Lesson. Generally, defendants in foreclosure actions - such as borrowers, guarantors or mortgagors - cannot contest the validity of a loan assignment.
Case cite. Duty v. CIT, 86 N.E.3d 214 (Ind. Ct. App. 2017)
Legal issue. Whether a borrower had standing to challenge the assignment of the loan documents from his original lender to the assignee of the loan.
Vital facts. The borrower executed a promissory note and mortgage in favor of lender Wilmington Finance in connection with the purchase of his home. Later, lender CIT Group filed a foreclosure action against him. Shortly thereafter, the loan was assigned to a Trust. A few months later, the trial court entered a judgment against the borrower, who then filed for bankruptcy. Years later, the bankruptcy stay was lifted, and the borrower sought relief from the judgment. By then the loan was held by yet another Trust (another mortgagee). The borrower essentially claimed that one or more of the assignments of the loan documents were faulty.
Procedural history. Following the entry of the foreclosure judgment against the borrower, the borrower moved the trial court to set aside the judgment on the basis that the entity that filed suit against him had no legal right to enforce the loan documents at the time. The trial court denied the motion, and the borrower appealed.
Key rules. As a fundamental matter, a party to an underlying contract lacks standing to attack problems with the reassignment of that contract. Therefore, the general rule across the country is that a debtor may not challenge an assignment between an assignor and assignee. Before Duty, however, that rule had not been adopted in Indiana. The only recognized exception to this rule is if the subject assignment is “void” (such as being made under duress), as opposed to being “voidable,” but the Court in Duty did not address this distinction, which I’ll defer to another day.
Holding. The Indiana Court of Appeals affirmed the trial court and held that the borrower had no standing to challenge the loan assignment.
Policy/rationale. The Duty opinion cited to a bankruptcy opinion from Pennsylvania for the rationale behind the prevailing rule:
[The underlying contract] is between [Debtor] and [Assignor]. [Assignor’s] assignment contract is between [Assignor] and [Assignee]. The two contracts are completely separate from one another. As a result of the assignment of the contract, [Debtor’s] rights and duties under the [underlying] contract remain the same: The only change is to whom those duties are owed…. [Debtor] was not a party to [the assignment], nor has a cognizable interest in it. Therefore, [Debtor] has no right to step into [Assignor’s] shoes to raise [its] contract rights against [Assignee]. [Debtor] has no more right than a complete stranger to raise [Assignor’s] rights under the assignment contract.
I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in contested foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.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.