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Creditor Avoids Host Of Damages Claims By Refunding Payments Received Pursuant To A Mistaken Proof of Claim

Lesson. If, as a lender in a bankruptcy proceeding involving a borrower, you learn that your proof of claim was false, either through mistake or otherwise, quickly withdraw the claim and reimburse the trustee or the debtor for any payments made. A quick, good-faith effort to correct the problem could help you avoid any damages arising out of the mess.

Case cite. Carter v HSBC, 2016 U.S. Dist. LEXIS 128682 (S.D. Ind. 2016) (.pdf).

Legal issue. Whether a mistaken BK proof of claim, together with debtor payments based on the claim, give rise to one or more actions for damages by the debtor.

Vital facts. In Carter, a bizarre situation, the debtor/borrower paid to the creditor/lender/mortgagee over $30,000 pursuant to the debtor’s Chapter 13 bankruptcy plan. The debtor had a mortgage loan with the lender. The mortgage itself identified MERS as lender’s nominee (see post re: MERS below). About six years after the closing of the loan, for reasons not stated in the Court’s opinion, and without the debtor’s knowledge, MERS recorded a satisfaction of mortgage. The lender continued to service the mortgage loan, however, and pursued collection of the debt from the debtor following the debtor’s default, which led to the debtor filing a Chapter 13.  In the BK case, the lender filed a proof of claim alleging secured status based on the mortgage that previously had been released. The plan was confirmed, and the debtor made payments to the trustee, which in turn paid the lender. Although not detailed in the Court’s opinion, at some point the lender discovered that the mortgage had been released, so it amended its proof of claim and withdrew its right to receive any further payments. The debtor herself later discovered the satisfaction of mortgage. Ultimately, the bankruptcy court ordered the lender to repay the 30k it received through the plan.

Procedural history. The debtor filed an action against the lender seeking damages under many theories, including: (1) violation of the automatic BK stay, (2) actual and constructive fraud and (3) unjust enrichment. The lender filed a Rule 12(b)(6) motion to dismiss the debtor’s claims.

Key rules.

11 U.S.C. 362(a)(6) bars any “act to … recover a [preexisting] claim against a debtor…” during the pendency of an automatic stay, which is triggered when a debtor files for bankruptcy.

• Both actual and constructive fraud actions require, among other things, proof of a misrepresentation that caused an injury.

• In Indiana, a party may have a claim for unjust enrichment when a “measurable benefit has been conferred on the defendant under such circumstances that the defendant’s retention of the benefit without payment would be unjust.”

Holding. United States District Judge Tonya Walton Pratt granted the lender’s motion to dismiss the debtor’s case in its entirety.

Policy/rationale.

The debtor claimed the lender violated the automatic stay by collecting a debt falsely labeled as being secured when the claim was unsecured. However, the Court reasoned that the payments were made by mutual mistake and that the money was collected pursuant to a confirmed BK plan. “Once the bankruptcy was filed, [lender] never attempted to recover a claim … rather [it] filed a claim and received … payments from the trustee.” Since the lender did not act outside of the BK process, there was no violation of the automatic stay.

The debtor’s fraud and unjust enrichment claims failed because the lender repaid the trustee in full for all payments received. The trustee, in turn, repaid the debtor in full. Further, the debtor was unable to show that alleged filing fees and administrative costs resulted from the false proof of claim.

Related posts.

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in loan-related litigation. If you need assistance with such a 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 to your left.


Hybrid Tax Sale/Mortgage Foreclosure Case Goes Off The Rails For Lender

Lesson. If a mortgagee acquires title to the mortgaged property via tax deed, the mortgage lien will be extinguished. For lenders and their servicers, be careful when making deals with tax sale purchasers while also negotiating loan modifications with borrowers. Best to include everyone in a global negotiation.

Case cite. Bayview v. Golden Foods, 59 N.E.3d 1056 (Ind. Ct. App. 2016).

Legal issues. Whether the lender’s mortgage merged with a tax deed, which the lender acquired from the tax sale purchaser. Also, whether the lender committed conversion of the mortgaged property.

Vital facts. The Bayview facts and procedural history are quite involved and unique. The borrower and the lender had a commercial mortgage loan secured by the borrower’s restaurant property. The borrower became delinquent in the real estate taxes, and the property later was sold at a tax sale. The lender sought to capitalize the delinquent taxes and enter into a loan modification with the borrower. Under the terms of the deal with the borrower, the lender agreed to redeem the property from the tax sale. However, the lender failed to do so and never told the borrower. When the tax sale purchaser petitioned for the issuance for a tax deed, the lender contested the proceeding on the basis that the purchaser failed to give certain required notices. The lender and the tax sale purchaser then entered their own settlement negotiations, without involving the borrower, that ultimately resulted in an agreed order. The Bayview opinion is a little unclear as to whether the lender got the tax deed directly from the auditor or from the tax sale purchaser through a quitclaim deed. Either way, the lender settled with the purchaser and got title. The lender then filed an action to quiet title to the property, which included a count to foreclose the mortgage, alleging that its interest in and title to the property was “superior to all persons who have an interest therein.” Adding to the confusion was the fact that the borrower made a series of loan mod payments to the lender after the lender became the owner of the property. Whew.

Procedural history. The trial court held a bench trial that included the lender’s mortgage foreclosure claim and the borrower’s counterclaim for conversion. The court ruled in favor of the borrower.

Key rules.

• A mortgage involves two entities: (1) the mortgagee, which holds the mortgage that serves as a lien on the property and (2) the mortgagor, who holds title to the property with the right of redemption.

• When one of the parties to a mortgage acquires both the mortgage lien and the legal title to the property, “the two interests are said to merge.” This means that the mortgage lien is extinguished.

• The key factor in deciding whether a merger has occurred is “determining what the parties, primarily the mortgagee, intended.” For more on Indiana’s anti-merger rule, click on the posts below, which discuss the key cases in detail.

Ind. Code 35-43-4-3 states that a “person who knowingly or intentionally exerts unauthorized control over the property of another commits criminal conversion.”

Holding. The Indiana Court of Appeals held that the evidence supported the trial court’s conclusions. As such, the Court affirmed the trial court’s ruling that the mortgage had been extinguished and that the lender committed conversion.

Policy/rationale.

The lender in Bayview asserted that it did not intend to merge its mortgage with the tax deed. The borrower responded that the lender “clearly intended to take title and extinguish the underlying mortgage and note when it surreptitiously acquired title.” The Court of Appeals pointed to evidence at the trial showing that the lender viewed the transaction similar to a deed in lieu of foreclosure “with no residual obligation for the borrower.”

The Bayview opinion also addressed in detail the borrower’s conversion claims against the lender. In a nutshell, the trial court found that the lender converted (stole) the subject real estate from the borrower. The court awarded the borrower treble damages for criminal conversion based on the amount of equity in the property, plus reimbursement for the loan mod payments made by the borrower.

Although not expressly spelled out in the opinion, the practical outcome of the case seemed to be that, on the one hand, the lender (holding a tax deed) remained the owner of the property while, on the other hand, the borrower’s debt was extinguished. On top of that, the lender had to pay the borrower substantial damages.

Related posts.

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in loan-related litigation, including disputes arising out of tax sales. If you need assistance with such a 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 to your left.


Indiana Supreme Court Order Amending Rules Regarding Service Of Process And Execution Sales

On July 31st, the Indiana Supreme Court entered this Order Amending Rules of Trial Procedure.  The changes become effective 1/1/18.  

The order makes a slight amendment to Rule 4.1(B) dealing with "copy service" and now requires a follow-up mailing of both the summons and the complaint.  For more on service of process matters, including copy service, read my post “Service Of Process” Fundamentals For The Plaintiff Lender.

The order also modifies Rule 69(A) dealing with execution sales and does away with the requirement that the subject real estate must first be appraised and then sell for at least two-thirds of the appraised value.  For a little more information on execution sales, check out my post The Difference Between An Execution Sale And A Foreclosure Sale In Indiana.

Incidentally, I have not yet seen a determination by the Indiana Supreme Court on the proposed changes to Rule 9.2(A) that I discussed in my 5/11/17 post.