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Borrowers/Guarantors Beware: Federal Magistrate Judge Strikes Undeveloped Affirmative Defenses


The Cincinnati Ins. Co. v. Kreager Bros., 2013 U.S. Dist. LEXIS 85743 (N.D. Ind. 2013) (.pdf), provides an entrée to the basics of affirmative defenses, which workout professionals may hear their foreclosure lawyers mention during the course of litigation.  The result in Kreager was surprising and is a lesson for defense attorneys, particularly those practicing in the Northern District of Indiana. 

Definition.  Generally, an affirmative defense is a defense for which the proponent bears the burden of proof and which, in effect, admits the essential allegations of the opposition’s claim, but asserts additional matter(s) barring relief.  Defendants must plead affirmative defenses in their answers to complaints.  See Fed. R. Civ. P. 8.

Procedural background.  The plaintiff in Kreager brought an action for the defendant’s default on a promissory note.  The defendant, in its answer to the plaintiff’s complaint, asserted four affirmative defenses, which can be found on pages 1 and 2 of the opinion.  The listed defenses were recognized affirmative defenses under Indiana law and were well written.   Nevertheless, the plaintiff moved to strike the defenses, under Rule 12(f), for an alleged failure to comply with Rule 8(a), which deals with pleading requirements. 

Pleading rules.  Under Rule 12(f), courts may strike from a pleading certain matters.  Although such motions generally are disfavored, “they may be granted if they remove unnecessary clutter from a case and expedite matters, rather than delay them.”  Affirmative defenses will be stricken “only when they are insufficient on the face of the pleadings.”  Federal pleading requirements require grounds for the court’s jurisdiction and must contain enough facts that the relief is plausible on its face.  “Bare legal conclusions” are insufficient, and affirmative defenses must involve a “short plain statement” of all material elements. 

Insufficient.  I must confess that the four affirmative defenses articulated in Kreager, a federal not a state court case, were generally consistent with custom and practice that I have observed, and frankly are not unlike my own approach to pleading affirmative defenses in answers to a complaint.  In Kreager, the plaintiff sought to have the affirmative defenses stricken.  The Court granted plaintiff’s motion.  While the affirmative defenses were concise, the Court found that they did not have “any surrounding factual support.”  “Boilerplate defenses without any support anywhere in the pleadings do not comply with Rule 8(a).” 

Successful tactic.  Plaintiff’s tactics in Kreager were a bit unusual because a determination of the viability of affirmative defenses probably could have been adjudicated in plaintiff’s subsequent motion for summary judgment.  But, the plaintiff and its lawyers decided to deal with the affirmative defenses at an early stage and were successful in doing so.  It was a good move in this particular case and before this particular Magistrate Judge (Andrew P. Rodovich).  For lawyers who represent secured lenders in foreclosure actions venued in federal court, Kreager represents an example of a procedural tactic one might want to consider.  For lawyers representing borrowers and guarantors, Kreager suggests that you might provide more beef when pleading affirmative defenses.  Boilerplate language, again something I admittedly have been guilty of and which would likely pass muster in state court, may subject you to an order to strike in federal court. 

Summary judgment on note.  As an aside, a year later (.pdf) the Court in Kreager granted summary judgment to the plaintiff.  The opinion cited to some good points of law:  (1) “a promissory note is a written promise by one person to pay another person, absolutely and unconditionally, a certain sum of money at a specific time,” (2) “an unconditional promissory note is a negotiable instrument rather than a contract,” and (3) “to enforce a negotiable instrument, the plaintiff must show that the instrument was endorsed and delivered” (see, Ind. Code § 26-1-3.1-201).

Bank Merger Rule Applied In Indiana Foreclosure/Tax Sale Case

In my 1/15/13 post, Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions, I discussed the Indiana Court of Appeals decision in CFS v. Bank of America, 962 N.E.2d 151 (Ind. Ct. App. 2012)CFS supported the idea that a predecessor bank in a mortgage foreclosure action need not assign its loans to the successor bank in order for the surviving bank to have legal standing to foreclosure a mortgage.  Such a transfer occurs as a matter of law by virtue of the merger/acquisition itself pursuant to 12 U.S.C. § 215(a)(e).

Last week's post, Secured Lender Loses Mortgage Due to Indiana Tax Sale, talked about the Iemma case, which dealt with whether a tax deed should have been set aside.  As a part of its analysis, the Court in Iemma cited to and relied upon the CFS opinion. 

In Iemma, Chase was the successor-in-interest to the original lender/mortgagee as identified in the subject mortgage on file with the county.  LRB, the tax sale purchaser in Iemma, argued, among other things, that Chase was not entitled to notice of the tax sale because Chase's status as a mortgagee was not recorded.  Essentially, LRB's contention was that Chase should have recorded an assignment of mortgage showing that Chase, not the predecessor bank, was the current holder of the mortgage.  Although Chase ultimately lost the case, Chase won on this particular point.  The Court held:

Under federal law pertaining to bank mergers, Chase was not required to file anything or to give public notice of its interest in the [real estate] because [the predecessor bank/original mortgagee] had alreay done so, and Chase acquired [the predecessor's] interest as a matter of law.

The main point of this post is to remind secured lenders and their counsel that the rule in 12 U.S.C. § 215(a)(e) is out there and that Indiana courts follow the principle that successor-by-merger banks don't need to record assignment documents.  They can, but they don't have to.


Secured Lender Loses Mortgage Due to Indiana Tax Sale

I previously addressed the pitfalls facing mortgage lenders when their borrowers fail to pay real estate taxes:  see, 11/16/10 and 12/30/11 Iemma v. JPMorgan, 992 N.E.2d 732 (Ind. Ct. App. 2013) is a recent Court of Appeals decision that upheld a tax sale and thus terminated a lender’s mortgage. 

The dispute.  The fundamental question in Iemma was whether the tax deed issued to the tax sale purchaser (“LRB”) should have been set aside due to LRB’s failure to properly notify the senior mortgagee, Chase, who was the successor-by-merger to Bank One-Merrillville (“BO-M”), the mortgagee identified on the recorded mortgage.  Chase filed an action to set aside the tax deed.  LRB’s defense to Chase’s case was two-fold:  (1) Chase was not entitled to statutory notice because its status as a mortgagee was not of record and (2) LRB’s mailing of notice to BO-M complied with the relevant notice statutes. 

Notice statutes.  The Court first examined whether LRB complied with the tax sale notice statutes.  In connection with LRB’s proceedings for a tax deed, its title search found an unreleased mortgage for the subject real estate in favor of BO-M at an address in Merrillville.  By law, BO-M was entitled to notice of the sale.  But LRB’s notices sent to BO-M at that address were returned as undeliverable.  LRB’s title search also disclosed Chase’s interests in the real estate by virtue of a separate foreclosure suit it had filed.  LRB sent the tax sale notices to Chase’s counsel in the foreclosure action, and the notices were delivered and received by Chase’s counsel, who in turn communicated the notices to their client, Chase.  The Court basically held that this method of notice complied with the Indiana statutes.  Candidly, and respectfully, I do not fully understand the bases of the Court’s conclusion on this particular point because LRB did not, in my view, comply with the technical requirements of the notice statutes.  Neither BO-M (non-existent) nor Chase received any direct notice.  The real rationale behind the Court’s decision, in my opinion, follows.

Due process.  The Court next examined whether LRB complied with constitutional due process, and the opinion turned upon an interpretation of Sawmill, about which I wrote on 12/14/12.  Again, LRB sent tax sale notices to Chase through its counsel actively engaged in an existing foreclosure suit that dealt with the subject real estate.  The Court felt this was enough:  “LRB gave notice to Chase Bank’s counsel, counsel received the notice and passed it along to Chase Bank, and Chase Bank thereafter sat on its rights until after the tax deeds were issued.”  The Court went on to state that notice, in tax sale matters, is required by statute, not Indiana’s trial rules, meaning that service of process/summons rules are not applicable:

Such notice can be achieved by yard signs, newspaper notices, and notices on doors; certainly, notice through counsel representing Chase’s property rights on the property is sufficient.  More importantly, the issue is not Chase’s actual knowledge; rather, the issue is whether LRB gave notice under the circumstances of this case in a manner reasonably calculated to inform Chase of the pending loss of its interest in the two lots . . ..  Under the particularities and peculiarities of this case, LRB has done so.

This was a tough decision for the lender and seemingly a close call.  The compelling factor was that Chase, through its lawyers, received actual notice of the tax sale.  If, as a mortgagee or foreclosure counsel, you receive tax sale notices, you need to take action.  If you don’t, your mortgage could be extinguished.