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Defendants’ “Unclean Hands” Defense Fails In Lender’s Indiana Foreclosure Case

Lesson.  Shrewd settlement negotiations by a lender in workout discussions with sophisticated borrowers and guarantors should not amount to “unclean hands” by the lender and should not bar a commercial mortgage foreclosure action if such negotiations reach an impasse. 

Case cite.  East Point Business Park v. Private Real Estate Holdings, 49 N.E.3d 589 (Ind. Ct. App. 2015).   

Legal issue.  Whether alleged “unclean hands” by a bank and its successor-in-interest prohibited the foreclosure of the mortgage. 

Vital facts.  East Point arose out of a failed commercial real estate development project involving both the purchase of land and the construction of improvements on the land.  The East Point case addressed several legal matters, and the facts in the lengthy opinion are dense.  For the purpose of this post, Defendants essentially contended that the plaintiff lender (assignee) and the predecessor-in-interest bank (assignor) (collectively, “Lender”) unfairly negotiated loan renewals, including grouping outstanding loans, transferring debt from one loan to another and asking a guarantor to pay delinquent real estate taxes on property he owned.  Moreover, during the negotiations, Lender allegedly had come to a verbal agreement to renew the loan only to later renege on the agreement – deciding instead to “scrap” the loan renewal process.      

Procedural history.  Lender filed a motion for summary judgment.  The trial court granted the motion.  Defendants appealed. 

Key rules. 

  • Under Indiana law, foreclosure actions are equitable in nature.  Trial courts have full discretion to fashion equitable remedies that are “complete and fair to all parties involved.” 
  • The equitable doctrine of unclean hands provides:  “the party who seeks equitable relief must be free of wrongdoing in the matter before the court.” 

Holding.  The Indiana Court of Appeals affirmed the trial court’s summary judgment for Lender.  Lender’s allegedly unclean hands did not prevent the foreclosure action from occurring.

Policy/rationale.  The Court did not buy into Defendants’ arguments that Lender’s actions constituted unclean hands:

[Defendants were] attempting to negotiate a long-term loan renewal with [Lender].  In exchange, [Lender] was attempting to obtain certain concessions from [Defendants]. …  [Lender’s behavior] was simply part of the negotiation process in the renewal of a multi-million dollar loan among sophisticated parties.

The Court also reasoned that there was no evidence suggesting that Lender was obligated to renew the loan.  “We will not say that [Lender] acted improperly by not renewing a loan it was under no obligation to renew.” 

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Part of my practice is to protect the interests of lenders in contested foreclosures.  If you need assistance with such matters in Indiana, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, you can receive my blog posts on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

 

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