Indiana Federal Court Dismisses Borrower’s Contract Claim Against Lender Because Lender Never Executed The HAMP Trial Period Plan

Lesson. Absent a fully-executed TPP, signed by a lender or its mortgage loan servicer, no enforceable contract exists, and a borrower’s claim against a lender based upon a TPP, or under HAMP, will be dismissed. In other words, an alleged loan modification agreement requires the signature of the lender.

Case cite. Taylor v. JP Morgan, 2017 WL 3754607 (N.D. Ind. 2017) (Judge Lozan's opinion); Taylor v. JP Morgan, 2017 WL 7370978 (N.D. Ind. 2017) (Magistrate Judge Martin's order)

Legal issue. The main question in Taylor was whether the Home Affordable Modification Program's Trial Period Plan constituted an enforceable contract between a lender and a borrower. A secondary issue was whether the lender was liable for breach of an implied covenant of good faith and fair dealing.

Vital facts. Borrower and his residential/consumer lender discussed a loan modification pursuant to the Home Affordable Modification Program (“HAMP”). Specifically, the lender sent the borrower a letter offering a HAMP Trial Period Plan (“TPP”). The TPP had certain terms and included certain steps for the borrower to complete before the lender would modify the mortgage loan. One of the conditions to the TPP was that the lender must provide the borrower with a fully-executed copy of the TPP; otherwise, there would be no loan modification. In Taylor, the borrower purportedly submitted the necessary paperwork, but the lender never returned an executed copy of the TPP. The borrower claimed that he qualified for a loan modification under HAMP but that the lender improperly denied the request.

Procedural history. The borrower filed a breach of contract action against the lender. The lender filed a motion for judgment on the pleadings. The U.S District Court for the Northern District of Indiana granted the lender’s motion and dismissed the borrower’s case.

Key rules.

Indiana case law involving HAMP provides that the language of the TPP is clear that it is not an offer by lenders that borrowers can accept simply by providing further documentation. Instead, the TPP is an invitation for borrowers to apply to the program, which requires the borrowers’ compliance to be considered. Cases around the country generally provide that a TPP does not take effect until the lender provides a signed copy.

There is no separate cause of action in cases like these for breach of an implied covenant of good faith and fair dealing.

Holding. Since the lender was required to execute the TPP but did not, no contract was formed and thus no viable breach of contract claim existed. Also, the Court rejected the borrower’s claim breach of good faith and fair dealing. (This case is now on appeal to the 7th Circuit.)

Policy/rationale.

TPP’s are not agreements to provide borrowers with a loan at a specified date, but rather are agreements governing obligations of both lenders and borrowers over a trial period after which lenders may extend a separate permanent loan modification should lenders determine that borrowers qualify.

The alleged contract was not for the sale of goods governed by the Uniform Commercial Code and was not the sale of insurance. Moreover, the mortgage did not give rise to any fiduciary or other special relationship. Thus the borrower’s complaint did not articulate the independent tort of breach of good faith/fair dealing.

Related post. Indiana Upholds Dismissal Of Residential Borrower’s Tort Claims Arising Out Of Alleged HAMP Violations
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I represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosures and related litigation. 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.


Borrower’s “Mutual Mistake” Defense Fails Under Indiana Law

Lesson. To set aside a loan document based upon the defense of mutual mistake, there first must be a mistake concerning a vital fact upon which the parties based the loan. Second, the mistake must be on the part of both parties.

Case cite. Williamson v. U.S. Bank, 55 N.E.3d 906 (Ind. Ct. App. 2016).

Legal issue. Whether a loan modification agreement should have been reformed or rescinded based upon an alleged mistake of fact.

Vital facts. In 2008, borrower defaulted under a promissory note and mortgage, and in 2009 lender obtained a default judgment against him. The day before the scheduled sheriff’s sale, lender notified the sheriff that the sale should be cancelled due to ongoing settlement negotiations. Nevertheless, the sheriff inadvertently held the sale, and the lender’s pre-sale written bid prevailed. The sheriff’s processed and recorded the sheriff’s deed. About three months later, lender discovered the mistake and ultimately got a court order vacating the deed. In 2010, borrower and lender executed a loan modification agreement that amended the note and mortgage, and set up a new payment plan. For three years, borrower made the payments under the loan mod. At some point, borrower discovered information leading him to believe that he was not on the deed to the property. He also had been denied his homestead exemption multiple times. About the same time, lender notified borrower that he needed to make an additional payment into escrow to cover real estate taxes. In response, borrower told lender he would not pay anything further until lender assured borrower “his name was back on the deed….” Lender then filed an affidavit with the county assessor reaffirming that the court had vacated lender’s title to the property and that the assessor’s records should reflect that title was with borrower. Despite lender’s action, borrower made no further mortgage payments.

Procedural history. Lender initiated a foreclosure lawsuit and filed a motion for summary judgment. In response, borrower filed an affidavit stating that he did not know that his name had been taken off the deed to the property when he signed the loan mod. Borrower argued that he would not have entered into the loan mod knowing his name had been taken off the deed. He essentially asserted that the loan mod was not enforceable against him. The trial court rejected borrower’s position and granted lender summary judgment.

Key rules. A contract may be reformed on grounds of mistake upon clear and convincing evidence of both the mistake and the original intent of the parties. Stated differently, “where both parties to a contract share a common assumption about a vital fact upon which they based their bargain, and that assumption is false, the transaction may be avoided if, because of the mistake, a quite different exchange of value occurs from the exchange of values contemplated by the parties.”

Ind. Code 32-30-10-3 provides that “if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee … may proceed in the circuit court of the county where the real estate is located to foreclose the equity of redemption….” If a lender produces evidence of a demand note and mortgage, it establishes the prima facie evidence supporting foreclosure. That shifts the burden to the borrower to prove payment of the note or any affirmative defense to foreclosure.

Holding. The Indiana Court of Appeals affirmed the trial court’s summary judgment in favor of lender.

Policy/rationale. Borrower contended that he should not have been held to the terms of the loan mod, and thus his mortgage should not have been foreclosed, because the parties mistakenly believed his name was on the deed when they executed the loan mod. But the alleged mistake of fact did not exist upon execution of the loan mod. Borrower did in fact have a valid deed at the time. Although borrower was temporarily divested of ownership through the sheriff’s sale, the trial court later set the sale aside and vacated the deed. That happened in December of 2009. The loan mod didn’t occur until December of 2010. Since borrower’s name was on the deed upon execution of the loan mod, “there was no basis to reform or rescind the agreement.”

This seemed to be a fairly straightforward decision, but I suspect there may have been more to the story. (It’s common for appellate court opinions to distill the facts to their essence.) In any event, despite borrower’s obvious frustrations arising out of the 2009 sheriff’s sale and the resulting confusion with the county’s records, the loan mod had to be enforced.

Related posts.

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I frequently represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.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.


Settlement Agreement Between Lender And Guarantors Did Not Release The Contribution Rights Of The Guarantors

Lesson. Be mindful of language in settlement agreements with lenders. Don’t unwittingly release contribution claims among guarantors unless that’s the objective.

Case cite. New v. T3 Investments, 55 N.E.3d 870 (Ind. Ct. App. 2016).

Legal issue. Whether a mutual release within a settlement agreement between a lender, on the one hand, and a borrower and several guarantors, on the other hand, resulted in a waiver of rights of contribution among the guarantors.

Vital facts. New was a commercial mortgage foreclosure matter. The heart of the case surrounded the liability of the guarantors of the loan. At issue was a “Settlement and Mutual Release Agreement” entered into by the lender, the borrower and the guarantors. The Court’s opinion sets out the relevant portions of the agreement, including the release provision. The borrower/guarantors breached the agreement by failing to pay the lender, so the lender’s claims later were reduced to a judgment. After a sheriff’s sale, an $865,315.95 deficiency remained, and one of the guarantors – T3 – paid the deficiency in full. T3 then filed an action for contribution against the other five guarantors seeking their pro-rata share of the deficiency payment. Those guarantors asserted that the prior settlement agreement had language that operated to release them from liability. T3 contended that the settlement agreement dealt only with the bank and did not demonstrate that the guarantors bargained for any benefits and detriments with respect to each other.

Procedural history. New was an appeal to the Indiana Court of Appeals following the trial court’s summary judgment in favor of T3.

Key rules.

  • The doctrine of contribution “rests on the principle that, where parties stand in equal right, equality of burden becomes equity.” Contribution ensures “those who assume a common burden carry it in equal portions.” A party who pays a debt is entitled to receive contribution from any party having the same joint and several liability.
  • Generally, the right of contribution only can be destroyed by an agreement between the obligated parties.
  • A release is a contract and is interpreted according to contract law. Contract formation requires an offer, acceptance and consideration. Consideration generally is where there is a benefit accruing to the promisor or a detriment to the promisee. Consideration “consists of bargained-for exchange.” A release must be supported by consideration.

Holding. The Court of Appeals affirmed the trial court’s summary judgment in favor of T3. The remaining guarantors were obligated to pay T3 their pro-rata portion of the deficiency judgment.

Policy/rationale. Although the language in the “mutual release” provision in the settlement agreement was very broad and arguably cut against T3’s position, the Court found that there was no “bargained-for” exchange among the guarantors related to any release among them. The guarantors negotiated collectively with the lender. The bargained-for exchange concerned only the loan and the lawsuits filed by the lender. The settlement agreement spelled out how to resolve only those claims. The guarantors in the agreement did not settle among themselves. In short, the mutual release contained within the settlement agreement was not applicable to T3’s contribution claim.

Related posts.

I represent parties, including guarantors, in commercial mortgage foreclosure disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.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.


Wire Payment Received One Day Late Did Not Breach Forbearance Agreement

If a lender receives a loan payment one day late, is it an actionable default?  Singleton v. Fifth Third Bank, 2012 Ind. App. LEXIS 532 (Ind. Ct. App. 2012), decided in the context of a forbearance agreement, advises that the answer depends on the contract language. 

Forbearance terms.  In the forbearance agreement in Singleton, the lender agreed to forbear from its loan enforcement action from April 4, 2011 to the earlier of (i) June 30, 2011 or (ii) the occurrence of any “Termination Event.”  A “Termination event” was the occurrence of, among other things, a failure to perform any of the obligations contained in the agreement.  Upon the occurrence of a Termination Event, the lender was entitled to file an agreed judgment in its favor and against the borrower.

Payment terms.  The forbearance agreement contained an obligation that the borrower “shall make payments” to lender by certain dates set forth in a payment schedule.  The last payment, in the amount of $350,000.00, was due June 30, 2011.  The agreement did not expressly provide for a particular method of payment or whether certain methods would or would not be acceptable.  The agreement did not require the borrower to make the final payment using a wire and was silent as to the date a payment would be deemed made if made using a wire, or any other method of payment.

The payment.  On the afternoon of June 30, 2011, the borrower and his counsel contacted the lender’s representative about how to make the final payment.  The lender’s representative directed borrower’s counsel to make a wire transfer, as had been done with prior payments.  Borrower’s counsel sent a confirming email to the lender’s representative that the final payment “will be wired today,” and the lender’s representative replied by stating “thank you.”  At 3:39 p.m. the borrower initiated the final payment via a wire transfer from his bank to the lender.  The borrower obtained a wire transfer receipt stating the “effective date” and “entered date” was June 30, 2011.  The rub was that the wired funds were not received by the lender until the morning of July 1, 2011.

Paid vs. received.  The lender sought the entry of the agreed judgment, arguing that the final payment under the forbearance agreement was untimely because the lender received the funds on July 1, 2011, one day late.  The trial court agreed and entered judgment against the borrower.  On appeal, the borrower contended that the trial court improperly created terms in the forbearance agreement requiring that the June 30, 2011 payment had to be “received by” that date, when the agreement stated only that borrower “shall make payments” by that date.  In essence, the borrower’s argument was that the forbearance agreement was a payment contract and not a “received by” contract. 

Not untimely.  The Court of Appeals reversed the trial court’s decision based upon the terms, or lack thereof, in the forbearance agreement, together with the lender’s oral directive to wire the funds.  The borrower’s payment was not untimely and did not constitute a Termination Event under the agreement:

We are not at liberty to supply omitted terms while professing to construe a contract.  Accordingly, we decline to expand upon the general language in the Forbearance Agreement that [borrower] “shall make payments” . . . to include a more specific requirement that a payment, if made by a funds-transfer system as contemplated by Ind. Code §26-1-4.1, must be made by issuing a payment order at a time and with instructions calculated to ensure, taking into account any applicable statutory requirements or possible variations, that the funds would be received or otherwise deposited into [lender’s] account by the applicable due date.  The Forbearance Agreement does not include such a specific requirement. 

More than anything, Singleton is a lesson in contract drafting.  If, as a lender, you intend to strictly enforce payment defaults, then your loan documents or settlement agreements must be crystal clear.  If they are, Indiana courts typically will enforce them, likely even with a one-day breach.  If the forbearance agreement in Singleton contained language that the final payment must have been “received by” or “delivered to” the lender by June 30, 2011, then the lender may have prevailed. 


Effectiveness Of A Release In An Indiana Forbearance Agreement

The September 20, 2007 decision by Judge Barker of the United States District Court for the Southern District of Indiana in Midwest Lumber v. Branch Banking, 2007 U.S. Dist. LEXIS 69924 (S.D. Ind. 2007) (MidwestLumberOpinion.pdf) involves the dismissal of borrowers’ lender liability claims, but it also specifically addresses a release provision in a forbearance agreement.  Even though lender liability is not the primary focus of my blog, certainly forbearance agreements are pertinent.  And the workout industry should be aware of Judge Barker’s holding.  (I’d like to thank my colleague Chris Jacobson for her contributions to this article.)      

Parties.  The plaintiff was borrower Midwest Lumber, a lumber supplier.  Mr. and Mrs. Davis, the principals of Midwest Lumber and guarantors in the subject transactions, also were plaintiffs.  The loans in question involved working capital for the business secured by accounts receivable, inventory and real estate.  The named defendant was Branch Banking and Trust Company, the lender, which refinanced Midwest Lumber’s working capital loan facility.

Defaults/forbearance agreements.  Midwest Lumber couldn’t make its payments, so it and the Davises entered into a series of loan modifications and, ultimately, forbearance agreements with Branch Banking.  As an inducement for Branch Banking to agree to the terms set out in the forbearance agreements, Midwest Lumber and the Davises gave comprehensive written releases to Branch Banking in each forbearance agreement that stated in pertinent part:

  [Midwest Lumber and the Davises] hereby release and forever
  discharge [Branch Banking], its officers, directors, attorneys,
  employees, predecessors and successors (the “Released Parties”) of
  and from any claims, demands, obligations, actions, causes of action,
  damages, costs (including without limitation court costs and attorneys’
  and paralegals’ fees and expenses), expenses and compensation of
  any nature whatsoever (collectively, “Claims”), known or unknown,
  whether based in tort, contract or any other theory of recovery, or which
  may exist or might be claimed to exist at or prior to the date of this
  Letter Agreement on account of or in any way arising out of the
  Banking relationship between [Midwest Lumber], [Branch Banking]
  and its successors . . ..

Id. at 15.

Midwest Lumber/Davises Lawsuit.  The suit giving rise to the opinion originated with the filing of a complaint by Midwest Lumber/the Davises against Branch Banking in which the plaintiffs alleged that Branch Banking should be liable for misrepresentation, breach of the covenant of good faith and fair dealing, interference with business relationships, breach of fiduciary duty, undue control, economic duress and business coercion and negligent misrepresentation.  Significantly, Midwest Lumber/the Davises initiated the lawsuit after they had executed the forbearance agreements containing the release. 

Midwest Lumber filed a motion to dismiss the claims based in part upon the releases in the forbearance agreements.  Branch Banking argued that the forbearance agreements released it of any liability toward Midwest Lumber and the Davises.  Judge Barker agreed.  Midwest Lumber and the Davises made a variety of arguments against the enforceability and effectiveness of the releases, but Judge Barker concluded on page 18:

  having determined that the releases clearly and unambiguously
  released [Branch Banking] from any claim by [Midwest Lumber
  and the Davises] arising out of their banking relationship and
  having further found that [Midwest Lumber and the Davises]
  were not under economic duress when they signed the releases
  and that [Midwest Lumber and the Davises] have not returned
  the consideration they received from [Branch Banking] in
  exchange for signing the releases, all of [Midwest Lumber and
  the Davises] claims in the Second Amended Complaint must
  be DISMISSED.

Message.  The Midwest Lumber case begs the question of whether lenders should demand general releases in all of their forbearance agreements.  Most workout scenarios will not involve questionable conduct on the part of the lender or allegations of lender liability.  So, such a release might not directly apply in many situations.  But there is no downside from the aspect of the lender to include such general releases in the forbearance agreements.  Indeed, there is only upside:  protection.  The time the parties forbear is the time to get a release – even if you don’t think you’ll ever need it.  Midwest Lumber generally supports the proposition that such a release should be effective to bar future lender liability claims brought by the borrowers or guarantors, so releases of liability probably should be negotiated into most if not all forbearance agreements, if possible.