Commercial Foreclosure Refresher: Some Basics

A prospective client, who holds a promissory note, which requires an upcoming balloon payment, and a mortgage on commercial real estate securing the note, had these questions for us:

1.    Could the client (effectively, a lender) pursue a default the day after the balloon payment was due?

2.    What did #1 require?

3.    How long would the loan collateral be tied up?

Since I've written about each of these topics in the past, I thought the prospective client's questions made for a nice, short blog post.  Here are the quick answers (as I prepare to head on a fall break vacation with the family):

1.    Depending upon the language in the note, usually yes.  The default and enforcement provisions in the note control.  But, some lenders provide a notice and cure letter as a courtesy, or to initiate settlement discussions.  For more, see Notices of Default, Who Should Send the Letter.   Moreover, while residential/consumer foreclosures require pre-suit notice in Indiana, commercial cases do not:  Indiana's Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures.  

2.    The Commercial Lender's 8-Item Care Package For Its Foreclosure Attorney

3.    Indiana Foreclosure Process And Timing - The Basics


Indiana’s Claims Deadlines Against An Estate Of A Deceased Borrower

First Merchants Bank v. Tolley, 982 N.E.2d 1061 (Ind. Ct. App. 2013) is a hybrid of probate and secured collections law.  The opinion helps guide secured lenders when an Indiana borrower, who is in default under a mortgage loan, passes away and an estate is opened.  Specifically, Tolley addresses the applicable deadlines to file a claim against the estate. 

The chronology.  In Tolley, co-borrower (Husband) died 11/17/10.  An Estate was opened on 12/17/10, and counsel for the Estate called Lender to notify Lender that Husband had died and that estate proceedings had begun in Miami County.  On 12/31/10 and again on 01/07/11, the Estate published a statutory “notice of administration” in a local newspaper.  On 07/26/11, Lender filed a claim against the Estate related to notes and mortgages co-signed by Husband and Wife. 

Trial court’s summary judgment.  The Estate filed a motion for summary judgment seeking to strike Lender’s two claims because they were not filed within three months after the date of the first published notice to creditors.  Lender countered by filing its own summary judgment motion asserting that its claims were timely filed within nine months of the date of death.  The trial court sided with the Estate, but the Court of Appeals later ruled for Lender.

Indiana probate-related notice requirements.  The Court of Appeals discussed at length the difference between a “nonclaim statute” and a “statute of limitation,” which analysis may only be stimulating to attorneys.  (FYI, at issue in Tolley were nonclaim statutes.)  I.C. § 29-1-14-1(d) bars claims against an estate if they are not filed within nine months after the death.  On the other hand, I.C. § 29-1-14-1(a) bars claims unless they are filed within three months after the first published notice of the death to (generally unknown) creditors.  But subsection (a) must be read in conjunction with I.C. § 29-1-7-7, which also governs notice and which relates to known creditors. 

Parties’ contentions.  Lender argued that subsection (d) of I.C. § 29-1-7-7 required the Estate to provide Lender, a known creditor, notice by direct mail or other written means, not merely by publication in a newspaper.  Lender asserted a constitutional due process-like argument.  On the other hand, the Estate argued that I.C. § 29-1-7-7 did not require direct written notice and that, in this case, notice was immaterial because Lender already knew about the death and the opening of the Estate.  Since Lender did not file any claim until almost seven months after the first published notice to creditors, the claims should fail, according to the Estate. 

Holding and rationale.  The Court reversed the trial court and granted summary judgment in favor of Lender.  The Court “[could not] say that [Lender] received proper notice.”  As such, Lender’s claims, which Lender filed within nine months of Husband’s death, were timely filed.  The Court reasoned that the nine-month deadline, as opposed to the three-month deadline, applied.  This is because I.C. § 29-1-7-7(d) requires a written, detailed notice to be served on each creditor “who is known or reasonably ascertainable” and, in Tolley, Lender fit that description.  The phone call from the attorney for the Estate did not meet the statutory notice requirements, which include notice of the time period for the filing of a claim. 

Inapplicable to foreclosures.  As an aside, the Estate in Tolley conceded that, should the probate-related claims be dismissed, Lender would not be prevented from foreclosing the mortgages or from recovering any deficiency from the surviving co-borrower.  Thus the lessons from Tolley really only apply to collection of a deficiency from the estate of a borrower.  In rem mortgage foreclosure claims (judgments as to the real estate, not the individual) can be brought outside of probate proceedings. 

Thanks to my partner Amy VonDielingen, who handles both creditor’s rights and probate matters at our firm, for her input into today’s post.

Indiana's Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures

We recently got a question from one of our firm's community bank clients that does a lot of small business lending.  The bank sometimes makes commercial loans that are guaranteed by the borrower’s principal.  The principal, in turn, secures his/her obligations under the guaranty with a mortgage on his/her primary residence.  The question was:

if the bank decides to foreclose on the mortgage in order to pay itself down under the guaranty of the commercial loan, do the pre-suit notice and settlement conference provisions of Ind. Code 32-30-10.5 apply?

The client believed that the answer was “no” because the subject loans were not made “primarily for personal, family or household purposes,” which in part defines the loans governed by the statute.  See I.C. 32-30-10.5-5(a)(2).

After consulting with my partner Tom Dinwiddie, who was involved in the creation of the 2009 legislation, we concluded that the client's understanding was correct.  (Click here for my 2009 post regarding the legislation.)  The process was never intended to apply to commercial loans.  The key is that the bank is foreclosing on property securing a business loan, not a consumer loan.  Even though the bank is targeting residential real estate, the protections afforded by the statute do not apply.  

Our conclusions with regard to the inapplicablity of Indiana's pre-suit notice and settlement conference statute - entitled "Foreclosure Prevention Agreements for Residential Mortgages" - are supported by case law interpreting the Fair Debt Collections Practices Act, which uses the identicle terminology "primarily for personal, family or household purposes...."  As noted by by 12/18/09 and 11/16/06 posts, the regulations of the FDCPA generally do not apply to commercial foreclosures or the collection of business debts. 


Loan documents often require the commercial lending institution to provide written notice (a letter) to the borrower before initiating foreclosure or lien enforcement proceedings.  Some of our clients have wondered whether, in Indiana, the default letter can come from outside counsel.  In my view, an effective notice can come from counsel.  But, if the borrower has its own lawyer, the letter probably should come directly from the lender.

Is notice required?  To my knowledge, there is no common law rule or statutory requirement that the borrower receive notice and an opportunity to cure.  (The UCC, Article 9.1, has a notice provision in Part 6 “Default,” but the notice requirements apply only to the disposition of collateral after default.)  Indeed there are loan documents that do not contain notice provisions, in which case the lender can immediately file suit upon default.  On the other hand, if there is a notice clause, basic contract law dictates that notice be sent.  Usually, notice to the borrower must come from the lender and must be sent to a specific person at a specific address.  The best way to ensure effective notice is to do exactly what the parties agreed to do in the written contract(s).

Problem #1 – effective notice.  The common question is whether outside counsel can send the letter on the lender’s behalf.  Sometimes it makes practical sense for outside counsel to do so, and I believe this is the routine practice for many Indiana lawyers.  Default notice letters sent by outside counsel raise two potential problems, however.  The first relates to the effectiveness of the letter.  A literal reading of most loan documents state that notice must come from the lender, not from a lawyer on the lender’s behalf.  A creative advocate for the defaulting party may argue such notice is invalid.  To my knowledge, there is no Indiana case speaking to this specific question.  But I think most if not all judges would conclude that notice from outside counsel is effective because the lawyer is a representative of the lender.  More importantly, the borrower got the letter.  Who sent the letter, it seems to me, is a distinction without a difference.

Problem #2 – ethics.  The second and perhaps greater problem, at least for the lender’s attorney, surrounds the ethics of writing to the client of another attorney.  The issue is governed by the Indiana Supreme Court’s Rules of Professional Conduct, which regulate the practices of Indiana attorneys.  Rule 4.2 “Communication with person represented by counsel” states:

  In representing a client, a lawyer shall not communicate about the
  subject of the representation with a person the lawyer knows to be
  represented by another lawyer
in the matter, unless the lawyer has
  the consent of the other lawyer or is authorized by law or a court order.

The purpose of Rule 4.2 relates to protections against “overreaching by other lawyers” . . . “interference by those lawyers with the client-lawyer relationship” . . . and “the uncounseled disclosure of information relating to the representation.”  (See, Official Comments).  Assuming the default notice letter is a standard, straight forward and to-the-point communication, the spirit of the rule, in my view, is not being violated.  This is particularly true if lender’s counsel “carbon copies” the borrower’s attorney on the letter, so that the borrower’s attorney has actual knowledge that the letter has been sent and can counsel his or her client accordingly.  Having said that, it’s my understanding that some Indiana lawyers disapprove of this practice and assert it is an ethical violation.  I concede there is a decent argument the practice technically violates Rule 4.2. 

Safety first.  Despite what I understand to be a relatively common practice, the more prudent approach is for default letters to come from the lender, not lender’s counsel, unless the borrower is unrepresented.  This technique will avoid conflict with the opposing party that could result in ill-will, which in turn could hamper settlement discussions or, more importantly, drive up legal fees associated with a fight.  Keep in mind that the letter still can be drafted by outside counsel.  It just needs to be signed in-house and on the lender’s stationery.  I therefore recommend that, in Indiana, commercial lending institutions declaring a default should (1) follow the explicit notice instructions in the operative loan documents and (2) have any required default letter come from the lender, not outside counsel, in the event the borrower is represented by an attorney.