. 

Cognovit note.  A confession of judgment goes hand in hand with a “cognovit note”.  The Indiana Court of Appeals has cited to the following common law definition of such a note:

[a] legal device by which a debtor [borrower] gives advance consent to a holder’s [lender’s] obtaining a judgment against him or her, without notice or hearing.  A cognovit clause is essentially a confession of judgment included in a note whereby the debtor agrees that, upon default, the holder of the note may obtain judgment without notice or a hearing. . .  The purpose of a cognovit note is to permit the noteholder to obtain judgment without the necessity of disproving defenses which the maker of the note might assert . . .  A party executing a cognovit clause contractually waives the right to notice and hearing. . . .

Jaehnen v. Booker, 800 N.E.2d 31 (Ind. Ct. App. 2004).  Indiana has codified the definition of a cognovit note at Ind. Code § 34-6-2-22.  As you can imagine, cognovit notes and confessions of judgment can be powerful loan enforcement tools for lenders. 

Prohibited.  Cognovit notes and confessions of judgment are prohibited in Indiana.  In fact, a person who knowingly procures one commits a Class B misdemeanor pursuant to I.C. § 34-54-4-1.  The Jaehnen Court suggested there is an “evil” associated with of obtaining judgment against a borrower without service of process or the opportunity to be heard. 

An aside.  The Jaehnen case addressed the issue of whether a party is precluded from enforcing a promissory note merely because it contained a cognovit provision.  The Court noted that the plaintiff did not avail himself of the specific cognovit provision in the note.  He sought payment only after filing a complaint, providing for service of process and allowing the defendant the opportunity to hire an attorney and to be heard.  The Court held that the illegal provision did not destroy the overall negotiability of the note.  In other words, cognovit paragraphs may be deleted by the plaintiff/lender/payee without destroying the right to a judgment on the note in a standard lawsuit. 

Don’t be confused.  Indiana has a statute entitled “Confession of judgment authorized” at I.C. § 34-54-2-1.  However, the authorized confession of judgment is a different animal than what I discuss above.  The statute states:

Any person indebted or against whom a cause of action exists may personally appear in a court of competent jurisdiction, and, with the consent of the creditor or person having the cause of action, confess judgment in the action. 

This confession of judgment is not a unilateral filing by a creditor but rather an event arising within a standard lawsuit following notice and an opportunity to be heard.

TIMBER! Creditor’s Alleged Vendor’s Lien Falls

Like last week, this week’s post arises out of In Re: Cruse, 2013 Bankr. LEXIS 360 (S.D. Ind. 2013) (.pdf).  For factual background, please review last week’s entry.  Indiana lenders and businesses dealing with timber will gain insight from Cruse.

Vendor’s lien.  Today’s discussion surrounds the Creditor’s contention in Cruse that he held an enforceable vendor’s lien against timber that the Debtor cut down from the Creditor’s land.  For more on Indiana vendor’s liens, please click on my prior post:  What Is A Vendor’s Lien?

Real estate only.  The Court in Cruse rejected the Creditor’s argument for the simple reason that “under Indiana law, no vendor’s lien can arise on personal property.”  As mentioned last week, the Court held that the timber in Cruse was personal property and thus governed by the Uniform Commercial Code.  Indiana law appears to be settled that vendor’s liens only arise in “the context of the sale of real property,” including for instance a land contract.  The Cruse contract, however, only involved the trees (a/k/a timber; a/k/a goods).

Timber = personal property.  It may be counterintuitive for living trees to be viewed as personal property, as opposed to real property.  Yet the result in Cruse and the supporting legal authorities leave no doubt that the UCC and personal property law, not vendor’s liens or real estate law, govern transactions involving timber.  Had the heart of the transaction in Cruse been the Debtor’s purchase of the Creditor’s land (including the trees), then there might have been a different outcome – definitely a different legal analysis.