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Seventh Circuit Reminds Us That Federal Law, And Not Indiana State Law, May Apply To Some Successor/Alter-Ego Claims

Lesson. If you’re trying to collect a judgment in federal court based upon veil-piercing theories, make sure you’re applying the correct legal standard. If the underlying claim arises out of a federal statute, Indiana’s state law tests may not apply. Although similar in nature, the standards are not the same and require a different analysis.

Case cite. McCleskey v. CWG Plastering 897 F.3d 899 (7th Cir. 2018)

Legal issue. Whether Indiana state law versus federal law standards controlled the outcome of plaintiff’s successor and alter ego claims against defendant.

Vital facts. As discussed here before (see below), corporate veil piercing cases tend to be very fact sensitive, and McCleskey is no different. Please review the opinion for a summary of the operative evidence. The Court examined whether a son’s plastering business should be liable for a judgment previously entered against the plastering business of the son’s father. The judgment stemmed from the father’s failure to make certain payments to a union. The Court noted, among other things, the “inconvenient fact” that the son went into business the same day that the $190,940.73 judgment was entered against his father’s company.

Procedural history. The district court (the trial court) granted summary judgment for the defendant (son), and the plaintiff appealed.

Key rules. Generally, cases resting on federal ERISA and NLRA statutes, including 29 U.S.C. § § 1132, 1145 and 29 U.S.C. § 185(a), respectively, “are within the federal court’s subject-matter jurisdiction and typically governed by federal law.”

Under federal law, both alter ego and successor liability “incorporate a scienter [intent or knowledge of wrongdoing] component coupled with an analysis of similarities between the old and new entities.” The “notice of the obligation” by the new entity is key to successor liability. In McCleskey, liability for alter ego required more, however: “a fraudulent intent to avoid collective bargaining obligations.” The McCleskey opinion spells out the other key factors that courts consider.

Holding. First, the Court found that federal post-judgment standards of collection applied. Second, the Court concluded, “the district court was too quick to grant summary judgment” in the defendant’s (the son’s) favor.

Policy/rationale. In fact-sensitive cases like McCleskey, I find it best to defer to the Court’s opinion for any detailed application of the evidence to the law. Every case is different (and blog posts can only be so long….) Importantly, the judgment arose out of the plaintiff’s action under a collective bargaining agreement. For today’s purposes, the significant takeaway is that federal courts have their own body of law in this veil-piercing arena. Admittedly, the federal standards should never apply to a commercial mortgage foreclosure action, which cases are based on state contract and foreclosure law. Nevertheless, if you’re a party chasing money in federal court or defending a non-foreclosure collection claim in an Indiana federal forum, you should be mindful that the Indiana standards, about which I’ve written previously (see below), might not apply.

Related posts.

Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part I

Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II
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I have experience representing parties entangled in post-judgment collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.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.


Who Owes The Taxes After An Indiana Tax Sale, And When?

Lesson. As a tax sale buyer, be prepared to pay the real estate taxes that accrue in the year of the sale.

Case cite. Picket Fence v. Davis, 109 N.E.3d 1021 (Ind. Ct. App. 2018) (pdf)

Legal issue. Whether a tax sale buyer owes real estate taxes that accrue in the year of the sale.

Vital facts. The following chronology is important:

10/26/15: Treasurer’s Tax Sale
(The subject property did not sell because there was no “minimum bid.” Thus, the County acquired a lien on the property.)

4/8/16: County Commissioners’ Certificate Sale
(The property “sold,” meaning that the buyer purchased a “certificate” for the property.)

8/22/16: Petition for Tax Deed
(Following the submission of the required statutory notices, the buyer sought a court order for the issuance of a tax deed.)

9/26/16: Order for Deed
(The trial court directed the County to execute and deliver a tax deed to the buyer.)

Procedural history. Following the order for deed, a dispute arose between the buyer and the County regarding whether the buyer was responsible for real estate taxes accruing on or after January 2015, the year of the Treasurer’s Tax Sale. The trial court ruled in favor of the County. The buyer appealed.

Key rules. Indiana counties assess taxes each year, but those taxes do not become due and payable until May and November of the following year. For example, if in 2019 the Boone County Assessor determines that my wife and I owe $1000 in taxes for our home, the Boone County Treasurer will not collect the $1000 until 2020 (May, $500 and November, $500).

Another Indiana tax sale feature illustrated by Picket Fence is that, if a property does not initially sell for a statutory minimum amount, then the property slides to the county for a second tax sale, which does not require a minimum bid. The Court’s opinion describes this process in detail and includes summaries of the testimony of two experts that testified in the case.

The Indiana Court of Appeals rightly focused on the provisions in the tax sale statute [Indiana Code 6-1.1-25-4(f) and 4(j)] that specifically dealt with the payment of taxes by a sale purchaser. The Court explained why the “sale” referenced in those subsections refers to the Treasurer’s Tax Sale, and not the County Commissioners’ Certificate Sale, as it relates to when taxes should be payable by the new owner.

Holding. The Court of Appeals affirmed the trial court’s decision and concluded that the buyer must pay the real estate taxes that accrued the year of the Treasurer’s Tax Sale, including the taxes that accrued before the date of the County Commissioners’ Certificate Sale.

Policy/rationale. The buyer in Picket Fence argued that he should not be on the hook for the 2015 taxes due in 2016 or the first installment of the 2016 taxes due in 2017. The rationale for the buyer’s argument was that he did not actually become the owner until 2016. The County, on the other hand, asserted that the operative “sale” was the Treasurer’s Tax Sale in October of 2015 and that the buyer was thus obligated to pay the taxes that accrued in 2015. While I’m not entirely sure what’s ultimately fair here, the Court properly zeroed in on the key statutory sections and logically followed the language as written by the legislature. Of perhaps some solace to the buyer was that he did not owe any taxes due and payable in 2015 (the 2014 taxes). He only owed taxes that accrued in 2015, payable in 2016.

Related posts.

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Mortgage loan servicers and title insurance companies sometimes engage me to handle tax sale-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.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.


Indiana General Assembly: Nothing Cooking This Year

My understanding is that there is no currently-pending legislation that would directly impact Indiana's foreclosure-related laws.  At one point, there was debate about sheriff's sale notices, but a Senate panel voted down the sheriff's sale notification bill.  Whether that bill might come back to life remains to be seen.  If anything develops at the end of this year's session, I'll make a point to post about it.

New post coming next week.  Time has gotten away from me this week....


Perplexing Result In “Bona Fide Mortgagee” Case

Lesson. The bona fide mortgagee defense, where a lender claims priority in title over another lender or an owner, may be a difficult on which to win on summary judgment. These cases can be somewhat fact sensitive. If filing an MSJ, dot i’s and cross t’s for all the necessary undisputed facts.

Case cite. Chmiel v. US Bank, 109 N.E.3d 398 (Ind. Ct. App. 2018)

Legal issue. Whether the assignee of a mortgage was a “bone fide mortgagee,” such that the assignee’s lien was valid and enforceable.

Vital facts. The thirty-page Chmiel opinion arises out of a quiet title dispute and is chock full of facts and legal issues. For purposes of this post, there was a dispute between an individual, who I will call “Son,” and the assignee of a mortgage loan, which I will call “Mortgagee.” Another character in this story is the Son’s mother (“Mom”). Here’s what happened:

1991: Mom deeded her real estate to Son subject to her life estate, meaning that Mom basically owned the property until her death at which point title passed to Son.

2005: Son purportedly deeded his residual interest in the real estate back to Mom, and Mom then got a mortgage loan secured by the property.

2007: Son wrote a letter to Mom’s mortgage lender/servicer at the time and disputed the validity of the 2005 deed. Specifically, Son claimed that his signature on the deed was forged and that, to the extent the mortgage loan was valid, it was only secured by Mom’s life estate interest and not Son’s residual ownership interest. In other words, Son claimed that the mortgage was invalid or, at best, the mortgage was only valid as to Mom during Mom’s lifetime.

2009: Son wrote a second letter to the mortgage lender/servicer at the time.

2010: Son wrote a third letter to the mortgage lender/servicer at the time. (The servicer and holder of the mortgage loan changed over the years). This time, the mortgage servicer simply acknowledged receipt of the letter.

2011: Mom defaulted under the mortgage loan. MERS, as nominee of the mortgage lender, executed an assignment of mortgage to Mortgagee, which initiated foreclosure proceedings. Son intervened in the case and claimed that the 2005 deed was forged. Mom later filed bankruptcy, which stayed the foreclosure, and a Chapter 13 Plan was approved.

2015: Mom died, and the Plan payments stopped.

Procedural history. In 2016, Son filed the instant quiet title action to, among other things, terminate Mortgagee’s lien. Mortgagee counterclaimed to foreclose its mortgage. The trial court granted summary judgment for Mortgagee, and Son appealed.

Key rules. To qualify as a bona fide mortgagee, one must purchase in good faith, for valuable consideration, and without notice of outstanding rights of others. Indiana law recognizes both constructive and actual notice. Notice is actual when “it has been directly and personally given to the person to be notified.” Further, in Indiana, actual notice may be implied or inferred from “the fact that the person charged had means of obtaining knowledge that he did not use.”

Holding. The Indiana Court of Appeals reversed the trial court and found there to be genuine issues of material fact regarding whether Mortgagee was a bona fide mortgagee – in other words, whether its mortgage was valid and enforceable. The Court therefore sent the case back for a trial.

Policy/rationale. Son contested the “consideration” and “notice” elements of Mortgagee’s defense. Regarding consideration, the Court found that, although the original lender received money/consideration from Mom for the mortgage, “Mortgagee did not designate any evidence of the consideration it gave for the assignment” of the loan. Mortgagee, or rather its servicer, didn’t help its cause when it answered discovery actually denying, apparently on technical terms, that it gave consideration.

As to notice, Son asserted that Mortgagee received actual notice of his forgery claims before Mortgagee became the assignee of the loan. Specifically, Son pointed out that, in the bankruptcy case, the mortgage servicer (as an agent of the mortgagee/holder of the loan) received his 2010 letter - before MERS assigned the mortgage to Mortgagee. Thus, there was a question of fact as to whether Mortgagee, via its loan servicer, had actual notice of Son’s rights/interests before Mortgagee acquired the loan.

Honestly, I struggle with the Court’s analysis and, frankly, disagree with its conclusion on the bona fide mortgagee issue. The result (denial of summary judgment) may have been correct simply because of the factual density of the case. Nevertheless, to me, the Court’s stated rationale focused on the incorrect time frame. The Court examined the circumstances surrounding the loan assignment transaction, as opposed to the facts associated with the original loan closing. The opinion identified no evidence that, in 2005, the original lender/mortgagee had any reason to believe that the recorded 2005 deed was invalid. In other words, the original lender had to be a bone fide mortgagee. To me, the 2005 closing was the operative moment, not what the assignee paid or knew years later. My view is that the assignee should step into the shoes of the original assignor and possess all its rights and defenses. Case closed. The opinion did not address my theory one way or the other, however, so admittedly I may be missing something. Please email me or post a comment below if you have any insights.

Related posts.

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I 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@woodenlawyers.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.