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Rooker-Feldman Doctrine Inapplicable To Some Claims, Says Indiana Court

The Rooker-Feldman doctrine generally will bar a borrower’s post-foreclosure federal court case against a lender.  I’ve written about this doctrine on four prior occasions, so for background and the basics click hereHochstetler v. Federal Home Loan Mortgage, 2013 U.S. Dist. LEXIS 99403 (N.D. Ind. 2013) (.pdf) is different from the other cases about which I’ve written because the Court found that three of the plaintiff borrower’s claims could not be dismissed pursuant to Rooker-Feldman “because they assert independent claims for relief.”  The implication is that the Court felt that the three claims were not "inextricably intertwined" with the prior state court foreclosure action.

FDCPA.  The borrower, in this residential/consumer case, made claims under the Fair Debt Collection Practices Act, which provides relief “that can be granted without setting aside the judgment of foreclosure,” said the Court.  If and only if the alleged violations of the FDCPA were completed before the state court judgment, the Court could provide relief for such violations.  Thus Rooker-Feldman did not bar this cause of action in Hochstetler.

TILA.  The borrower also asserted claims under the Truth in Lending Act, another consumer protection statute (not applicable in commercial cases).  See, 15 USC 1640(a)(1).  In Hochstetler, the borrower alleged that the lender misrepresented the terms of the mortgage before the signing of the mortgage.  The Court concluded that the claim could not be denied under Rooker-Feldman.  (I respectfully question this result, given the other opinions describing the doctrine.)

Intentional infliction of emotional distress.  The Court held that this cause of action also passed the Rooker-Feldman test because the borrower asserted a claim for relief “outside the scope of the state court judgment.”  (Again, I wonder about the correctness of this holding given the scope of the doctrine as presented in other cases.)

Dismissed.  The borrower averred a handful of other claims that were dismissed via Rooker-Feldman.  Further, despite passing the Rooker-Feldman test, the Court dismissed the borrower's FDCPA, TILA and IIED claims based upon Rule 12(b)(6) for the failure to state a claim for relief.  So, the lender ultimately was able to achieve a dismissal of the entire case.          

Guarantor Wins Res Judicata Battle, Loses Deficiency War

This follows up last week’s post regarding Weinreb v. Fannie Mae, 993 N.E.2d 223 (Ind. Ct. App. 2013).  This week, I delve into what Weinreb tells us about naming guarantors in foreclosure suits and pursuing defenses that don’t work.   

Procedural history.  Weinreb involved the personal liability of a defendant guarantor for a deficiency judgment.  In a prior lawsuit, the lender obtained a $7.8MM judgment on a promissory note and a decree of foreclosure on a mortgage, which proceedings resulted in a sheriff’s sale of the mortgaged property for $6.6MM and a deficiency of $1.8MM.  The guarantor was not a party to those proceedings.  Months later, the lender filed a complaint against the guarantor to collect the deficiency. 

Res judicata/collateral estoppel.  The guarantor disputed the deficiency.  The lender responded by asserting that the guarantor could not contest the elements of, or his liability for, the deficiency because those matters had been determined in the prior foreclosure.  Indeed the doctrine of res judicata “bars the litigation of a claim after final judgment has been rendered in a prior action involving the same claim between the same parties for their privies.”  The guarantor’s retort was that, since he was not a party to the foreclosure proceedings, he was not precluded from challenging the elements of the deficiency judgment.  The Court agreed:  “[the guarantor] did not have a full and fair opportunity to litigate the enforceability of the Note or his Guaranty.”  Weinreb highlights the question of whether to name guarantors as defendants in the initial foreclosure lawsuit.  You don’t have to, but in doing so, you avoid litigating two lawsuits.  (There are reasons why a lender may not want to name a guarantor in the foreclosure case.  For example, the lender could reach a sheriff’s sale more quickly without resistance from a defendant guarantor.)  The main point here is that the Court of Appeals, in the post-foreclosure action, gave the guarantor an opportunity to contest the enforceability of the loan documents and the amount of the deficiency.  Although the opinion leaves room for argument depending upon the facts of a particular case, the foreclosure action in Weinreb did not set the deficiency in stone.

Alleged ambiguity.  Despite winning the res judicata battle, the guarantor in Weinreb ultimately lost the deficiency war.  His two arguments against the enforceability of the guaranty failed.  The first was that summary judgment in favor of the lender was inappropriate because the loan documents were “extrinsically ambiguous.”  The guarantor’s theory was similar to the “confusion defense” articulated in my 1/14/13 post.  After addressing Indiana law related to alleged ambiguities in contracts, the Court concluded that “parties are obligated to know the terms of the agreement they are signing, and cannot avoid their obligations under the agreement due to a failure to read it.”  The guarantor’s alleged failure to read did not equate to an ambiguity, and the Court affirmed the trial court’s summary judgment for the lender. 

Unconscionability.  The guarantor’s second contention was that summary judgment should not have been granted due to factual questions surrounding whether the lender “used superior bargaining power to cause hardship to him.”  This triggered a discussion by the Court of the doctrine of unconscionability.  The rule in Indiana is that “a contract will be deemed unconscionable [and thus unenforceable] when a great disparity in bargaining power exists which leads the weaker party to sign a contract unwillingly or without being aware of its terms.”  This is always  a steep hill to climb in Indiana, and Weinreb was no different.  The evidence was undisputed that the guarantor was not in a position of weakness or unequal bargaining power.  The Court held that the loan documents, including the guaranty, were not unconscionable. 

The Court enforced the deficiency arising out of the prior foreclosure judgment.  For more on the liability of, and defenses surrounding, guarantors, please click on the Guarantors category on the right side of my home page. 

North of 96th Blog: Hawthorns To Lender For $5.5M

To bring this case study full circle, Andrea Davis, in her IBJ blog North of 96th, reported earlier this week that:  Hawthorns golf course sells to lender for $5.5M.  I followed this Indiana commercial foreclosure case starting with my 6/10/14 post, IBJ.com:  Hawthorns Golf & Country Club Bankruptcy/Foreclosure, and then my 10/24/14 post, IBJ.com:  Hawthorns Golf Club Foreclosure Update

The outcome of the Hawthorns matter, which centered around a splendid golf club on the northeast side of Indy, was that the lender/mortgagee (actually, a private investor group) acquired title to the Hawthorns free and clear of all liens.  The case is illustrative of how a real estate developer (in this instance, a golf course-based business) can become the owner of a project by first purchasing a distressed, secured loan and then foreclosing on that loan.        

If you are interested in pursuing a transaction like this, please give me a call.  Our firm has experience with these deals, which encompass real estate, litigation and bankruptcy law. 

Indiana Court of Appeals Concludes That Prepayment Premium Enforceable In Foreclosure Case

The opinion in Weinreb v. Fannie Mae, 993 N.E.2d 223 (Ind. Ct. App. 2013) is full of Indiana commercial law tidbits, and I intend to write more about the case later this week.  Today, I’d like to highlight quickly one of the important, stand-alone holdings by the Court related to “yield maintenance fees” a/k/a “prepayment premiums.”  To my knowledge, Weinreb is the first Indiana state court opinion since 1991 commenting on a lender’s right to recover these damages. 

Education.  For background and context, please click on my 2007 posts:  Yield Maintenance Fees, Part I:  Indiana Law and Yield Maintenance Fees, Part II:  Applying Indiana LawWeinreb does not change Indiana law.  Rather, the case officially extends it.  The Weinreb decision for first time upholds prepayment premium damages in a foreclosure (debt acceleration) action, as opposed to a mere pre-maturity payoff scenario. 

Recovery of lost interest.  The Court in Weinreb first determined that the subject clause constituted a liquidated damages provision.  The promissory note stated that, upon a default, the borrower was liable for repayment of “all of the Indebtedness,” which specifically included a recovery of the prepayment premium.  (The details of the language used will matter in your particular case.)  When a loan is prepaid, the lender is deprived “of interest it was to receive as consideration for making the loan.”  It follows that prepayment premiums “insure the lender against the loss of his bargain if interest rates decline.”    For a handful of reasons, the Court viewed the subject language as an enforceable liquidated damages clause as opposed to an unenforceable penalty provision. 

Amount okay.  The defendant guarantor in Weinreb contended that the premium could not be enforced in his case because it was too high.  Generally, a lender will need to demonstrate “some proportionality between the loss and the sum established as liquidated damages.”  Under the specific facts of Weinreb, which involved a $6MM loan payable over ten years at 6.37%, the 25% of unpaid principle premium was not grossly disproportionate to the lender’s losses, especially considering that the default occurred about two years after closing.  

Re-lent at higher rate?  The guarantor’s second argument was that the lender could have re-lent at a higher interest rate and thus may not have lost any money as a result of the default.  The Court rejected this point.  “All that is required is that the prepayment premium be reasonable and bear a relation to [the lender’s] loss.”  In Weinreb, the note articulated this idea, and prior Indiana precedent established that such provisions generally are enforceable.  The Court held that the prepayment premium fairly compensated the lender for the interest lost. 

The Court’s opinion sets out the yield maintenance provision in the Weinreb promissory note.  Since the language held up, lenders -  both on the front end of transactions and during post-default workout negotiations - might want to compare their clauses to the one in Weinreb.