Indiana Court of Appeals Denies Guarantor’s “Material Alteration” Defense

Lesson. While it still is advisable for lenders to have guarantors sign off on any loan modifications, such paperwork may not always be required. Indiana courts will look closely at both the nature of the alterations and any waiver/consent language in the guaranty when deciding whether to absolve guarantors of liability.

Case cite. Shoaff v. First Merchs. Bank, 2022 Ind. App. LEXIS 395 (Ind. Ct. App. 2022)

Legal issue. Whether a guarantor was released from liability based on alleged “material alterations” of the original obligation.

Vital facts. Borrower defaulted on a $600k loan, and Lender sued Guarantor for the debt. The Shoaff opinion quotes verbatim important provisions of the guaranty upon which the Court relied, so please review for more facts. Over a five-year period, Borrower’s underlying obligation was modified “multiple times,” which included:

(1) a series of new notes being issued for the debt; (2) a new loan number being provided; (3) [a co-guarantor] signing a new guaranty; (4) the alteration of the payment of the debt from a revolving line of credit to a term note; (5) a change in the manner in which the debt was to be repaid (altered to required monthly payments); and (6) multiple changes in the form and amount of the interest rate.

Lender notified Guarantor “as a courtesy” about many, but not all, of these modifications.

Procedural history. The trial court granted summary judgment in favor of Lender. Borrower appealed.

Key rules. Shoaff provides an impressive summary of Indiana guaranty law, including how the rules operate within the summary judgment context. As it relates to Guarantor’s key defense, Indiana common law provides that “when parties cause a material alteration of an underlying obligation without the consent of the guarantor, the guarantor is discharged from further liability whether the change is to [the guarantor’s] injury or benefit.” A “material alteration” is:

a change which [1] alters the legal identity of the principal's contract, [2] substantially increases the risk of loss to the guarantor, or [3] places the guarantor in a different position. The change must be binding.

“[T]he legal identity of the principal's contract … is best understood to mean whether the obligation itself—rather than the instrument which records it—has meaningfully changed.” On this point, the Court cited to a legal encyclopedia, American Jurisprudence 2d, for authority:

even without an express term in a guaranty allowing it, a modification of the underlying obligation generally does not revoke a continuing guaranty; the guarantor is only discharged if the modification, other than an extension of time, creates a substituted contract or imposes risks on the secondary obligor fundamentally different from those imposed pursuant to the original one.

Holding. The Indiana Court of Appeals affirmed the summary judgment for Lender.

Policy/rationale. Guarantor contended that Borrower’s underlying obligation had been “materially altered” such that Guarantor was released from the debt. The Court disagreed. A distinctive aspect of Shoaff is the Court's reliance on language in the guaranty that Guarantor “prospectively consented” to the alterations and waived notice of them:

The only changes were to the structure of the loan, the dates associated with its repayment, and the manner in which it was to be repaid. Those changes do not fit any of the three categories of materiality, and clearly fall within the language of the [guaranty], demonstrating that [Guarantor] contemplated their possibility and prospectively consented to them.

Moreover, the Court did not view the loan modifications as imposing “fundamentally different risks” on Guarantor, even though Guarantor may end up paying more than he expected to pay when he signed the guaranty. Such changes, the Court reasoned, were “in degree, not in kind.” Guarantor “assumed” such risks of paying interest, late fees and future debts by virtue of the language in the guaranty. In a nod to a strict reading of the operative contract language, the Court concluded:

the underlying obligation—guaranteed by [Guarantor]—was not materially altered. Regardless, any alterations were contemplated by the parties to the Agreement, and prospectively consented to by [Guarantor].

Related posts.

• Indiana Court Releases Mortgage On Parents' Farmland Based On Material Alteration Of Kids' Loan
• “Material Alteration” Defense Rejected In Indiana Guaranty Enforcement Action
• Liability Of Guarantors Or Accommodation Parties When The Original Obligation Is Materially Altered

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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 [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.

Indiana Court Holds That Contract For Purchase Of Loan Was Not Breached

Lesson. When dealing with the purchase or sale of a loan, be mindful that the borrower could pay off the loan before closing, so consider including language in the agreement to account for that contingency.

Case cite. Singleton St. Pierre Realty Invs. LLC v. Estate of Singleton 2022 Ind. App. Unpub. LEXIS 1390 (Ind. Ct. App. Dec. 6 2022)

Legal issue. Whether a seller breached a loan sale agreement.

Vital facts. Buyer and Seller (and estate) entered into an agreement for the purchase and sale of a $1MM loan that was in default. The parties contemporaneously contracted for the purchase of a funeral home, which the underlying borrower operated. The borrower (as tenant) was $366k behind in its lease payments. If the deals closed, Buyer would become both a lender and a landlord with rights to recover the $1.0MM loan and the $366k lease arrearage. The probate court approved the agreements. About a week before closing, the borrower paid off the loan, so the closing on that agreement never occurred. The closing on the purchase of the property did occur, however. Buyer later collected the $366k.

Procedural history. Seller claimed Buyer was obligated to remit the lease arrearage to Seller. The trial court agreed and granted a summary judgment awarding damages to Seller for the arrearage. Buyer appealed.

Key rules. The Singleton opinion, which turned on the Court’s reading of the two agreements, spelled out Indiana’s general rules of contract interpretation (citations omitted):

The unambiguous language of a contract is conclusive upon the parties to the contract and upon the courts. Courts may not construe clear and unambiguous provisions, nor may courts add provisions not agreed upon by the parties. Unambiguous contracts must be specifically enforced as written without any additions or deletions by the court. In interpreting a written contract, the court should attempt to determine the intent of the parties at the time the contract was made as discovered by the language used to express their rights and duties. If the language of the instrument is unambiguous, the intent of the parties is determined from the four corners of that instrument. If, however, a contract is ambiguous or uncertain, its meaning is to be determined by extrinsic evidence and its construction is a matter for the fact finder. The contract is to be read as a whole when trying to ascertain the intent of the parties. The court will make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless.

Holding. The Indiana Court of Appeals affirmed the trial court.

Policy/rationale. One of Buyer’s theories to retain the $366k was based on its interpretation of the loan purchase agreement. Buyer contended that Seller breached the contract despite the fact that “no amounts were owed” under the loan at the time of the scheduled closing. Nonetheless, Buyer claimed that, because the loan had a balance of over $1,000,000 when the related (but separate) property sale agreement was executed, "[$1MM was] the amount … that the parties understood and intended that [Buyer] had to recover before it would be obligated to remit the Arrearage to the [Seller]."

Seller countered that Buyer did not identify which contract term in the loan purchase agreement was allegedly breached. No language in the agreement “prevented [Seller] from accepting the amount due under the [loan] before the closing date and [nothing gave Buyer] any right to the [loan] proceeds before the closing date.” Had Buyer "wanted to prevent an early payoff … or require [the loan have] some minimum balance at the time of closing, [Buyer] could have demanded that the [agreement] include language to that effect." Or, the agreement "could have included language reducing the purchase price … to account for any payments made … prior to the closing date[,] but it did not.” Moreover, Buyer did not tender the purchase price to Seller and did not proceed with the closing as the agreement stipulated, “thus relieving [Seller] of performing its obligations under the [loan purchase] agreement.”
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Part of my practice includes the purchase and sale of secured loans. 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.

Criminal Fraud Arising Out of Civil Title/Foreclosure Disputes

Quick post today to start the New Year. My routine case law search uncovered a criminal case related to some procedural technicalities that admittedly have no relevance to my blog:    United States v. Yoder, No. 3:17-CR-30 JD, 2022 U.S. Dist. LEXIS 204060 (N.D. Ind. Nov. 9, 2022).

What I found interesting was that the two characters implicated in the criminal matters were involved in a pair of residential title/foreclosure disputes we handled back in 2016. The factual background in Yoder essentially mirrors what we thought occurred in our cases:

As set out in the presentence report, in 2014 and 2015, Mr. Yoder and his codefendant Kyle Holt, were engaged in a scheme to defraud homeowners who were facing foreclosures on their homes. They would approach such distressed homeowners and convince them to transfer title of the property in exchange for false promises of being able to avoid further foreclosure obligations. In particular, they falsely represented to the homeowners that they would handle their mortgage arrearages and the foreclosure process. Some believed these lies and transferred their interest in the property through quit claim deeds to entities controlled by the defendants. Mr. Yoder and Mr. Holt would then record the quit claims deeds at the local recorder's office. In reality, though, the quit claim deeds did not extinguish the outstanding mortgage debts. Regardless, Mr. Yoder would use the fraudulent interest in the property to secure to himself or others ownership of the property.

In some instances, to further the fraud, Mr. Yoder would cause to be mailed a bogus document entitled "International Promissory Note" to the financial institution holding the outstanding mortgage debt, purporting to extinguish the debt. Mr. Yoder knew this was fiction and did this to cloud the title of the property. Simultaneously, Mr. Yoder would cause to be filed a fraudulent “Satisfaction of Mortgage” with the county recorder's office in an attempt to discharge the mortgage.

We were engaged by a residential mortgage loan servicer to protect the interests of the senior lender/mortgagee in the prior matters. We were able to convince the court that the paperwork purportedly affecting title and our client’s mortgage was bogus, and the court granted summary judgment in our client’s favor.

Apparently our cases were not isolated events, and someone must have reported Yoder and Holt to the authorities. The criminal actions appear to be ongoing, and you can search Pacer under the case number above to learn more.

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I represent lenders, as well as their mortgage loan servicers, entangled in 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.