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Borrower’s Loan Reinstatement-Related Promissory Estoppel Defense Dismissed

Note: on 5/6/22 and 5/20/22, I wrote about the 410 case cited below. Today’s post addresses more issues from the same opinion. In particular, the 5/20/22 article provides context for today’s installment, which follows up on the “loan balance statement” at issue.

Lesson. A promissory estoppel theory in the defense of a foreclosure case often fails for the simple reason that there is no evidence the lender made an actual promise to the borrower (to reinstate or forbear).

Case cite. Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether a lender’s foreclosure action could be defeated on the basis of promissory estoppel, where the lender had tendered a “loan balance statement” during workout discussions that was arguably a commitment to reinstate a loan.

Vital facts. The “balance statement” (the subject of my May 20th post) was at the center of the Defendants’ promissory estoppel theory. The Defendants essentially claimed that they were “ready, willing and able” to reinstate the loan in reliance on the figures in the balance statement. The Defendants alleged that they took steps to obtain the necessary funds, but Lender “made an about face and refused to honor the Balance Statement, damaging Defendants.”

Procedural history. Lender filed a motion for summary judgment on the promissory estoppel claim/defense.

Key rules. The Court cited to an Indiana Supreme Court case for the five elements of promissory estoppel: “1) a promise by the promissor [here, Lender]; 2) that was made with the expectation that the promisee [here, Defendants] would rely on it; 3) and induces reasonable reliance by the promisee [Defendants]; 4) of a definite and substantial nature; 5) in a way where injustice can be avoided only be enforcement of the promise.”

Holding. The Court granted Lender’s motion summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale.

The Court reasoned that the balance statement simply did not create a promise to reinstate the loan and waive prior defaults. “Without a promise, promissory estoppel fails from the start.” Moreover, there was no evidence that Lender sent the balance statement with the expectation that Defendants would rely on it as they did. For good measure, the Court also noted that the Defendants did not meet the payment deadline in the balance statement anyway.

Related posts.

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.


Loan Reinstatement Communication Did Not Bind Lender In Workout Negotiations

Note: on 5/6/22, I wrote about the 410 case cited below. Today’s post addresses additional subject matter from the same opinion. Please review my previous post for background.

Lesson. In workout negotiations, if banks wish to avoid communications that could unwittingly bind them to a deal, ensure the communications do not have these three elements: (a) a writing, (b) that sets forth all material terms and conditions of the workout/resolution, (c) that is signed by both parties. Also, to the extent lenders engage in written communications or issue reinstatement memos, consider including limiting language such as the following: "if your loan has matured, or is otherwise in default, neither your receipt of this statement nor acceptance of any partial payment, or any future partial payment, shall be deemed to amend or modify the terms of the loan documents, nor cure or waive the default existing under the loan. Lender reserves all of its rights and remedies under the loan documents, at law or in equity."

Case cite. Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether a “loan balance statement” tendered by a lender in connection with workout discussions constituted a binding contract to reinstate a loan and waive any prior events of default upon payment of the amount listed.

Vital facts. The standard loan documents were at issue in this commercial mortgage foreclosure case: a promissory note, a loan agreement, a mortgage, an assignment of rents and a guaranty. Borrower began missing monthly loan payments. Borrower also was in default because it “had also been involved in a variety of transfers and liens related to the real estate underlying the loan, none of which were disclosed to the Trustee and none of which were executed with the Trustee's prior written consent as the loan documents required.”

In an effort to resolve the loan default, one of the parties connected to the Borrower requested mortgage statements and received a “balance statement” identifying an amount owed. The statement seems to have been a kind of loan reinstatement memorandum. Please read the opinion for further details. The Defendants contended the balance statement was an agreement that, if the quoted amount was paid, then Lender would reinstate the loan and waive any past defaults. Lender viewed the balance statement as merely giving a snapshot of the amount owed on a particular day and nothing more.

As the payment defaults and improper transfers continued to mount, the Trust notified Defendants that it was accelerating the loan and that full payment was due in 30 days. Defendants did not meet the demand. Instead, they made a series of payments that nearly satisfied the amount articulated in the balance statement.

Procedural history. Lender filed suit to enforce the loan. Defendants asserted various defenses to Lender’s foreclosure action, and also filed counterclaims for breach of contract and negligent misrepresentation. The Trustee filed a motion for summary judgment on all claims and defenses.

Key rules. I’ve previously written about the Indiana Lender Liability Act at Indiana Code 26-2-9. See Related Posts below. 410 reminds us that:

under the ILLA, a “credit agreement,” which includes an agreement to forebear or make any other financial accommodation, is enforceable if: 1) it is in writing; 2) that writing sets forth all material terms and conditions, and; 3) that writing is signed by both parties. All material terms and conditions must be embodied by the singular, signed writing. A combination of multiple writings does not suffice to form a single agreement.

Under Indiana law, the fundamental requirements for a contract include “an offer, acceptance, consideration, and a meeting of the minds of the contracting parties.”

Holding. The Court granted Lender’s summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that the balance statement was either a “credit agreement” under the ILLA or a binding common law contract. The Court disagreed. Despite the balance statement being in writing, it failed to satisfy the other elements of an enforceable credit agreement, namely an outline of all materials terms and conditions, together with signatures by both parties. Among other things, the balance statement contained no language promising any future action in the event the quoted amount was paid. Indeed the statement provided that it should not be read as promising anything. Further, the statement was not signed by the parties. The Court refused to adopt Defendants’ theory that signatures were incorporated by reference because the statement referred to the underlying loan documents.

As to the common loan contract theory, the Court stated that “the only ‘offer’ the Defendants have pointed to is the one to reinstate the Loan and cure the defaults that they unilaterally read into the Balance Statement despite the Balance Statement explicitly stating it did not amend, modify, cure, or waive any existing default under the Loan.”

Related posts.

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.


Pooling And Servicing Agreement Did Not Divest Trustee Of Ability To Foreclose

Lesson. With securitized loans, the trustee on behalf of the trust (the lender) is a “real party in interest” for purposes of filing a foreclosure suit, despite the existence of a special servicer appointed by a pooling and servicing agreement.

Case citeWilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether the special servicer of securitized loan is the only party that can bring a suit to enforce that loan.

Vital facts. The 410 opinion arises out of a $3.0 million commercial loan transaction related to a single tenant retail building, and efforts by the lender to collect on the loan after default. As is typical with securitized debt, the original lender assigned the loan to a trust (the “Trust”), which entered into a Pooling and Servicing Agreement (“PSA”) with a company to service the loan (the “Servicer”). The PSA conveyed the interests in the loan to a bank that acted as the trustee for the Trust (the “Trustee”), thereby putting the Trustee “in the standard role” of a party that could sue. After the loan went into default, the Trustee filed suit to enforce the loan.

Procedural history. This is an Indiana federal district (trial) court decision.  One of the defenses asserted in the action was that the court lacked jurisdiction because the Servicer, not the Trustee, was the “real party in interest.” In other words, the Servicer should have been the named plaintiff. Because the Servicer shared New York citizenship with several defendants, the so-called “diversity of citizenship” requirement for federal court cases of this type was absent. If applicable, the defense would compel dismissal (although the case could be re-filed in state court).

Key rules. Under Rule 17, a "real party in interest" is the “person or entity that possesses the right or interest to be enforced through litigation.” The Court noted further that “the purpose of Rule 17 is to protect the defendant against a subsequent action by the party actually entitled to recover.”

Case law provides that “the terms of a PSA can permit a special servicer to sue in its own name if the special servicer chooses to do so, . . . [but the terms of the PSA do not] divest the trustee for whom that special servicer acts from bringing suit when it is the one that chooses to do so.” The Court relied on law stating that the Trustee, as the holder of the loan for the Trust, could “sue to enforce and collect on those interests.” The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that the Trustee did not have standing to sue because the “true party in interest” was the Servicer by virtue of the PSA’s provisions giving the Servicer discretion to pursue litigation. The Court disagreed because, even if the Servicer was the party that filed the lawsuit, it would be litigating as the Trustee’s representative under the PSA. The Servicer’s role, “no matter how many duties it may be given,” was to act as an agent for the Trustee related to its interest in the loan. Ultimately, the Trustee had “the true stake in the litigation. . . .”

The Court did not buy the argument that the PSA “dispossessed” the Trustee of the power to initiate suit. The PSA as a whole suggested that the Servicer’s “powers … are only the result of delegated authority from the Trust, not separate authority given solely to [the Servicer]….” 410 suggests that a special servicer under a PSA can be the named plaintiff in a mortgage foreclosure lawsuit. While I’ve seen that approach, the more common practice is for the trustee to bring the case. The 410 opinion supports this approach.

Related posts.

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.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.