« October 2020 | Main | December 2020 »

Recent Indiana Mortgage Foreclosure Opinion, Post I of III: Liability – First Material Breach Doctrine

Lesson.  Indiana’s “first to breach” defense would appear to be an exceedingly difficult theory for borrowers to establish in most foreclosure cases. 

Case cite.  Hussain v. Salin Bank, 143 N.E.3d 322 (Ind. Ct. App. 2020)

Legal issue.  Whether the lender was precluded from foreclosing based upon its alleged contract breach, which purportedly occurred before the borrowers’ default.

Vital facts.  Hussain involved a typical mortgage loan.  The promissory note had a 15-year term and was secured by the borrowers’ real estate.  From the outset, the borrowers struggled to make payments, and the lender assessed a series of non-sufficient funds fees and late fees.  The loan ended up in the borrowers’ Chapter 13 bankruptcy case that was later dismissed.  The lender then pursued a state court mortgage foreclosure action and filed a motion for summary judgment in the case.

The liability (loan default) aspect of the action surrounded the so-called “first to breach” rule.  Specifically, the borrowers tendered an affidavit stating that the lender (not the borrowers) initially breached the promissory note by assessing a $20 NSF fee to the principal due on the loan.  The borrowers had bounced a check due at the closing of the loan.  Nonetheless, the borrowers contended that the NSF fee amounted to a “unilateral, unauthorized alternation in the terms of the Note by [the lender].”

Procedural history.  The trial court granted summary judgment for the lender on liability.

Key rules.

The Court in Hussain outlined Indiana’s elements for a prima facie case for the foreclosure of a mortgage: 

(1) the existence of a demand note and the mortgage, and (2) the mortgagor's default….  Ind. Code § 32-30-10-3(a) provides that “if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee or the mortgagee's assign may proceed ... to foreclose the equity of redemption contained in the mortgage.”  To establish a prima facie case that it is entitled to foreclose upon the mortgage, the mortgagee or its assign must enter into evidence the demand note and the mortgage, and must prove the mortgagor's default….  Once the mortgagee establishes its prima facie case, the burden shifts to the mortgagor to show that the note has been paid in full or to establish any other defenses to the foreclosure.

The Court cited to Indiana’s “first material breach doctrine,” which provided:

When one party to a contract commits the first material breach of that contract, it cannot seek to enforce the provisions of the contract against the other party if that other party breaches the contract at a later date….  Whether a party has materially breached an agreement is a question of fact and is dependent upon several factors including:

(a) The extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated;

(b) The extent to which the injured party may be adequately compensated in damages for lack of complete performance;

(c) The extent to which the party failing to perform has already partly performed or made preparations for performance;

(d) The greater or less hardship on the party failing to perform in terminating the contract;

(e) The willful, negligent or innocent behavior of the party failing to perform;

(f) The greater or less uncertainty that the party failing to perform will perform the remainder of the contract.

Holding.  The Court of Appeals affirmed the trial court’s summary judgment as to liability.

Policy/rationale.  The Court first pointed to language in the note about how payments are to be applied:  “payments are first to be applied to any accrued unpaid interest, then to principal, and then to any unpaid collection costs.”  The Court reasoned: “the note provides that collection costs will be assessed to the [borrowers], and they do not dispute that the NSF fee is a collection cost.”  Further, the lender had established that it performed its obligations under the loan by funding the principal at closing.  “The $20 NSF fee in no way prevented [the borrowers] from obtaining the benefit of the loan.”  Even more, the evidence established that it was the borrowers who breached by failing to make the initial payment due under the loan and that there was no evidence the lender “committed a material breach of the loan prior to that time.” 

I suspect that, at the trial court level, the proceedings were more involved with regard to the minutia surrounding the theoretical applicability of the “first to breach” rule, but in the end the Court of Appeals was having none of it.  The meatier parts of the Hussain opinion deal with the issues of damages and evidence, and I will address those matters in the coming days. 

Have a great Thanksgiving.  

Related posts.  


I represent parties involved in foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. 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.

“Economics Of The Transaction” Establish Land Contract Rather Than Lease

Lesson. When determining whether a real estate agreement is a lease or a land sale contract, follow the money.

Case cite. Vic’s Antiques v. J. Elra Holdingz, 143 N.E.3d 300 (Ind. Ct. 2020)

Legal issue. Whether an agreement was a lease (subject to an eviction remedy) or a land sale contract.

Vital facts. Elra, as the owner, and Vic’s, as either the purchaser or the tenant, executed a “Lease Agreement” for a building and 3+ acres of real estate. Vic’s agreed to pay $1,265.30/month for twenty years with an option to purchase the property for $1.00 at the end. The opinion details the terms and conditions of the agreement. The language of the contract controlled the outcome – not testimony or any other documents. Of paramount importance were “the economics of the transaction.”

Procedural history. About a year after the signing of the agreement, Elra filed an eviction action against Vic’s based, not on a payment default, but on other breaches related to the maintenance and condition of the property. The trial court ruled in Elra’s favor and ordered Vic’s to vacate the property. Vic’s appealed.

Key rules. In Indiana, “the transaction's purported form and assigned label do not control its legal status.” Therefore, “to determine whether the agreement is a lease or a land sale contract, [Indiana courts] look beneath the surface of the agreement and … consider the substance of the agreement to determine the intent of the parties.”

“'In effect,' a land sale contract is 'a sale with a security interest in the form of legal title reserved by the vendor' and that the 'retention of the title by the vendor [owner] is the same as reserving a lien or mortgage.' In other words, in a land sale contract, the vendor retains legal title to the real estate until the vendee pays the total contract price. And … a land sale contract is ‘in the nature of a secured transaction.’”

The Court also looked to the UCC for help in making its decision as “essentially the same rules which distinguish a lease from a sale under the UCC apply….”

Holding. The Indiana Court of Appeals reversed the trial court and concluded that the agreement was a land contract, which could not give rise to an eviction.

Policy/rationale. The Vic’s opinion is excellent in terms of how the Court relies upon and analyzes the financial aspects of the deal. Vic’s is a valuable resource for parties or counsel on the origination side of such deals and on the back-end enforcement of them. Although the facts are dense, there is a road map within the case about how to create a land contract or how to create a lease with an option to buy so as to avoid land contract status—depending upon your objectives. This case, together with the Indiana Supreme Court’s decision in Rainbow Realty (link to my 8/22/20 post here), have really helped define this area of Indiana law over the last couple years.

The Court’s comments below capture the essence of its overall rationale, which zeroed in on the “economics” of the deal:

In addition, in order to exercise its $1.00 “option to purchase,” Vic's must first have paid a sum equal to 240 monthly payments of $1,265.30, or a total of $303,671.63, which is $103,671.63 more than the purchase price. Elra has failed to account for this additional payment. A simple calculation confirms that this amount represents interest on the $200,000 purchase price.

Amortization is the payment of a debt with interest over time. The agreement provides for the amortization of $200,000 in principal payable in 240 monthly payments of exactly $1,265.30. Solving for the interest rate yields a rate of 4.5%. This amortization is the Rosetta Stone that unpacks and reveals the nature of the agreement. All four of these factors—the principal amount, the number of monthly payments, the amount of each monthly payment, and the interest rate—are integral to the amortization schedule, and each factor depends upon the others.

Interest represents the time value of money. While contract purchasers pay interest on the unpaid principal balance of a land sale contract, lessees do not pay interest on future rent payments. Here, the four factors comprising the amortization show that the monthly payments were not “rent payments” but contract payments of principal and interest on a fully amortized land sale contract.

The Court concluded that, although the contract “contains terms that are consistent with a lease, it is clear from the economics of the transaction that from the outset the parties intended for Vic's to acquire the option property. Accordingly, we can say with confidence that the agreement … is a land sale contract.”

Note: I regret that the opinion in Vic’s did not address the remedy available to Vic’s: foreclosure vs. forfeiture. The Court was on a roll, and the remedy aspect of land contract cases can be just as complicated as determining whether the agreement is or is not a land contract to begin with. Alas, that issue was not ripe for a ruling, and the early termination of the contract weighed heavily in favor of forfeiture anyway.  

Related posts.

Part of my practice involves handling real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. 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.