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Following A Dismissal, Lenders Generally Are Able To Refile Foreclosure Actions Based On New Defaults

In Indiana, if a mortgage foreclosure action gets dismissed, even with prejudice, the lender usually has the right to file another action if there is a subsequent and separate loan default.  The Indiana Court of Appeals in Deutsche Bank v. Harris, 2013 Ind. App. LEXIS 150 (Ind. Ct. App. 2013) touches upon this rule.

Procedural posture.  For a multitude of reasons not pertinent to this post, the trial court in Harris dismissed the lender’s foreclosure case, pursuant to Indiana Trial Rule 41(E), for an alleged failure to prosecute.  The appeal explored whether the trial court abused its discretion in denying the lender’s Trial Rule 60(B) motion for relief from the adverse judgment.  The main point here is that the trial court dismissed, with prejudice, the lender’s mortgage foreclosure suit, and even went so far as to enter an order quieting title per the borrower’s counterclaim. 

Reinstitution possible.  The Court of Appeals reversed the trial court’s decision for a number of reasons, one of which was the borrower’s “incorrect argument that the [lender] could not reinstitute an action under the Note and Mortgage based upon a new default.”  Indiana case law provides that, where the initial foreclosure action by the lender was dismissed with prejudice pursuant to Trial Rule 41(E), a lender is not barred from initiating successive foreclosure actions for “subsequent and separate” alleged defaults by a borrower under a promissory note.  “Subsequent and separate alleged defaults under notes create a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action,” the Court said. 

Upshot.  The Court of Appeals held that the lender “would not be precluded from later filing a claim under the Note and Mortgage for subsequent and separate alleged defaults” by the borrower.  Based on that and other reasons, the Court reversed the trial court’s entry dismissing the lender’s lawsuit, and the Court remanded with instructions that the trial court reinstate the lender’s cause of action. 

Impact of rule.  Without doing more exhaustive research, it is not entirely clear to me, based upon the Harris opinion alone, whether the “right to refile” rule is limited to dismissals under Trial Rule 41(E).  The opinion did not specify whether (or not) the rule also applies to other dismissals, for instance those under a borrower’s motion to dismiss under Trial Rule 12(B)(6) or motion for summary judgment under Trial Rule 56. 

In my view, a technical, procedural dismissal will not, in Indiana, prevent lenders from suing on future loan defaults.  The dismissal of a lender’s mortgage foreclosure action should not, in and of itself, terminate a mortgage or release the borrower from obligations under a promissory note.  For that to occur, my opinion is that a court would need to enter a specific judgment or decree reaching that conclusion, and would need legal justification to do so.  A mere dismissal of a foreclosure lawsuit, without some corresponding adjudication on the merits that the mortgage is terminated and/or that the note is cancelled, should not bar a lender from subsequently trying to foreclose. 

UPDATES:

Following Rule 41(E) Dismissal For Failure To Prosecute, Can A Second Suit Be Filed?

Third In Rem Foreclosure Action Barred Due to Rule 41(E) Dismissal Of First Action

 


Borrower’s Claims Of Negligence, Unconscionability And Quiet Title Negated

The Seventh Circuit Court of Appeals put an end to a borrower’s tactics to overcome a mortgage loan default in Jackson v. Bank of America Corporation, 711 F.3d 788 (7th Cir. 2013).  The case provides some good law for lenders/mortgagees.  Specifically, the opinion addresses the claims/defenses of negligence, fiduciary duty, unconscionability and quiet title.  Interestingly, the mortgagee had not yet filed a foreclosure action.  Apparently the borrower attempted a preemptive strike by filing his own lawsuit to thwart any future loan enforcement suit by the mortgagee. 

Negligence/fiduciary duty.  The borrower first contended that the mortgagee “negligently evaluated . . . the ability [of borrower] to repay the loan,” including specifically the utilization of gross income rather than net income.  In Indiana, claims of negligence involve three elements:  duty, breach of duty and injury proximately caused by breach.  To meet the first (relationship-related) element, the borrower contended that the mortgagee owed him a fiduciary duty.  The Court noted that, under Indiana law, such a duty generally does not arise between a lender and a borrower.  “A mortgage contract does not, on its own, create a confidential relationship between a creditor and a debtor.”  Accordingly, the Seventh Circuit affirmed the District Court’s dismissal of the borrower’s negligence claim. 

Unconscionability.  The second assertion of the borrower was that the mortgage was “unconscionable” and should be set aside.  Under Indiana law, an unconscionable (and thus unenforceable) contract is one that “no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.”  The Court rejected the borrower’s claim with a nice discussion of unconscionable-related contract law in Indiana.  The Court’s opinion touched upon the borrower’s suggestions that the mortgagee committed fraud based on the borrower’s lack of “specialized knowledge” required to evaluate whether the loan was in his best interests.  The Court reasoned that the borrower had “not shown how this contract, which is so similar to untold numbers of other mortgage refinancing contracts, could possibly be one that ‘no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.’” 

Quiet title.  The borrower’s quiet title claim was odd, and the Court disposed of  it with brief comments.  From what I can gather, the borrower’s claim was an attempt to extinguish the mortgage from the chain of title.  The borrower’s effort to pound a square peg in a round hole did not survive the mortgagee’s motion to dismiss.  The opinion on this point is not particularly educational, primarily due to what the Court noted to be the borrower’s attempt to “cut new turf” in Indiana quiet title law.  The Seventh Circuit did not allow any new turf to be cut.

Jackson is yet another recent Indiana opinion that helps lenders with early dispositions of borrowers’ attempts to delay the inevitable.  And, federal courts appear to be more receptive than state courts to Rule 12(b)(6) motions to dismiss. 

(Please forgive the absence of posts lately.  My day job has put me on the road a lot this Spring and thus away from my blog.)


2003 Guaranty Applied To 2007 Promissory Note And Other Post-2003 Liabilities

 

Judge Barker’s opinion in Knauf v. Southern Brands, U.S. Dist. LEXIS 38435 (S.D. Ind. 2013) (.pdf), dealt with defendant guarantors’ motion to dismiss.  As reported here previously, guarantors’ efforts to defeat liability in Indiana is a challenge to say the least.  Knauf is yet another opinion rejecting defenses to a guaranty.

The players.  Knauf did not involve a traditional lender/borrower commercial mortgage loan but rather a manufacturer and a distributor.  The opinion details a multitude of financial transactions between the parties.  For purposes of this post, the case turned on a 2003 guaranty signed by a husband and wife, who were the owners and operators of the distributor indebted to the manufacturer. 

The guaranty.  In 2003, the distributor signed a promissory note for nearly $800,000, and the subject guaranty was to be in effect “[u]ntil all [l]iabilities guaranteed [there] by [were] paid in full.”  In 2006, the 2003 note was paid in full.  In 2007 the distributor signed another promissory note, in the amount of $1.9MM, upon which it later defaulted.  The manufacturer sought to recover on the 2007 note plus an additional $1.6MM for goods the distributor purchased over the course of the relationship.

Defense.  The guarantors filed a motion to dismiss and asserted that the 2003 guaranty “expired on its own terms in July 2006, when the “liabilities guaranteed hereby [were] paid in full.”  In short, the guarantors contended that the guaranty only applied to the corresponding 2003 note. 

Offense.  The manufacturer, in turn, argued that the guarantors misinterpreted the guaranty’s definition of the term “liabilities.”  The provision stated:

[T]he undersigned hereby unconditionally guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of the DEBTOR to the CREDITOR, howsoever created, arising or evidenced, whether direct or indirect. Absolute or contingent, or now or hereafter existing, or due or to become due (all such obligations being collectively called the “Liabilities”). . . .

The manufacturer reasoned that the language defining “liabilities” was unambiguous and reflected the guarantors’ stipulation to vouch for the distributor as to all obligations owed to the manufacturer, “howsoever created.” 

Finding.  The Court denied the motion to dismiss and held that the parties intended the term “liabilities” to include several amounts, not just the sum due under the 2003 note that had been paid, but rather the 2007 note and the additional sums owed for goods purchased over time.  The result in Knauf was similar to that in the TW General Contracting Services case addressed in my August 6, 2009 post.  In Indiana, the language in the guaranty will control the outcome.  Broad language likely will be applied broadly. 

While it may be advisable for lenders, when renewing promissory notes or obtaining subsequent promissory notes, to have a new guaranty signed, Indiana law does not appear to this in cases in which guaranty-related language is open-ended.  Certainly each case, and each guaranty, is different, but generally speaking decks are stacked against guarantors in Indiana.