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Bankruptcy Proofs Of Claim Following A State Court Judgment: Debt Locked In

Lesson.  If a lender obtains a judgment in a foreclosure case, the borrower generally cannot re-litigate the amount of the debt in a subsequent bankruptcy action.  

Case cite.  Harris v. Deutsche Bank, 2016 U.S. Dist. LEXIS 14838 (S.D. Ind. 2016) (.pdf).  Our law firm successfully handled this appeal for one of my servicer clients.  My partner Matt Millis took the lead with the briefing.   

Legal issue.  Whether a bankruptcy court is barred from recalculating a debt amount previously determined by a state court. 

Vital facts.  Lender held a senior mortgage on real estate owned by Debtor, who defaulted on the subject promissory note and mortgage.  Lender, in state court, filed a foreclosure action and obtained a summary judgment after Debtor unsuccessfully argued that Lender improperly calculated the amount due.  One of Debtor’s points was that Lender failed to account for payments the Chapter 13 Trustee made in Debtor’s prior bankruptcy.  Debtor did not appeal the state court’s summary judgment.  Debtor later filed the instant Chapter 13 case, and Lender filed a Proof of Claim based upon debt figures in the state court’s summary judgment order.  Debtor objected to the Proof of Claim and once again argued, among other things, that Lender failed to credit payments made during the prior Chapter 13 action. 

Procedural history.  Debtor appealed the bankruptcy court’s denial of her objection to Lender’s Proof of Claim.   

Key rules. 

The federal Full Faith and Credit Act at 28 U.S.C. 1738 “requires federal courts to give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State….”  In Harris, the doctrine of collateral estoppel (aka issue preclusion) applied. 

In Indiana, when used as a defense, the doctrine has five elements:  (1) a final judgment on the merits, (2) identity of the issues, (3) the party to be estopped was a party or in privity of a party in the prior case, (4) the party to be estopped had a full and fair opportunity to litigate the issue and (5) whether it would be otherwise unfair under the circumstances to permit the use of collateral estoppel. 

Holding.  The district court affirmed the bankruptcy court’s decision.  All of the elements of collateral estoppel had been met.

Policy/rationale.  The state court conclusively decided the amount owed by Debtor to Lender in the prior foreclosure action – after the parties litigated the matter.  There was an identity of the issues between the two cases.  Debtor had a full and fair opportunity to litigate the debt amount in state court.  Permitting the use of collateral estoppel was not unfair under these circumstances.  “If [Debtor] felt that the [state court] erred by disregarding her arguments or miscalculating an amount, she could have sought review by the Indiana Court of Appeals.  For whatever reason, she chose not to do that.”  As such, the law precluded Debtor from re-litigating that issue in the subsequent federal bankruptcy proceedings.   

Related posts. 

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I represent judgment creditors and lenders, as well as mortgage loan servicers, in bankruptcy-related litigation.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


Will A Mortgage Granted To Fund Renovation Costs Have Priority Over A Pre-Existing Judgment Against A Mortgagor/Purchaser?

Lesson.  If a mortgage is not granted for purchase money, then the mortgage will not have priority over a pre-existing judgment against the mortgagor/purchaser.  The law favors judgment creditors in this instance. 

Case cite.  Amici Resources v. Nelson, 49 N.E.3d 1046 (Ind. Ct. App. 2016).

Legal issue.  If a mortgage is not a “purchase-money mortgage,” will it nevertheless be senior to a pre-existing judgment against the purchaser/mortgagor upon the closing of a sale/loan?

Vital facts.  For background, please see last week’s post about Amici:  What Is A “Purchase-Money” Mortgage, And Does It Have Priority Over A Pre-Existing Judgment Against The Mortgagor? This post deals with a second lender/mortgagee.  Amici loaned money to SFIP, not to buy the real estate, but to fund renovations to the property.  The closing of the Amici mortgage loan appears to have occurred as part of the closing of SFIP’s purchase of the real estate (discussed last week).  Although the Amici opinion did not label this second loan a “home equity line of credit,” I think the reasoning and holding in this case would apply to lines of credit granted simultaneously upon the purchase of the real estate.   

Procedural history.  At the trial court level, in this quiet title action brought by Matthies, Amici prevailed.  Matthies appealed. 

Key rules.  A judgment lien is a lien on the interest the debtor has in the land.  Ind. Code 34-55-9-2 spells out that money judgments become liens on the debtor’s real property when the judgment is recorded in the judgment docket in the county where the realty held by the debtor is located. 

Generally, “priority in time gives a lien priority in right.”  If the facts show that the judgment lien attached to the real estate before the mortgage lien, then the judgment lien has priority over the subsequent mortgage lien.  As noted in last week’s post, however, “quite a different question would be presented if the mortgage had been a purchase-money mortgage, rather than to pay” for other services or products. 

Holding.  The Court of Appeals reversed the trial court and concluded that Amici’s mortgage lien had second priority to Matthies’s judgment lien. 

Policy/rationale.  In Indiana, judgments rendered against an individual will attach to real estate subsequently purchased by that individual instantly upon the acquisition of ownership to the real estate.  Unless the mortgage arose out of a loan to purchase the real estate, the mortgage will be junior to the judgment.    

Related posts. 

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I frequently represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


What Is A “Purchase-Money” Mortgage, And Does It Have Priority Over A Pre-Existing Judgment Against The Mortgagor?

Lesson.  If a loan involves a “purchase-money” mortgage, then the mortgage will have priority in title over a pre-existing judgment against the purchaser/mortgagor.  The law favors lenders over judgment creditors in this instance.   

Case cite.  Amici Resources v. Nelson, 49 N.E.3d 1046 (Ind. Ct. App. 2016).

Legal issue.  What constitutes a purchase-money mortgage, and will such a mortgage lien be senior to a pre-existing judgment against the purchaser? 

Vital facts.  Matthies obtained a judgment against SFIP in 2012.  In 2013, HSBC agreed to sell its real estate to SFIP, but HSBC required the transaction to be a cash deal.  SFIP needed financing for the purchase, however, and on April 29, 2013 it executed a mortgage in favor of Nelson for the purchase of the real estate.  Payment for the purchase came via wire transfer from Nelson to SFIP at 4:00 p.m. that day.  However, the actual closing was not until the next day, meaning that SFIP signed the promissory note to Nelson and HSBC executed the deed to SFIP on April 30th.  The Matthies judgment against SFIP remained outstanding following the sale.    

Procedural history.  Matthies sought to enforce her judgment lien against SFIP.  The trial court ruled against Matthies, and she appealed.

Key rules.  A purchase-money mortgage is “one which is given as security for a loan, the proceeds of which are used by the mortgagor to acquire legal title to the real estate.”

The test used to determine whether a mortgage is purchase money is (1) “whether the proceeds are applied to the purchase price” and (2) “whether the deed and mortgage are executed as part of the same transaction.”

Generally, the law protects the superior equity of the mortgagee to be paid the purchase money before the property shall be subjected to other claims against the purchaser:

when the deed and mortgage are executed as part of the same transaction the purchaser does not obtain title to the property and then grant the mortgage; rather, he is deemed to take the title already charged with the encumbrance.  Because there is no moment at which the judgment lien can attach to the property before the mortgage of one who advances purchase money, the prior judgment lien is junior to the purchase-money mortgage.

Holding.  The Indiana Court of Appeals in Amici affirmed the trial court’s finding that Nelson’s mortgage was a purchase-money mortgage, which had priority over Matthies’s judgment lien. 

Policy/rationale.  First, the proceeds of Nelson’s loan to SFIP were applied as payment for the purchase of the property.  Second, the parties executed the deed and the mortgage as part of the same transaction.  In short, the Court concluded that SFIP and Nelson intended for the loan to be used to purchase the property.  “The mere fact that some of the financing documents were signed on the day before the closing took place does not, in and of itself, indicate that the execution of the documents was a separate transaction.”  Additionally, public policy favors providing a system under which a purchaser can obtain funding to purchase property. 

Related posts. 

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I frequently represent judgment creditors and lenders, as well as their mortgage loan servicers, that are entangled in lien priority and title claim disputes.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


"Wet Signature" Defense To Indiana Promissory Note Enforcement Action

A pro se (unrepresented) borrower, in a recent contested mortgage foreclosure case our firm is handling, claimed that the action should be dismissed because the lender failed to file or otherwise produce the promissory note with a "wet signature" with the complaint.  We're fairly certain the borrower pulled her filing, or at least the argument, off the internet.  

The only legitimate argument coming even close to a "wet signature" defense is outlined in my 10/14/14 post:   Promissory Notes “Endorsed In Blank” Are Perfectly Fine.  Essentially, if an assignee of a note (not the original lender) holds a note that has been endorsed in blank, then the assignee needs to establish that it possesses the original note.  Even then, filing the original note with the complaint, or even with a motion for summary judgment, is not strictly required.  

To expand on why there is no "wet signature" defense in Indiana, I'm reposting below my 3/26/10 article Judgment Granted To Lender Despite Absence Of Signature On Promissory Note.

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Has your lending institution failed to maintain an original or copy of an executed promissory note?  Similar to the case discussed in my February 7, 2009 post No Signatures, No Promissory Notes, No Problem, the Indiana Court of Appeals in Baldwin v. Tippecanoe Land & Cattle, 2009 Ind. App. LEXIS 1491 (Ind. Ct. App. 2009) upheld a summary judgment for the plaintiff lender even though the lender could not produce the signed promissory note. 

Procedural history.  Lender filed a claim to foreclose its second mortgage and attached to the complaint a promissory note that was not signed.  (The mortgage did, however, appear to contain the borrower’s signature, and the unsigned note referred specifically to the accompanying mortgage.)  In his response to the lender’s claim, the borrower entered a “general denial” pursuant to Indiana Trial Rule 8(B).  The lender later filed a motion for summary judgment that the trial court granted.

The borrower’s contentions.  The borrower argued that the mortgage was unenforceable because the note was not signed by him. 

The lender’s contentions.  The lender’s theory to get around the absence of the signature rested upon Ind. T. R. 9.2(B), which states:

When a pleading is founded on a written instrument and the instrument or a copy thereof is included in or filed with the pleading, execution of such instrument . . . shall be deemed to be established . .  . unless execution be denied under oath in the responsive pleading or by an affidavit filed therewith.

The lender’s point was that the execution of the note was deemed to be established pursuant to this trial rule. 

Rule 8(B) versus 9.2(B).  The Court of Appeals analyzed the technical requirements of Trial Rules 8(B) and 9.2(B), as well as Rule 11(A) dealing with signatures on court filings.  Those rules, collectively, “mean that the attorney’s signature on a general denial [per Rule 8(B)] rejects the assertions in the claim, but does not constitute an oath by which the pleader denies the execution of an instrument attached to a claim [per 9.2(B)].” 

Must deny under oath.  Because the borrower failed to deny, under oath, the execution of the subject note, the Court affirmed the summary judgment granted in favor of the lender:

As [lender] attached the Note and Second Mortgage to its cross-claim, execution of both would be deemed to be established, by operation of Trial Rule 9.2(B), unless [borrower] denied under oath that they were executed.  [Borrower], himself an attorney, filed a general denial.  He signed it as “respectfully submitted.”  He omitted to include a statement that his general denial was truthful and made under penalty for perjury.  Thus, [borrower] failed to deny under oath the execution of the Note.  We therefore conclude that execution of the Note was deemed to be established . . ..

As was the case with the Bonilla opinion, which was the subject of my February 7, 2009 post, Indiana law seemingly allowed the lender in Baldwin to dodge a bullet in order to obtain a pre-trial judgment in its favor.