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Mortgage On Wife’s Real Estate Discharged Post-Divorce Following Material Alteration Of Underlying Debt Owed By Ex-Husband’s Business

Lesson.  Lenders are well served to get the signatures of all parties to a loan, including all guarantors and mortgagees, if the loan is renewed or modified.  Otherwise, there is a risk that the guarantor or even a mortgage could be released.

Case cite.  First Federal Bank v. Greenwalt, 42 N.E.3d 89 (Ind. Ct. App. 2015).

Legal issue.  Whether a mortgage was discharged due to a material modification of the guaranteed indebtedness. 

Vital facts.  Husband and Wife granted a mortgage in the amount of $300,000 on two properties they owned to secure a promissory note executed by Husband’s business.  Following a divorce, Wife got Property 1, and Husband got Property 2.  Thereafter, Husband’s business and Lender consolidated debts and renewed the note multiple times without Wife’s knowledge.  The debt amount increased to nearly $450,000.  Husband later sold Property 2 and gave about $110,000 in net proceeds to Lender.  Ultimately, Husband was discharged of his debts in a Chapter 7 bankruptcy proceeding.  Lender then sought to foreclose on Property 1 to satisfy the remaining debt owed by Husband’s business.

Procedural history.  The trial court granted summary judgment for Wife, and Lender appealed.

Key rules.  In Indiana, one who mortgages her land to secure another’s debt is called a surety.  Indiana does not distinguish guarantors from sureties.  A surety’s collateral can be released by a creditor’s actions “such as the extension of the time of payment of the debt, the acceptance of a renewal note, or the release of other security.”  When a principal “alters the terms of the contract without the consent of the surety, the surety is discharged, even if the alteration is to the benefit of the surety.”  To result in a discharge, 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.”  

Holding.  The Court of Appeals affirmed the trial court’s summary judgment in favor of Wife.

Policy/rationale.  Wife originally was a surety for Husband’s business’s debt, but she contended that Property 1 was no longer subject to Lender’s mortgage.  Lender argued that there had been no material alteration to the debt but, if there had been, the debt that existed at the time of any material obligation was not discharged.  The First Federal Bank opinion thoroughly outlined the complex facts and applicable law, including the Keesling case (see post below).  The Court concluded that the alteration of the loan terms between Lender and Husband’s business constituted material alterations of the underlying obligation guaranteed by Wife such that both Wife, as a surety, and Property 1 were discharged.    

Related posts. 

Some Tips For Indiana Receivers

On occasion I represent receivers in commercial mortgage foreclosure cases.  Since I've been unable to create a new post this week, I thought re-share, with some updates, some of my tips here today related to receiverships over mortgaged real estate: 

1. Review and understand the proposed order appointing receiver before signing on.   Ask an attorney (like me) to review and help negotiate terms, as needed. 

2. Ensure your compensation is fair and profitable from the outset.  See #1.

3. Before the receivership hearing, eyeball the property – drive by and/or inspect if possible.  Understand the lay of the land.

4. Determine the plaintiff lender’s objectives with regard to the case and the property from the beginning:  babysit the property only, improve the property, sell the property, etc.?  Get a feel for the lender’s cost tolerance.  As a practical matter, the plaintiff lender is the captain of the ship. 

5. Once appointed:

    a. Secure rents ASAP.

    b. Ensure that hazard insurance is current.

    c. Determine the status of real estate taxes and confer with the lender regarding any delinquency.  Develop a plan with the lender as to how and when taxes should be paid, if at all.  Send a confirming email and record the status/plan in court-filed reports.

    d. Investigate the status of utilities and consider action.

    e. Evaluate whether there is any non-real estate (personal property) collateral of value and, if so, learn what the lender wants you to do with it.  Ensure that the action is covered by prior court order, or obtain order authorizing the action.

6. Hire an attorney unless (a) you have prior experience with, and trust in, lender’s counsel and (b) there is no apparent adversity with the lender.  Some lawyers have the view that receivers should always retain independent counsel.  I don’t necessarily share that opinion and tend to assess the issue on a case-by-case basis.  Having said that, the recent trend is for receiver's to have independent counsel, which probably is best.   

7. Report, report, report.  Inundate the lender’s representative and/or lender’s counsel with emails regarding significant issues and action.  Timely file all reports required by the order appointing receiver.  Full disclosure of operations is the best practice, especially if there are other creditors involved and/or an interested owner/borrower.  

8. As to major decisions affecting the property, including significant expenditures, obtain prior written approval from the lender or lender’s counsel.  See #7.  Emails are easy.  Use them.  Archive them for your file.

Potential receivers are free to call or email me with any questions.  And for more information on Indiana receiverships, please click on the category “Receiverships” and the "Receivership" statute to your right.

Indiana Commercial Court Pilot Project And Interim Rules

Yesterday, the Indiana Supreme Court issued interim rules related to Indiana's effort to form specialty commercial courts, about which I mentioned here in June and August of last year.  This program and these rules would apply to commercial foreclosures.   Click here for the rules.

One of our Firm's summer associates, Jedidiah Bressman, prepared a summary of the rules.  Thanks to Jedidiah for his contribution to my blog.

General Notes

There are six commercial courts handling specialized dockets of business cases.  The pilot project establishes these courts for business disputes in which parties agree to have their cases resolved:

• Allen Superior Civil Division Judge Craig Bobay;
• Elkhart Superior 2 Judge Stephen Bowers;
• Vanderburgh Superior Judge Richard D’Amour;
• Floyd Superior 3 Judge Maria Granger;
• Lake Superior Judge John Sedia; and
• Marion Superior Civil Division 1 Judge Heather Welch.

Commercial Courts employ and encourage electronic information technologies, such as e-filing, e-discovery, telephone/video conferencing, and employ early alternative dispute resolution interventions, as consistent with Indiana law.

Cases Eligible For Commercial Court Docket (CCD)

Any civil case, including any jury, non-jury case, TRO, injunction, restraining order, class action, declaratory judgment, or derivative action, shall be eligible for assignment into the CCD if the case relates to:

1. The formation, governance, dissolution, or liquidation of a business entity
2. Rights, obligations, liabilities, or indemnities of owners, shareholders, etc.
3. Agreements involving a business entity and an employee, member of the business entity, etc.
4.  Disputes between or among two or more business entities or individuals as to their business activities relating to contracts, transactions, or relationships between or among them, including without limited to:

a. Any transactions governed by the UCC, except for Consumer claims against business entities or insurers of business entities and Consumer Debts.
b. Cases relating or arising under antitrust laws.
c. Cases relating to securities or relating to or arising under securities laws.
d. Commercial insurance contracts, including coverage disputes.
e. Environmental claims arising from breach of contract or legal obligations or indemnities between business entities.
f. Cases with a gravamen substantially similar to the previous and not otherwise disallowed by Commercial Court Rule 3.
g. Subject to the acceptance of jurisdiction over the matter by the Commercial Court Judge, cases otherwise falling within the general intended purpose of the Commercial Court Docket wherein the parties agree to submit to the Commercial Court Docket.

Cases Not Eligible For CCD

1. Personal Injury;
2. Consumer Claims;
3. Matters involving only wages or hours, occupational health or safety, workers’ comp, or unemployment;
4. Any environmental claims not already established;
5. Eminent domain;
6. Any employment law cases not already established;
7. Discrimination cases based on federal or state constitutions;
8. Administrative agency, tax, zoning, and other appeals;
9. Petition Actions; strategizing;
10. Individual residential real estate disputes;
11. Any matter subject to the domestic relations, juvenile, or probate division of a court;
12. Any matter subject to the exclusive jurisdiction of a city court, a town court, or the small claims division of a court;
13. Any matter required by law to be heard in some other court or division of a court;
14. Any criminal matter, other than criminal contempt in connection with a matter pending on the Commercial Court Docket;
15. Consumer debts.

Steps To Get Into The CCD

1. If case is eligible and a party seeks to have the case assigned to the CCD, the attorney representing that party shall identify the case as a “CCD case” by filing with the clerk of the court a “Notice Identifying CCD Case” (“Identifying Notice”).
2. If a party does not consent a “Notice of Refusal to Consent to Commercial Court Docket: (“Refusal Notice”) must be filed within 30 days after service of the Identifying Notice; or 30 days after the date the non-consenting party first appears in the case.
3. If Identifying Notice is filed: (a) the clerk of court shall assign the case to the CCD, which assignment is deemed a provisional assignment; (b) if no Refusal Notice is timely filed by any party that has appeared in the case, the assignment of the case is deemed permanent; and (c) if a Refusal Notice is timely filed, the clerk shall transfer and assign the case to a non-CCD in accordance with applicable Rule.
4. If new trial is granted; or after remand is granted, the steps of getting into the CCD start over again.
5. The CCD judge has final say over whether a case is deemed appropriate for the CCD and can send a case back to a non-CCD in accordance with applicable rule. The judge’s determination shall not be subject to appeal.

General Notes About Getting Into CCD

1. This can be done at any time. (Of course, all parties must agree.)
2. This includes if a case becomes eligible for the CCD after a cross-claim, etc.
3. The Commercial Court Rules are limited to cases filed after June 1, 2016.  Cases already pending cannot be transferred.
4. Rule 4(C)(2) is the same as used in Trial Rule 3.1(B).