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Defective Notary Does Not Mean Defective Mortgage

Lesson.  Technical errors in a mortgage instrument will not necessarily invalidate it.  In particular, Indiana mortgages, which almost always are notarized, are not unenforceable simply because the notarization is flawed.

Case cite.  Borgwald v. Old National Bank, 12 N.E.3d 252 (Ind. Ct. App. 2014).

Legal issue.  Whether the lender’s mortgage was invalidated by an alleged violation of an Indiana statute prohibiting a notary from taking an acknowledgement from someone who is blind without first reading the instrument to her. 

Vital facts.  The borrower in this foreclosure case was an elderly woman who, at the time of closing, had difficulties with sight and hearing.  The borrower’s granddaughter was her caretaker, and the granddaughter took the borrower to a bank to apply for a home equity line of credit, the purpose of which, in part, was to pay the granddaughter for the care.  The borrower subsequently passed away, and the line of credit had a sizable balance that the lender pursued against the borrower’s estate.  In defense of the debt, the estate claimed, among other things, theft and undue influence on the part of the granddaughter.  As to the mortgage, the lender’s customer service representative testified that she explained the mortgage to the borrower but did not read it in its entirety to her.  But the bank’s customer service representative, who closed the loan, was not the notary for the mortgage, and the notary did not testify.

Procedural history.  Borgwald was an appeal from a bench trial in which the trial court found that the mortgage was enforceable. 

Key rules.  Indiana Code § 33-42-2-2(a)(4) states, among other things, that a notary public may not “take the acknowledgement of any person who is blind, without first reading the instrument to the blind person.”  On the other hand, in Indiana, “a mortgage need not be notarized in order to be enforceable.”  See, I.C. § 32-29-1-5

Holding.  The Indiana Court of Appeals affirmed the trial court and concluded that the lender’s mortgage was not invalidated by the defective notary. 

Policy/rationale.  The Court reasoned that the problems with the notary only invalidated the notary’s signature, not the mortgage:  “[e]ven assuming that the mortgage was not read to [the borrower] and that [the borrower] could be characterized as being blind . . . the validity of the mortgage would not be affected, only the notary’s signature.”  Very generally, the purpose of a notarization is to create a presumption that a signature on a legal document is authentic.  In Borgwald, there was no question that the borrower executed the mortgage. 

Related posts. 

Full Faith And Credit: Indiana Foreclosure’s Die Was Cast By Kentucky Judgment

Lesson.  If, as a lender, you have a promissory note (or notes) secured by mortgages in two (or more) states, you should only be required to litigate the note default and damages claims in one state.  Although you still must open a subsequent case in Indiana to obtain a decree of foreclosure, you should not have to incur the time and expense of a “do-over” to adjudicate the merits of the underlying promissory note (or guaranty) issues. 

Case Cite.  Setree vs. River City Bank, 10 N.E.3d 30 (Ind. Ct. App. 2014).

Legal Issue.  Whether principles of full faith and credit required the Indiana trial court to consider a Kentucky judgment res judicata.  A sub-issue was whether the Kentucky judgment had any influence in the Indiana foreclosure action, which involved a property separate from that which was the subject of the Kentucky action. 

Vital Facts.  In Setree, the borrowers executed promissory notes in favor of the lender, which notes were secured by mortgages on real estate in both Indiana and Kentucky.  The lenders claimed the borrowers defaulted under the notes.  In a foreclosure proceeding in the state of Kentucky, the judge found the borrowers to be in default under a note that was secured by the Indiana mortgage.  Following the Kentucky ruling, the lender, in the Indiana action, sought to foreclose on the Indiana property.  The Indiana trial court granted the lender’s summary judgment motion and concluded, in part, that, based upon full faith and credit principles, res judicata prevented the relitigation of the borrowers’ defaults, which the Kentucky court previously decided. 

Procedural History.  Setree arose out of the borrowers’ appeal of the trial court’s summary judgment in favor of the lender.

Key Rules.  The United States Constitute requires “full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state.”  Indiana codified this principle at Ind. Code § 34-39-4-3, which provides that records and judicial proceedings from courts in other states “shall have full faith and credit given to them in any court in Indiana as by law or usage they have in the courts in which they originated.” 

The one exception to this rule, is that a foreign judgment may be open to collateral attack “for want of jurisdiction.”  Before Indiana is bound by a foreign judgment, it may inquire as to the jurisdictional basis for the original judgment because, if the original court did not have jurisdiction over the subject matter or the parties, “full faith and credit need not be given.”  (Jurisdiction was a non-issue in Setree.)

The doctrine of res judicata is designed to prevent relitigation of the same issues in a subsequent case.  To apply, there must be (1) an identity of the parties between the two actions, (2) an identity of the two causes of action, and (3) the prior action must have been decided on the merits.

Holding.  The Indiana Court of Appeals resolved that it must grant full faith and credit to the Kentucky order.  The Court held that, although the Kentucky case concerned different mortgages and different property, the trial courts in both states litigated the same issues between the same parties, including specifically whether the borrowers were in default.  Therefore, “granting the Kentucky judgments full faith and credit, we are precluded from addressing the [borrowers’] claim [that there was no default].” 

Policy/Rationale.  The Setree opinion did not delve into policy.  My understanding has always been that these rules are rooted in principles of judicial economy or, in other words, are to save the court system and the parties time and money. 

Related Posts. 


Note Sale Will Not Release Guarantor

The Indiana Court of Appeals opinion in Riviera Plaza v. Wells Fargo, 2014 Ind. App. LEXIS 208 (Ind. Ct. App. 2014), discussed whether the “material alteration” defense, sometimes asserted by guarantors seeking dismissal, applies when a loan is transferred from one lender to another.

The defense.  My 01-10-09 post talks about “material alteration” in detail.  The general rule is that, when the lender and borrower cause a material alteration of the underlying obligation -  without the consent of the guarantor - the guarantor is discharged from further liability.  The nature of the alteration must be “a change which alters the legal identity of the principal’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position.” 

Assignment a material alteration?  In Riviera, the guarantor asserted that the sale and assignment of the underlying mortgage loan from the prior lender to the plaintiff lender constituted a material alteration that released the guarantor of his obligation under the guaranty.  The guarantor argued that he did not consent to the transfer and cited to the Keesling case about which I wrote on 03-23-07.  The Court in Riviera, however, stated that Keesling “is easily distinguishable from the instant matter.”  Simply put, “the assignment of the Loan Documents did not alter [the borrower’s] obligation under the terms of the Note.”  The Court in Riviera also pointed to language (see my 8-26-15 post) in the subject guaranty that suggested an assignment of the guaranty does not constitute a material alteration. 

Fail.  The guarantor’s defense failed.  Here is what the Court in Riviera said:

[I]n light of the language contained in the Guaranty expressly providing that the Loan Documents could be assigned to another lender with or without notice to [the guarantor] and that the Guaranty shall follow the Note and Mortgage in the event the Note and Mortgage were assigned by [the original lender], we conclude that the assignment of the Loan Documents did not constitute a material alteration which would release [the guarantor] from his obligation under the Guaranty and preclude recovery by [the plaintiff lender/assignee].

The argument asserted by the guarantor was clever but, in the end, lacked merit.  In a loan sale, with regard to the guarantor, really the only thing materially altered is the party to whom payments must be made.  The obligation itself remains unchanged in such transactions.  Plus, the law does not require a guarantor or a borrower to consent to the sale in the first place.  They are not parties to such transactions.       

In addition to prosecuting and defending commercial foreclosure cases, I assist clients with the purchase and sale of mortgage loans.  If you would like to discuss such a transaction, please contact me or my partner Rob Inselberg, who is a whiz at negotiating and papering these deals. 

Employees Of Mortgage Loan Servicers Are Competent To Testify About Default And Damages In Foreclosure Cases

This is a spin on my 09/10/13 post discussing how to prove a default.  Many mortgage loans, both residential and commercial, are “serviced” by companies separate and distinct from the lender itself.  In a nutshell, servicers are the liaison between the lender and the borrower (my definition).  Servicers are therefore agents of the lenders.  Whether and to what extent employees of servicers can testify at a trial on behalf of the lender was at issue in Riviera Plaza v. Wells Fargo, 2014 Ind. App. LEXIS 208 (Ind. Ct. App. 2014)

Objection.  In Riviera, a case I discussed last week, the defendants in the commercial mortgage foreclosure objected to the testimony of witnesses who serviced the loan on behalf of the plaintiff, Wells Fargo, as well as predecessors in interest to Wells Fargo.  All of the witnesses testified about the borrower’s default on the promissory note, including that the borrower failed to make scheduled loan payments during the time each specific witness serviced the loan.  The borrower challenged whether the witnesses were competent to testify and specifically claimed that the witnesses lacked the requisite personal knowledge. 

Competent.  Indiana Rule of Evidence 602 “Lack of Personal Knowledge” provides that a “witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter.”  So, a lack of personal knowledge renders the witness incompetent.  A determination of competency is a determination of whether, and to what extent, a witness may testify at all.  Indiana case law provides that “a witness’ personal knowledge of a situation can be inferred from his or her position or relationship to the facts set forth in his or her testimony or affidavit.”  Moreover, Indiana cases hold specifically that personal knowledge can be inferred from a witness’ position as a recovery specialist for a loan servicer.  Further, an asset manager “and his possession of files relating to the debt” justifies admission of the testimony concerning a borrower’s default and the amounts owed on the debt. 

Admissible.  The upshot is that employees of mortgage loan servicers are indeed the proper witnesses to prove a lender’s case to enforce its loan, assuming a proper foundation is laid for that particular witness to testify.  The Court expanded on this idea:

Here, each of the challenged witnesses testified that [the borrower] failed to make scheduled loan payments during the time in which each serviced the loan pursuant to their positions in loan recovery for the appropriate loan services.  Each of the challenged witnesses further testified to the amount owed and indicated that they had personal knowledge of the loan and serviced the loan in a manner consistent with the policies employed in the loan servicers’ normal courses of business.  As such, we conclude that the trial court did not err in determining that each of the challenged witnesses held the requisite personal knowledge to testify about [the borrower’s] default of the loan.

Normally the basis of this kind of testimony will be on the witness’ review and analysis of the records maintained by the servicer.  Although the Court in Riviera did not dwell on the records review concept, experience tells me that the review of loan records is the primary way to form a basis for the requisite personal knowledge of servicer witnesses.  Riviera supports this proposition.