Pooling And Servicing Agreement Did Not Divest Trustee Of Ability To Foreclose
Borrower’s Loan Reinstatement-Related Promissory Estoppel Defense Dismissed

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.

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 [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.