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Indiana Adopts “Partial Subordination” Approach To Priority Disputes Arising Out Of Subordination Agreements

 

The Indiana Court of Appeals in Co-Alliance v. Monticello Farm Service, 7 N.E.3d 355 (Ind. Ct. App. 2014) discusses subordination agreements, generally, and lien priority disputes arising out of them, specifically.

Three lenders.  Co-Alliance dealt with three lenders, each of which financed the borrower’s farming operations.  Lender 1 had the senior lien on the borrower’s assets, and Lender 2 and Lender 3 held the second and third position liens, respectively.  In 2010, Lender 1 agreed to subordinate part of its senior lien in favor of Lender 3, thereby reducing the extent of Lender 1’s first position.  The subordination agreement was borne out of Lender 3’s stipulation to finance the borrower’s crops for that year.  In turn, Lender 1 agreed to subordinate its interests in the 2010 crops to Lender 3’s interests in them.  Lender 2 was not a party to the subordination agreement.

Subordination agreements, generally.  I touched upon subordination agreements in my September 18, 2013 post.  The Court in Co-Alliance noted that subordination agreements “are nothing more than contractual modifications of lien priorities.”  These types of agreements can “accelerate the flow of cash to troubled projects, providing financial relief that promotes the development of assets that are then used to secure payments to all lienholders.”

Contentions.  The Co-Alliance case was a dispute between Lender 2 and Lender 3.  Lender 2 basically asserted that it jumped into first position and theorized that “subordinate” necessarily means “to move a right or claim to a lower rank.”  Lender 2 took the position that the subordination agreement completely reduced Lender 1’s security interest in the 2010 crops such that that Lender 1’s position dropped to the last (or third) position.  The law commonly refers to this as “complete subordination,” and some states follow this rule.  Lender 3 argued that the subordination agreement “merely allowed [Lender 3] to momentarily step into the [Lender 1’s] first priority status.”  This is commonly referred to as “partial subordination.”  The Indiana Court of Appeals preferred this result.

Intent.  In Co-Alliance, the language of the subordination agreement showed that the parties’ intent was for Lender 1 to assign to Lender 3 a portion of any crop proceeds received by Lender 1 based upon its status as the senior lienholder.  In essence, Lender 1 induced Lender 3 to make a loan by guaranteeing it the right of first payment.  Again, Lender 2 claimed that the subordination agreement moved Lender 1 (and, by extension, Lender 3) to the back of the line, to the full extent of the security.  Yet, Lender 2 was not a party to the agreement and, according to the Court, “should not be entitled to a windfall.”  The Court illustrated the intent of the subordination agreement and how it would work:

Thus, [3,] by virtue of the subordination agreement, is paid first, but only to the amount of [1’s] claim, to which [2] was in any event junior.  [2] receives what it had expected to receive, the fund less [1’s] prior claim.  If [1’s] claim is smaller than [3’s], [3] will collect the balance of its claim, in its own right, only after [2] has been paid in full.  [1,] the subordinator, receives nothing until [2] and [3] have been paid except to the extent that its claim, entitled to first priority, exceeds the amount of [2’s] claim, which, under its agreement, is to be first paid. 

Lender 2 loses.  In Co-Alliance, the evidence showed that the amount of the crop proceeds in question did not exceed either the amount of Lender 1’s lien or the amount that Lender 1 was subordinated to Lender 3.  There was no evidence that Lender 2 was burdened by or benefited from the subordination agreement.  “Rather, [Lender 2] was unaffected.”  Accordingly, the Court held that the trial court properly found the subordination agreement gave Lender 3 a first-priority in the subject proceeds.


2015 Indiana Legislation: Uneventful

In the end, the Indiana General Assembly's 2015 session did not produce any meaningful foreclosure-related legislation or any amendments to prior foreclosure-related state laws.  As I wrote this Spring, there were some fireworks pertaining to SB 415, but the only thing that really arose out of the signed SB 415 was the creation of a state preemption of any local ordinance that involves foreclosures.  Quiet year. 


Indiana Foreclosures: How Long Do They Take?

One question I often get is:  how long does the foreclosure process take in Indiana?  I posted about this back in November, 2006.  With the benefit of seven more years of experience and dozens of more cases, I’ve refined my answer.  As outlined below, commercial foreclosures can take anywhere from five months at the absolute earliest to several years. 

Judicial state.  The first thing to understand is that Indiana is a judicial foreclosure state.  A foreclosure requires a lawsuit, a judgment and a sheriff’s sale.  The process officially starts with the filing of a complaint.  (In residential cases only, Indiana law has pre-suit notice and settlement conference mandates.)

Timing.  Predicting the timing largely depends upon whether and to what extent the borrower contests (defends) the proceeding. 

Uncontested:  5 months minimum.  If a business borrower does not contest a foreclosure, the process can move relatively quickly.  Below are the major steps and an estimated timeline.  Five months is about as fast as things will go.  Realistically, the process will take longer.

Day 1:  Filing of the Complaint.

Day 7+:  Service of process on defendant - can occur in 7 to 10 days, but difficulties perfecting service are not uncommon.  This simple step can take several weeks

Day 28/31:  Motion for default judgment - can be sought 21 to 24 days after service of process.  A summary judgment may be preferable to a default judgment, but that should not alter the timing in an uncontested case.

Day 60:  Entry of judgment and decree of foreclosure - should occur in under 30 days.

Day 90:  Praecipe for sheriff’s sale, including notice of same - by statute, cannot be filed until three months after the Complaint.

Day 150:  Sheriff’s sale - happens about 60 days from Praecipe, depending on the county.

Contested:  8+ months minimum.  The steps in a contested case essentially will be the same as those above, except that the court will hold a hearing on the summary judgment motion that will necessarily delay a ruling.  Having said that, with the vagaries of litigation, it’s virtually impossible to conclusively estimate how long a case may last.  Each one is different and driven by a wide variety of factors.  Much depends upon how clear the default and the damages are, and how aggressively each party pushes its position.  An eight-month contested foreclosure is optimistic.  A year is not unusual.

Be prepared for delays.  The timing will be impacted by the docket of a particular court and/or the schedule of an individual civil sheriffs’ office.  Moreover, defense attorneys can prolong the matter by seeking (and obtaining) multiple extensions of time, serving requests for discovery and vigorously challenging a motion for summary judgment.  In the event of a trial, meaning that the court denied summary judgment, a resolution of the case will be deferred many months if not years.  Also remember that defendants can appeal an unfavorable ruling.  Finally, a borrower/mortgagor can stop a sheriff’s sale by filing for bankruptcy protection at any time before the sale begins. 

Even with the best loan documents and great facts, the Indiana foreclosure process, perhaps to the delight of borrowers and certainly the chagrin of lenders, has the potential to be a lengthy and expensive undertaking. 


Pro Hac Vice Admission In Indiana And The Role Of Local Counsel

You’re an out-of-state lawyer with a client who needs to enforce a loan in Indiana.  You’re not licensed to practice in the state, and no one in your firm is admitted in Indiana.  You don’t want to relinquish control over the case, but instead wish to be in charge of representing your long-standing client in its important matter.  What you need is to be admitted pro hac vice in the Indiana court.  

More Latin.  “Pro hac vice” in English means “for this turn; for this one temporary occasion.”  Black’s Law Dictionary.  In the legal context, the phrase refers to the limited admission to practice in a court.  Admission pro hac vice is governed by the Indiana Rules for Admission to the Bar and the Discipline of Attorneys, including specifically Rule 3, which was substantially amended in 2007. 

The 7 hoops.  Indiana’s rules require prospective pro hac vice admitees to jump through a number of hoops.  The rules mandate filings with both the Clerk of the Indiana Supreme Court ("Clerk") and with the particular trial court.  According to Rule 3(2)(a), here’s what needs to be done:

  1. Hire a member of the bar of the State of Indiana to act as co-counsel and ensure he or she has an appearance on file.
  2. Pay the Clerk a registration fee of $180.  See, Rule 2(b).  The registration fee must be paid annually until the proceeding has concluded.  See, Rule 3(2)(c). 
  3. Provide the Clerk with a copy of the Rule 3(2)(a)(4) Verified Petition for Temporary Admission ("VPTA") that will be filed with the trial court. 
  4. Procure from the Clerk a temporary admission attorney number and payment receipt. 
  5. File the VPTA with the trial court, co-signed by Indiana co-counsel, setting forth the nine specific disclosures articulated in Rule 3(2)(a)(4). 
  6. Obtain from the trial court an order granting the VPTA.
  7. File with the Clerk a Notice of Temporary Admission that includes a statement of good standing issued by the highest court in each jurisdiction in which the attorney is admitted to practice law, a copy of the VPTA and a copy of the order granting the VPTA.   

After successfully jumping through these hoops, counsel may file an appearance in the trial court.

Further handling of the case.  Beware of Rule 3(2)(d), which mandates that all papers filed in the cause of action be co-signed by the Indiana co-counsel.  On the other hand, unless ordered by the trial court, local counsel need not be personally present for court appearances. 

Indiana's philosophy.  Here is an excellent article entitled Taking the vice out of pro hac vice:  temporary admission and local counsel from the October, 2006 issue of Res Gestae, the official publication of the Indiana State Bar Association.  Donald R. Lundberg, the Executive Secretary of the Indiana Supreme Court Disciplinary Commission at the time, is the author.  The article describes the January 1, 2007 changes to the rules.  It also explains why Indiana co-counsel cannot be a “potted plant,” but instead must play a meaningful role in the case, particularly with written submissions.  In response to those who feel that Indiana’s procedural requirements for admission pro hac vice may be burdensome, Mr. Lundberg makes a great point:  “would you rather take the bar exam?”

The General and the Lieutenant.  My standard approach to serving as local counsel is based on the notion that, as with most cases, there needs to be a General and a Lieutenant.  Someone - one person – should be in charge, and others should follow that person’s orders.  Otherwise, the “too many cooks in the kitchen” syndrome develops, followed by reduced efficiency and increased costs to the client.  Usually, but not always, my primary purpose as local counsel is to support the out-of-state lawyer – to be a Lieutenant – regardless of the age or experience of the non-Indiana attorney.  Most good local counsel set their egos aside and do as little (or as much) as the lead counsel wants.  To me, the main objective of any out-of-state, lead attorney should be to hire a responsive, cost-effective role player with local knowledge of the law and procedures.  Certainly I’m always ready, willing and able to be lead counsel, and there are times when the referring attorney hires me to serve in that capacity.  But most of the time, out-of-state Generals simply want a local Lieutenant, which is fine with me.