Court Invalidates Mortgages In Favor Of Creditor In Judgment Lien Foreclosure Action

Lesson. If you are trying to collect a judgment and suspect the judgment debtor granted a bogus mortgage to neutralize the judgment lien, then study the description of the purported debt in the mortgage and investigate the debt’s nature. You may be able to invalidate the mortgage lien.

Case cite. Drake Investments v. Ballatan, 138 N.E.3d 964 (Ind. Ct. App. 2019) (unpublished, memorandum decision)

Legal issue. Whether the subject mortgages were invalid, rendering priority in title to the judgment lien.

Vital facts. Judgment creditor Ballatan obtained a 125k judgment against Huntley on 9/28/07. While the underlying action was pending but before the entry of judgment, Huntley granted mortgages to her son on four parcels of real estate. The one-page mortgages indicate that Huntley agreed to pay her son an aggregate amount of 830k secured by the real estate. The son testified that Huntley granted the mortgages “in exchange for [son] taking care of [mom’s] living expenses….” Three years later, the son paid Huntley 30k for title to all the real estate. Then, the son transferred ownership of the four parcels to Drake Investments. The son was the president of Drake.

Procedural history. Ballatan filed suit to foreclose his judgment lien against the real estate formerly owned by Huntley, the judgment debtor. Drake asserted that the mortgages had priority over the judgment lien. The trial court granted summary judgment in favor of Ballatan and against Drake, which appealed.

Key rules.

Indiana Code 32-29-1-5 defines the proper form for mortgages in Indiana.

Indiana common law provides that mortgages must secure a debt that must be described in the document:

The debt need not be described with literal accuracy but it ‘must be correct so far as it goes, and full enough to direct attention to the sources of correct information in regard to it, and be such as not to mislead or deceive, as to the nature or amount of it, by the language used.’ It is necessary for the parties to the mortgage to correctly describe the debt ‘so as to preclude the parties from substituting debts other than those described for the mere purpose of defrauding creditors.’ As our federal sister court has observed, ‘most Indiana cases have examined the description of the debt as a whole to decide whether it puts a potential purchaser on in essence inquiry notice of an encumbrance, and whether it is specific enough to prevent the substitution of another debt.’

Holding. The Indiana Court of Appeals affirmed the trial court and held that the mortgages were invalid.

Policy/rationale. The Court’s opinion has a lengthy and thorough discussion of what constitutes a valid mortgage in Indiana, in particular the requirement for the description of the underlying debt. In Drake, the mortgages referred to promissory notes for the purported debts, but Drake never produced the notes. In fact, the only evidence was that the mortgages secured payment of future living expenses for Huntley. In other words, Huntley did not owe her son money upon execution of the mortgages. The mortgages also failed to include a date for repayment as required by statute. “One cannot tell from looking at the [mortgages] when [son’s] purported mortgage interest … was scheduled to expire.” Thus, the descriptions of the debts were inaccurate. Further, the Court concluded that the inaccuracies were “sufficiently material” to mislead or deceive as to the nature and amount of the debt. The mortgages made no connection between, or mention of, the debt and the living expenses. “The descriptions of the debts are so vague that they do not preclude [Huntley] and [son] from substituting other debts for the debts described.”

Related posts.

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I represent judgment creditors and lenders, as well as their mortgage loan servicers and title insurers, entangled in lien priority disputes. 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.


Indiana's Recording Law Change, Effective July 1

I'm passing along information distributed by the Indiana State Bar Association.  For today's content, all the credit goes to the ISBA:   

On July 1, 2020, an obscure change to an Indiana recording statute becomes effective, requiring lawyers to change how they prepare deeds, mortgages, powers of attorney, affidavits, and other instruments that must be recorded in an Indiana County recorder’s office.

The ISBA has drafted a directive to provide significant guidance to all members about this change and the sufficiency of signatures and notarial certificates for recording any deed, mortgage, or other paper or electronic instrument after June 30, 2020.

Click here for the ISBA's directive.  


Governor Holcomb's June 30 Order Extending Residential Foreclosure Moritoriaum

Section 1 of the Governor's order addresses residential mortgage foreclosures and follows-up his order order from March 19th, which was the subject of my March 28th post.  Here are the highlights:

  1. Residential mortgage foreclosure actions based upon nonpayment cannot be filed until August 1.
  2. This does not change the federal order that prevents FHA-insured mortgages from being foreclosed through August 31.
  3. Foreclosure actions on vacant or abandoned property can proceed.

Lender’s Failure To Comply With HUD’s Face-To-Face Meeting Requirement Dooms Indiana Mortgage Foreclosure Action

Lesson. A borrower/mortgagor may be able to defeat a foreclosure action if a lender/mortgagee does not comply with HUD regulations designed to be conditions precedent to foreclosure. For example, in certain cases, a failure to have an in-person meeting with the borrower/mortgagor before the borrower becomes more than three full months delinquent in payments, could lead to the dismissal of a subsequent foreclosure case.

Case cite. Gaeta v. Huntington, 129 N.E.3d 825 (Ind. Ct. App. 2019). NOTE: Gaeta is a so-called “memorandum decision,” meaning that, under Indiana law, the opinion is not supposed to be regarded as precedent or cited before any court. Nevertheless, the analysis and outcome are noteworthy.

Legal issue. Whether, in the context of a HUD-insured loan, a lender violated 24 C.F.R. 203.604 by failing to have a face-to-face meeting with the borrower before three monthly installments due on the loan went unpaid and, if so, whether the violation constituted a defense to the lender’s subsequent foreclosure suit.

Vital facts. The nine pages summarizing the underlying facts and the litigation in the Gaeta opinion tell a long and complex story. From the view of the Indiana Court of Appeals, the keys were: (1) the borrower defaulted under the loan by missing payments, (2) the lender failed to have a face-to-face interview with the borrower before three monthly installments due on the loan went unpaid, and (3) the lender filed a mortgage foreclosure action without ever having the face-to-face meeting.

Procedural history. This residential mortgage foreclosure case proceeded to a bench trial, and the court entered a money judgment for the lender and a decree foreclosing the mortgage. The borrower appealed.

Key rules.

24 C.F.R. 203.604(b) requires certain lenders to engage in specific steps before they can foreclose. One of those steps is to seek a face-to-face meeting with the mortgagor (borrower) “before three full monthly installments due on the mortgage are unpaid….” Click here for the entire reg.

There are exceptions to the face-to-face requirement, one of them being if the parties enter into a repayment plan making the meeting unnecessary. See, Section 604(c)(4).

The Court cited to and relied upon its 2010 opinion in Lacy-McKinney v. Taylor, Bean & Whitaker Mortgage, 937 N.E.2d 853 (Ind. Ct. App. 2010). Please click on the “related post” below for my discussion of that case.

“Noncompliance with HUD regulations [can constitute] the failure of the mortgagee to satisfy a HUD-imposed condition precedent to foreclosure.”

Not all mortgages are subject to HUD regs – only loans insured by the federal government.

Holding. The Court of Appeals reversed the trial court’s in rem judgment that foreclosed the mortgage. However, the Court affirmed the money judgment.

Policy/rationale. The Court concluded that the lender’s failure to conduct, or even attempt to conduct, a face-to-face meeting with the borrower before he became more than three months delinquent was a “clear violation” of applicable HUD regs. The lender made several arguments – very compelling ones in my view – as to why it substantially complied with the reg or did not violate the reg to begin with. The trial court agreed. The Court of Appeals disagreed, choosing to apply a strict reading of the law.

See the opinion for more because no two cases are the same, and the outcome could be different in your dispute. The silver lining, if there was one, for the lender was that the in personam judgment on the promissory note stood and thus created a judgment lien on the subject property. The debt was not extinguished - only the mortgage.

Related post. In Indiana, Failure To Comply With HUD Servicing Regulations Can Be A Defense To A Foreclosure Action 
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Part of my practice includes representing lenders, as well as their mortgage loan servicers, entangled in contested residential foreclosures and servicing disputes. 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.


Marion County (Indianapolis) Sheriff's Sales Will NOT Start Back Up In July

Following-up last week's post (below), we learned this morning that the sheriff's office has postponed the July sale "due to the extended evictions and foreclosures issued by Gov Eric Holcomb through August 1st."  No sale in July.

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Following the COVID-19 cancellations of the March, April, May, and June sales, the Marion County Civil Sheriff's Office is back in business.  The first sale since February will occur on July 15th.  Here is an email distributed by the Real Estate team this morning:

NEW RULES, REGULATIONS AND LOCATION FOR THE JULY SALE.

NEW LOCATION FOR THE JULY SALE - 8115 E. Washington St, Indianapolis IN 46219. Great parking.

SEVERAL WAYS TO LEAVE YOUR DEPOSIT:
You may come between 8:00 a.m. and 10:00 a.m. the morning of the sale, July 15th at 8115 E. Washington St and leave your deposit. However, we will end this process at 10:00 a.m. So if you are in line and the time hits 10:00 a.m. you will not be able to leave your deposit. So our suggestion is that you still come to the City-County Building at 200 E. Washington St 11th Floor conference room the day before the sale between 8:00 a.m. and Noon. Only one person allowed in the conference room at a time. Please social distance in the hallway of 6 feet.

For those of you that are in the pilot program you may still continue to send your registration form and check via email. Teena will stay one hour after the sale at 8115 E Washington St for you to bring your check back or you may also take it downtown to the City County Building right after the sale and Lori will be there to also take your check. Your choice.

It is mandatory that you stay and pick up your check if you did NOT win a bid. We will instruct you on this process the day of the sale.

SOCIAL DISTANCING:

A mask is required at the new location and in the City County Building.
Only bidders that have a paddle will be allowed in the bidding room. Other guest and attorney’s not bidding must go into the conference room. You will be able to hear the bidding process in that room. The conference room is not very large and may be difficult to social distance as per the recommendations of CDC. Please take this into consideration when choosing on whether or not you would like to attend since only 1 bidder is allowed in the bidding room per company/investor.

We will update the website soon as well with these changes. Please feel to contact us with any questions.

RE Team


Please visit our website: https://www.indy.gov/activity/sheriff-real-estate-sales

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I represent parties in connection with foreclosure cases and sheriff’s sales. 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.


“Debtor” In Alleged Fraudulent Transfer Must Be Liable For Creditor’s Underlying Claim

Lesson. If there is no underlying claim, then there can be no fraudulent transfer.

Case cite. Underwood v. Fulford, 128 N.E.3d 519 (Ind. Ct. App. 2019)

Legal issue. What is a “debtor” under Indiana’s Uniform Fraudulent Transfer Act?

Vital facts. This case arises out of a tangled web of disputes between parties to a real estate transaction. Many suits and many years led to this particular opinion. To cut to the chase, Underwood alleged that Kinney, before he died, conveyed certain properties to his wife for the purpose of defrauding Underwood, a purported creditor of Kinney (later, his Estate). The Underwood decision dealt with both the underlying action for damages and the fraudulent transfer action. The nature of Underwood’s primary claim is not important here. The key is that both the trial court and the Court of Appeals concluded that the Estate owed no money to Underwood.

Procedural history. The trial court dismissed Underwood’s fraudulent transfer claim, and Underwood appealed.

Key rules. Indiana's UFTA, at Ind. Code § 32-18-2-14, generally provides that:

A transfer made … by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made…, if the debtor made the transfer ... with actual intent to hinder, delay, or defraud any creditor of the debtor[.]

The statute defines a “debtor” as “a person who is liable on a claim.” I.C. § 32-18-2-2.

Indiana courts previously have declared, “a defendant cannot logically be held liable for a fraudulent transfer … if he is not to be held liable for the creditor’s underlying claim.” In other words, when a “UFTA defendant is not a debtor to the plaintiff, dismissal is proper.”

Holding. The Court affirmed the trial court’s dismissal of the UFTA action.

Policy/rationale. The Court first concluded on a separate contention that Underwood had no claim for damages against the Estate. Based on that premise, the Estate was not a “debtor” under the UFTA. For reasons that frankly are not altogether clear, Underwood continued to press her theory that the Estate was a debtor, but the Court found that she “failed to present a cogent argument” in support of her theory. The outcome is not surprising here, but the discussion is nonetheless noteworthy. For those who may be analyzing the viability of a fraudulent transfer claim, Underwood highlights who can be a “debtor” under the UFTA and why that definition is significant.

Related post. More On Piercing The Corporate Veil In Indiana, And The UFTA
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Part of my practice is to advise parties in connection with post-judgment collection matters. 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.


Indiana Supreme Court's 5/29/20 Order Extending Its 3/16/20 Order Related to COVID Relief And Procedures

On May 29, 2020, the Supreme Court entered the following order:  Order Extending Trial Courts' Emergency Tolling Authority and Setting Expiration of Other Emergency Orders.  The latest order follows-up the original order entered March 16, 2020, which I discussed in the following post from that date:  Indiana State Bar Association: COVID-19 Updates for the Legal Community

Be sure to check your relevant county courts for any local measures adopted.  For example, here in Marion County (Indianapolis), the Indiana State Bar Association released the following on May 18th:

We wanted to share the below update from the Marion Superior and Circuit Courts.

The Indiana Supreme Court has required that all Indiana trial courts seek advice and guidance from stakeholders. Based on this advice and guidance, you can expect that the earliest date the Marion Superior and Circuit Courts may return to any in-person hearings would be June 15. This is based on guidance and orders from the Indiana Supreme Court, collaboration with the controller and other city officials, as well as expert medical advice. 

Due to the high number of COVID-19 positive cases and deaths in Marion County, the courts are currently at least two weeks behind Governor Holcomb's Roadmap to Safely Reopen Indiana. The City-County Building is a particularly tough building to comply with the CDC and state/local health department requirements and recommendations. On an average day, 5,000 individuals enter the building, including employees. The city is in the process of engaging a firm with expertise in assisting all branches of government and city/county agencies in operating safely in a COVID-19 environment. This requires modification of the building in many areas. Some examples are installation of plexiglass, how elevators will be used by staff and the public, use of PPE by employees and the public, and what screening measure(s) will be used to enter the building, just to name a few.

With questions about a case, visit mycase.in.gov.

If you need the assistance of court staff, click here to visit the Marion Superior Court’s website for a listing of essential staff, or click here to visit the Marion County Circuit Court website. This is the best way to obtain information about a particular court and/or that court’s practices and policies during this time. While there is a general voicemail for the court system, court-specific phone communication is not possible at this time.


Status Of Marion County Indiana Sheriff's Sales

The Marion County Civil Sheriff's Office issued the following email last week:

The Marion County Sheriff sale for June 17th has been cancelled. These sales will be moved to August. However, your sales that moved from April to the June sale will have to be praeciped again. Please continue to send in your April cost checks.

I should be getting the July sale decrees from the Clerk this Friday. I will reassign your May SFN to the July sale. If you have not let us know the sales you want moved from May to July please let me know no later than Friday, the 15th by Noon.

We continue to work from home for the unforeseeable future. Please stay safe.

RE Team


Judgment Creditor Entitled To Recover Entire Value Of Real Estate Fraudulently Conveyed

Lesson. Although the transferee of real estate fraudulently conveyed theoretically could retain, or receive credit for, money spent to improve or otherwise increase the value of the subject property, the credit will only apply to improvements made after the fraudulent transfer. Otherwise, the judgment creditor will be entitled to the full value of the real estate, unless there is evidence of an inequitable windfall to the creditor.

Case cite. State v. Lawson, 128 N.E.3d 471 (Ind. Ct. App. 2019)

Legal issue. Whether judgment creditor was entitled to one-half ($7,500), or the full amount ($15,000), of proceeds from the sale of a Husband’s interest in real estate fraudulently transferred to him by Wife, the judgment debtor.

Vital facts. In 2017, the State obtained a large civil judgment against Wife for alleged theft. The State claimed that, when the theft was about to be discovered, Wife fraudulently conveyed to Husband her interest in the subject real estate. The property previously had been owned by Husband and a family member, both of whom spent $7,500 each improving the property in the 1990’s. In 2004, Husband transferred his one-half interest to Wife’s daughter, who later transferred her interest to Wife. Upon learning of the theft investigation in August 2014, Wife quitclaimed her one-half interest in the real estate back to Husband. While the litigation was pending, the parties agreed to the sale of Husband’s interests in the real estate for $15,000, which was deposited with the trial court pending the outcome of the case.

Procedural history. Following a bench trial, the trial court found that Wife had fraudulently transferred her interest in the real estate but ordered only $7,500 of the sale proceeds to be released to the State. The trial court ordered the remaining $7,500 to be released to Husband “for his equitable interest in the Property.” The State appealed.

Key rules.

Lawson involved the interpretation of Indiana’s Uniform Fraudulent Transfer Act. Under the Act, a creditor may bring a claim to set aside a fraudulent conveyance made by a debtor. As relevant here, a conveyance is fraudulent and voidable if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud a creditor of the debtor. I.C. § 32-18-2-14.

Section 18 was the key provision at issue and states in relevant part:

(b) To the extent that a transfer is avoidable in an action by a creditor under section 17(a)(1) of this chapter, the following rules apply:

    (1) Except as otherwise provided in this chapter, the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor’s claim, whichever is less....

* * *
(c) If the judgment under subsection (b) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.

The Indiana Court of Appeals interpreted “subject to adjustment as the equities may require” to mean: “A defrauded creditor is entitled to the full value of the fraudulently transferred property at the time of the transfer, and an equitable adjustment is permitted only when an inequitable windfall would result by granting the creditor the full value of the property.”

Holding. The Indiana Court of Appeals reversed the trial court and held that the State was entitled to a judgment for the full $15,000.

Policy/rationale. The trial court granted $7,500 to Husband under the equitable test of Section 18(c) based upon his cash outlay to improve the real estate in the 1990’s. On appeal, the State asserted that it should obtain the full value of the asset, as provided in Section 18(b) and (c). Significantly, Husband incurred the $7,500 “long before” the fraudulent transfer and after he himself transferred the property to Wife’s daughter. The Court of Appeals' focus was on whether any improvements had been made after the fraudulent transfer, and there had been none. Because Husband had not increased the value of the real estate after the subject transfer, “the equities did not require [Husband] to be reimbursed.”

Related post. “Negative Value” Dooms Indiana Fraudulent Transfer And Direct Continuation Claims

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I represent parties in disputes arising out of loans that occasionally involve post-judgment fraudulent transfer issues.  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.


Indiana Court Of Appeals Clarifies Bond Requirement In Corvette Receivership

Burelli v. Martin, 130 N.E.3d 661 (Ind. Ct. App. 2019) approved the appointment of a receiver to sell an expensive item of personal property, subject to the posting of a bond.  

At a judgment creditor’s request, the trial court appointed a receiver under I.C. 32-30-5-1(1) and (2) to sell a multi-million dollar Corvette to satisfy the debts of the owners of the Corvette.  Those sections are:

    (1): In an action by a vendor to vacate a fraudulent purchase of property or by a creditor to subject any property or fund to the creditor's claim.  [The judgment creditor alleged the Corvette was subject to his claim.]

    (2): In actions between partners or persons jointly interested in any property or fund.  [ The judgment creditor and the Corvette’s co-owners were all jointly interested in the Corvette, and the proceeds from its sale.]

The Court of Appeals affirmed the appointment a receiver. 

However, the Court reversed the trial court for failing to require the receiver to post a bond.  Although the parties apparently had stipulated to a $2.5 million insurance policy on the car, the insurance did not meet the bond obligation. 

The Court held that the insurance policy only protected the receivership property (the Corvette).  The statutory requirement for a bond (Section 3), on the other hand, insures the receiver’s conduct.  The Court expanded on the point of the receiver's personal liability:

When a receiver breaches his duty by acting outside his statutory authority or orders of the appointing court or is guilty of negligence and misconduct in administering the receivership, he is personally liable for any loss to any interested party.  A receiver must therefore post a bond to secure that obligation.

The Court remanded the case to the trial court to amend the receivership order to require the receiver to post “an appropriate bond to secure [the receiver’s] oath to faithfully discharge his duties.”  The Court expressed no opinion on what would be an appropriate amount, however.

See Also:  Standards And Duties Applicable To Indiana Receivers

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I represent parties involved with receiverships, including receivers themselves.  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.


Status Of Indiana Sheriff's Sales

For what it's worth, the Marion County (Indianapolis) Civil Sheriff's Office announced last week that its May 2020 sale has been cancelled.  (The sheriff previously cancelled the April sale.)  The email from Marion County indicated that the June 2020 sale is still a go - at least for now.  The Marion County situation seems to be consistent with both our Governor's order and the CARES Act, Sections 4022 and 4023, to the extent those apply to a particular case.  

Always remain mindful that, although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific procedures vary by county.  Local rules, customs, and practices control.  There is a saying in Indiana that there are 92 counties and therefore 92 different sets of rules applicable to sheriff's sales.  My point is that, if you have questions, you should call the local civil sheriff's office to confirm the status of its foreclosure sale activities (publications, notices, sales, etc.)  during the COVID-19 pandemic.  


The Federal CARES Act - Multifamily Properties With Federally Backed Loans

Here is a verbatim quote of Section 4023:

FORBEARANCE OF RESIDENTIAL MORTGAGE LOAN PAYMENTS FOR MULTIFAMILY PROPERTIES WITH FEDERALLY BACKED LOANS

(a) IN GENERAL.—During the covered period, a multifamily borrower with a Federally backed multifamily mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request a forbearance under the terms set forth in this section.

(b) REQUEST FOR RELIEF.—A multifamily borrower with a Federally backed multifamily mortgage loan that  was current on its payments as of February 1, 2020, may submit an oral or written request for forbearance under subsection (a) to the borrower’s servicer affirming that the multifamily borrower is experiencing a financial hardship during the COVID–19 emergency.

(c) FORBEARANCE PERIOD.—

    (1) IN GENERAL.—Upon receipt of an oral or written request for forbearance from a multifamily borrower, a servicer shall—

        (A) document the financial hardship;

        (B) provide the forbearance for up to 30 days; and

        (C) extend the forbearance for up to 2 additional 30 day periods upon the request of the borrower provided that, the borrower’s request for an extension is made during the covered period, and, at least 15 days prior to the end of the forbearance period described under subparagraph (B).

    (2) RIGHT TO DISCONTINUE.—A multifamily borrower shall have the option to discontinue the forbearance at any time.

(d) RENTER PROTECTIONS DURING FORBEARANCE PERIOD.—A multifamily borrower that receives a forbearance under this section may not, for the duration of the forbearance—

    (1) evict or initiate the eviction of a tenant from a dwelling unit located in or on the applicable property solely for nonpayment of rent or other fees or charges; or

    (2) charge any late fees, penalties, or other charges to a tenant described in paragraph (1) for late payment of rent.

(e) NOTICE.—A multifamily borrower that receives a forbearance under this section—

    (1) may not require a tenant to vacate a dwelling unit located in or on the applicable property before the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate; and

    (2) may not issue a notice to vacate under paragraph (1) until after the expiration of the forbearance.

(f) DEFINITIONS.—In this section:

    (1) APPLICABLE PROPERTY.—The term “applicable property”, with respect to a Federally backed multifamily mortgage loan, means the residential multifamily property against which the mortgage loan is secured by a lien.

    (2) FEDERALLY BACKED MULTIFAMILY MORTGAGE LOAN.—The term “Federally backed multifamily mortgage loan” includes any loan (other than temporary financing such as a construction loan) that—

        (A) is secured by a first or subordinate lien on residential multifamily real property designed principally for the occupancy of 5 or more families, including any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and

        (B) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or a housing or related program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

    (3) MULTIFAMILY BORROWER.—the term “multifamily borrower” means a borrower of a residential mortgage loan that is secured by a lien against a property comprising 5 or more dwelling units.

    (4) COVID–19 EMERGENCY.—The term “COVID–19 emergency” means the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.).

    (5) COVERED PERIOD.—The term “covered period” means the period beginning on the date of enactment of this Act and ending on the sooner of—

        (A) the termination date of the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.); or

        (B) December 31, 2020.

A Few Thoughts:

  1. Section 4023 applies to a limited set of commercial mortgage loans that are "federally backed" and that essentially are related to apartments.  
  2. Borrowers might be entitled to an automatic 30-day "forbearance" and two more automatic 30-day "forbearance" periods upon a written request, which documents a financial hardship.
  3. The borrower must have been current as of 2/1/20.
  4. The law does not apply to construction loans.
  5. "Forbearance" is not defined.

The Federal CARES Act - Consumer/Residential Mortgage Loans

Here is a verbatim quote of Section 4022:

FORECLOSURE MORATORIUM AND CONSUMER RIGHT TO REQUEST FORBEARANCE

(a) DEFINITIONS.—In this section:

    (1) COVID–19 EMERGENCY.—The term “COVID–19 emergency” means the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.).

    (2) FEDERALLY BACKED MORTGAGE LOAN.—The term “Federally backed mortgage loan” includes any loan which is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from 1- to 4- families that is—(A) insured by the Federal Housing Administration under title II of the National Housing Act (12 U.S.C. 1707 et seq.);

        (B) insured under section 255 of the National Housing Act (12 U.S.C. 1715z–20);

        (C) guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992 (12 U.S.C. 1715z–13a, 1715z–13b);

        (D) guaranteed or insured by the Department of Veterans Affairs;

        (E) guaranteed or insured by the Department of Agriculture;

        (F) made by the Department of Agriculture;    or

        (G) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

(b) FORBEARANCE.—

    (1) IN GENERAL.—During the covered period, a borrower with a Federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request forbearance on the Federally backed mortgage loan, regardless of delinquency status, by—

        (A) submitting a request to the borrower’s servicer; and

        (B) affirming that the borrower is experiencing a financial hardship during the COVID–19 emergency.

    (2) DURATION OF FORBEARANCE.—Upon a request by a borrower for forbearance under paragraph (1), such forbearance shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower, provided that, at the borrower’s request, either the initial or extended period of forbearance may be shortened.

    (3) ACCRUAL OF INTEREST OR FEES.—During a period of forbearance described in this subsection, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract, shall accrue on the borrower’s account.

(c) REQUIREMENTS FOR SERVICERS.—

    (1) IN GENERAL.—Upon receiving a request for forbearance from a borrower under subsection (b), the servicer shall with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID–19 emergency and with no fees, penalties, or interest (beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract) charged to the borrower in connection with the forbearance, provide the forbearance for up to 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower, provided that, the borrower’s request for an extension is made during the covered period, and, at the borrower’s request, either the initial or extended period of forbearance may be shortened.

    (2) FORECLOSURE MORATORIUM.—Except with respect to a vacant or abandoned property, a servicer of a Federally backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

Limited Applicability:

Neither the forbearance mandate nor the foreclosure moratorium of Section 4022 apply to commercial mortgage loans, nor do they apply to residential/consumer mortgage loans that are not "federally backed" per Section (a)(2).  See also the moratorium exception at Section (c)(2) for vacant or abandoned property.   


Governor Holcomb's Executive Order 20-06: How Does It Affect Indiana Foreclosures?

On March 19, 2020, Indiana's Governor handed down his Order for Temporary Prohibition on Evictions and Foreclosures.  With regard to mortgage foreclosures, here's what it says in pertinent part (italics added):

WHEREAS, the adverse economic impacts of COVID-19 … on Hoosiers … include … hindering their ability to pay … mortgages, which could potentially result in creditors … initiating foreclosure … proceedings to remove them from their homes;

WHEREAS, to avoid the serious health, welfare, and safety consequences that may result if Hoosiers are … removed from their homes during this emergency, it is reasonable and necessary to suspend laws relating to real property (including breach of … mortgages, etc.), to control the occupancy of premises in … Indiana, and to impose a moratorium on … foreclosures;

WHEREAS, … HUD, in an effort to provide immediate relief to … homeowners … will temporarily suspend all foreclosures …;

NOW, THEREFORE … [the Governor orders] that:

  1. No … foreclosure actions or proceedings involving residential real estate real estate … may be initiated … until the state of emergency has been terminated….
  2. No provision contained in this … Order shall be construed as relieving any individual of their obligations … to make mortgage payments, or to comply with any other obligation(s) that an individual may have under a … mortgage.

Takeaways

  1. Order 20-06 applies only to consumer/residential mortgage foreclosures - not commercial foreclosures.
  2. Lenders cannot file a mortgage foreclosure complaint (start a lawsuit) against a homeowner until the Governor terminates this order.
  3. Despite the Order, Borrowers must continue to make mortgage loan payments. 

Gray Area

    A question I have relates to the Order's use of the term "proceedings."  For example, paraphrasing Paragraph 1:  "no foreclosure proceedings may be initiated."  This part of the Order is subject to interpretation, and the courts ultimately will decide what it means.  It seems to me that the Order effectively suspends all residential foreclosure (sheriff's) sales.  On the other hand, in a pending residential foreclosure case, the Order arguably does not prohibit a party from filing a motion.  But, the Order may prevent the court from holding a hearing on the motion or from ruling on the motion.  To that end, in connection with a pending case it would be wise to investigate whether any county-specific orders exist or to simply call the court's office to determine how the judge has decided to apply the Order.          

    


Force Mejeure And The COVID-19 Pandemic: Impact On Indiana Notes and Mortgages

  1. What does force majeure mean?

A “force majeure” is “[a]n event or effect that can be neither anticipated nor controlled” and “prevents someone from doing or completing something that he or she had agreed or officially planned to do.” Black’s Law Dictionary (11th ed. 2019). 

  1. What is the typical applicability of force majeure?

The purpose of a force majeure provision is to allocate the risk of loss if performance is impossible or impractical due to a force majeure event.  Black’s Law Dictionary (11th ed. 2019).  A force majeure clause in a contract will usually define various events that excuse or delay certain obligations of a party should these events occur.  In short, force majeure is a defense to a contract breach – it’s an excuse for a failure to perform.

  1. What is an example of a force majeure contract provision?

Here is a example:  “Force Majeure shall mean strikes, lockouts, flood, fire, acts of war, weather, acts of God and other events beyond the control of the Borrower.”  I am not aware of the use of force majeure clauses in promissory notes.  The same goes for mortgages.  Force majeure provisions are more often the subject of commercial leases, sales agreements, and construction contracts in which there are performance qualifiers.  For example, force majeure clauses related to construction obligations in construction loan agreements are common. 

Under Indiana law, the “scope and effect” of a force majeure clause centers on the specific language of the provision.  Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 27 (Ind. Ct. App. 2013).  Courts are not permitted to “rewrite the contract or interpret it in a manner which the parties never intended.”  Id.  Importantly, “[a] force majeure clause is not intended to buffer a party against the normal risks of a contract. Murdock & Sons Const., Inc. v. Goheen Gen. Const., Inc., 461 F.3d 837, 843 (7th Cir. 2006).  Thus, a party’s nonperformance due to economic hardship is insufficient to trigger a force majeure provision.  § 77:31.  Force Majeure clauses, 30 Williston on Contracts § 77:31 (4th ed.). 

  1. Does the COVID-19 pandemic constitute an “act of God?”

As of 1894, the answer in Indiana would be no.  See Gear v. Gray, 10 Ind. App. 428, 37 N.E. 1059 (1894).  An “act of God” is defined as “[a]n overwhelming, unpredictable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.”  Black’s Law Dictionary (11th ed. 2019).  Although the virus itself is arguably a natural event, the government-imposed restrictions that would actually inhibit a party from completing its contractual obligations arguably do not satisfy the definition of an act of God.  Gear, 37 N.E. at 1061 (holding that the closing of a school due to a diphtheria outbreak was not an act of God).  Certainly this area of the law could evolve in the wake of the current pandemic.  

  1. Does the COVID-19 pandemic constitute an “event beyond the control of the borrower?”

We are aware of no Indiana case law on this, but we believe that the answer would be yes, depending upon the particular performance qualifier in the contract.

  1. Would a governmental shutdown order constitute an event beyond the control of the borrower?

We are aware of no Indiana case law on this but believe that the answer would be yes, again depending upon the particular performance qualifier in the contract.

  1. Is force majeure limited to situations in which a contract contains a provision?  In other words, is it only an express contract right?

Indiana law is clear that the answer is yes.  Force majeure should only arise if the parties’ contract has expressly provided for it.

  1. Can the force majeure defense be “read into” a contract or will the excuse apply as a matter of law?

As Indiana law currently stands, force majeure should not apply in the absence of a contract provision.  This rule would appear to be the prevailing view across the country, although certainly each state has its own set of rules, and we have not performed exhaustive research at this point.  According to our limited research, if a contract does not contain a force majeure clause, then a party cannot use force majeure to excuse a breach of its contractual obligations.  Metals Res. Grp. Ltd., 293 A.D.2d at 418.  (“The parties’ integrated agreement contained no force majeure provision, much less one specifying the occurrence that defendant would now have treated as a force majeure, and, accordingly, there is no basis for a force majeure defense.”).

  1. Can a force majeure defense be read into a promissory note?  

No.  See 7 and 8 above.

  1. Can a force majeure defense be read into a mortgage?

It shouldn’t.  See 7 and 8 above.  However, mortgages generally are governed by principles of equity, and it is not inconceivable that a judge might consider applying force majeure to certain performance-related covenants in a mortgage in the wake of the COVID-19 pandemic.  For example, if the mortgage requires real estate taxes to be current, but the county treasurer’s office is unable to accept payments, then the policy behind force majeure might excuse such a breach.  A pure loan payment default is another matter, however.

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I'd like to thank my colleague David Patton for the legal research that formed the basis of this post. 

Please remember that we represent parties in disputes arising out of loans.  Please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com to discuss an engagement.  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.


Boone County Courts COVID-19 Order

If and to the extent you have any cases pending in Boone County, Indiana (my home county), please see the following order entered by the Indiana Supreme Court:  Boone County Order.

As to Marion County (where I work), my understanding is the Court's Executive Committee will be providing an update later this afternoon.  As of 3/13/20, click here for Marion County's press release.  


Indiana State Bar Association: COVID-19 Updates for the Legal Community

To: Indiana State Bar Association Members

From:  Indiana State Bar Assocaition

Date:  3/16/20

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In response to the COVID-19 outbreak, the Supreme Court has ordered trial courts to implement relevant portions of Continuity of Operations Planning (such as postponing jury trials, allowing for remote hearings, and keeping only essential staff in courthouses).

Trial courts are being directed to petition the Supreme Court through Administrative Rule 17 to carry out operational changes. AR 17 provides the framework for trial courts to put operational changes in place in the face of an emergency. Indiana Chief Justice Loretta Rush has already signed orders allowing for adjustments to jury trials, hearings, and other business practices as requested by counties. The Supreme Court is prioritizing review of any AR 17 petitions filed.

At the Supreme Court, attendance at oral arguments will be limited to the attorneys and parties in the case; the public is encouraged to watch the live webcasts.

The Office of Judicial Administration has already put in place social distancing and telework options for its employees.

In a press release just issued, Chief Justice Rush reported that she is monitoring the situation with guidance from the Indiana State Department of Health. She explained, “The Indiana Supreme Court will continue to hold oral arguments (subject to change), review cases, and accept filings—while taking proper measures to reduce exposure of COVID-19. We also know our trial court judges across the state are focused on ensuring essential court functions continue while being mindful of the safety of their communities. The Judicial Branch has avenues in place to ensure court operations at all levels continue.”

Resources:
Indiana Department of Health COVID-19 page
Indiana Supreme Court COVID-19 update page
Indiana State Bar Association COVID-19 page for the legal community
Webinar: COVID-19 Guidance for Individuals & Employers, presented by the Indianapolis Bar Association
Indiana Lawyer Coronavirus Update

Indiana State Bar Association Meetings & Events
ISBA staff began working remotely today, March 16, effectively closing the office space to meetings and visitors. In addition, all in-person events scheduled for March have been cancelled. We will keep you updated on events scheduled for April and May.

In the meantime, business will carry on, but virtually. Feel free to e-mail or call just as you have always done (click here for a staff directory). Although we won’t be able to answer calls directly, we will return them within 24 hours. We remain committed to serving your needs each day.


Indiana Supreme Court Negates Reasonableness Test For Statute Of Limitations

Three cases.  On February 17, 2020, Indiana’s highest court issued opinions in two cases dealing with the statute of limitations applicable to “closed account” notes or, in other words, installment contracts with a maturity date.  Here are links to the two opinions:

A third case, Stroud v. Stone, 122 N.E.3d 825 (Ind. Ct. App. 2019), which followed Alialy, was not on appeal but effectively was overturned. 

Background.  For information on the cases and how the law developed before the Supreme Court’s decisions, click on these posts:

Nature of notes.  Both Blair and Alialy involved an installment contract (required a series of payments) that had a maturity date (stated when the full balance was due).   The notes in the two cases also had discretionary acceleration clauses, which gave “the lender the option to immediately demand payment on the full loan amount if the borrower fail[ed] to pay one or more installments.” 

Not all notes have maturity dates or optional acceleration clauses, so the Court’s rulings do not apply to all loans.  For example, see:  Indiana’s Statute Of Limitations For “Open Account” Claims: Supplier’s Case Too Late.  Always be sure to study the language in the note.  Having said that, I believe the vast majority of promissory notes secured by real estate mortgages are “closed” and have optional acceleration provisions. 

Accrual dates.  As previously reported here, the length of the statute (six years) was not the issue.  When the clock on the six years starts ticking – the “accrual date” – was.  The Court in Blair studied Indiana’s two applicable statutes, Ind. Code 34-11-2-9 and Ind. Code 26-1-3.1-118(a), and concluded that “three events [trigger] the accrual of a cause of action for payment upon a promissory notice containing an optional acceleration clause:” 

  1. A lender can sue for a missed payment within six years of a borrower’s default;
  2. Upon a missed payment, a lender can exercise its option to accelerate, “fast-forward to the note’s maturity date,” and sue for the full balance owed within six years of acceleration; or
  3. A lender can chose not to accelerate and sue for the entire amount owed within six years of maturity.

The “reasonableness test” is now gone. 

Bar dates.  Looking at the three scenarios above, here is my view of when an action would be barred:

  1. No bar. The lender could, but does not have to, sue within six years of a missed payment.  See 2 and 3.
  2. Barred if no suit filed within six years of acceleration.  
  3. Barred if no suit filed within six years of maturity.

Outcome.  Interestingly, to illustrate how the Court apparently buried for good the “reasonableness test,” theoretically a lender would have 36 years to file suit under a standard 30-year mortgage loan, even if the borrower never made a single payment.  (Mortgages are governed by different statutes, however.)  It’s hard to argue with the Court’s logic, which is based upon pretty clear language in the two statutes.  Unless the General Assembly takes action, this matter is closed. 

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I represent parties in disputes arising out of loans. 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.


Indiana Supreme Court Rules On Statute Of Limitations Cases

On February 10th, I posted - Indiana Supreme Court Currently Reviewing Statute Of Limitations Rules Applicable to Promissory Notes.  Well, a week later the Court handed down its two opinions and ruled in favor of the lenders.  You can review the cases by clicking on the links below:

    *Dean Blair and Paula Blair v. EMC Mortgage, LLC

    *Collins Asset Group, LLC v. Alkhemer Alialy

Meanwhile, I intend to write more about these important decisions and post something next week.


Interests Held In A Joint Tenancy With Right Of Survivorship Are Not Exempt From Execution

Lesson.  Unlike spouses jointly holding real estate as a tenancy by the entireties, real estate co-owned under joint tenancy is subject to a lien arising from a judgment against one of the joint tenants. 

Case cite.  Flatrock River Lodge v. Stout, 130 N.E.3d 96 (Ind. Ct. App. 2019)

Legal issue.  Whether an ownership interest in real estate as a joint tenant with right of survivorship is exempt from execution on a judgment lien created during the owner’s lifetime.

Vital facts. In 1985, a couple deeded forty-six acres of real estate in Rush County to their son and their granddaughter as joint tenants with right of survivorship.  In 2016, a creditor obtained a $40,000 judgment against the son, at which time the Rush County Clerk entered the judgment in the record of judgments.  The son died in 2018, and his interest in the real estate became the granddaughter’s.  In other words, the granddaughter became the owner of all forty-six acres.      

Procedural history.  In January 2018, the judgment creditor moved to foreclose its judgment lien on the real estate.  The granddaughter intervened in the action and asserted that the son’s interest was exempt from execution because their interests were held jointly.  While the action was pending, the son passed away.  The trial court ultimately granted the granddaughter’s objection to the creditor’s motion.  The creditor appealed.

Key rules. 

As stated here many times, in Indiana “a money judgment becomes a lien on the defendant’s real property when the judgment is recorded in the judgment docket in the county where the realty held by the debtor is located.”

Ind. Code 34-55-10-2(c)(5) is the statute providing that “’[a]ny interest that the debtor has in real estate held as a tenant by the entireties’ is exempt from execution of a judgment lien.”

The Court in Flatrock identified the three forms of concurrent ownership in Indiana - (1) joint tenancy, (2) tenancy in common, and (3) tenancy by the entireties – and then contrasted joint tenancy with tenancy by the entireties:

A joint tenancy is a single estate in property owned by two or more persons under one instrument or act. Upon the death of any one of the tenants, his share vests in the survivors. When a joint tenancy is created, each tenant acquires an equal right to share in the enjoyment of the land during their lives. “It is well settled that a conveyance of his interest by one joint tenant during his lifetime operates as a severance of the joint tenancy as to the interest so conveyed, and [it] destroys the right of survivorship in the other joint tenants as to the part so conveyed.” Each joint tenant may sell or mortgage his or her interest in the property to a third party.  And the interest of each joint tenant “is subject to execution.” On the other hand, a tenancy by the entireties exists only between spouses and is premised on the legal fiction that husband and wife are a single entity.

* * *

The same difference which existed at common law between joint tenants and tenants by entireties continues to exist under our statute. In both, the title and estate are joint, and each has the quality of survivorship, but the marked difference between the two consists in this: that in a joint tenancy, either tenant may convey his share to a co-tenant, or even to a stranger, who thereby becomes tenant in common with the other co-tenant; while neither tenant by the entirety can convey his or her interest so as to affect their joint use of the property during their joint lives, or to defeat the right of survivorship upon the death of either of the co-tenants; and there may be a partition between joint tenants, while there can be none between tenants by entireties.

(I’ve omitted legal citations in the above quotes.)

Holding.  The Indiana Court of Appeals reversed the trial court and held that the real estate was not immune from execution on the judgment lien.  “We hold that subsection 2(c)(5) does not exempt from execution interests held in a joint tenancy with right of survivorship.”

Policy/rationale.  The granddaughter generally contended that real estate held jointly should be exempt from execution.  Thus, she sought to apply the I.C. 34-55-10-2(c)(5) exemption to a joint tenant with right of survivorship.  The granddaughter improperly equated the two tenancies, however.  The Court was compelled to follow the clear language in the exemptions statute, which applied only to tenancy by the entireties in which one spouse may not unilaterally convey or mortgage his interest to a third party and in which the property “is immune to seizure for the satisfaction of the individual debt of either spouse.”  To the contrary, a joint tenant may sell or mortgage his interest to a third party.  The Court also pointed out that the granddaughter took the son’s interest in the real estate subject to the judgment lien, which was not extinguished upon his death. 

As an aside, the Court stated that, if a third party were to buy the son’s interest at the execution (sheriff’s) sale, the purchaser and the granddaughter would each own an undivided interest as tenants in common.  As a practical matter, the outcome of the Flatrock appeal likely compelled the granddaughter to pay off the lien, assuming she had the means.

Related posts. 

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I represent lenders, loan servicers, borrowers, and guarantors in foreclosure and real estate-related disputes. 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.


Indiana Supreme Court Currently Reviewing Statute Of Limitations Rules Applicable to Promissory Notes

Indiana law is clear that actions to enforce promissory notes have a six-year statute of limitations.  The trickier question surrounds when the clock starts ticking on the six years.  The law frames this issue as:  when does the cause of action accrue

Over the last couple years, three cases before the Indiana Court of Appeals have tackled that question in the context of promissory notes with optional acceleration clauses.  I’ve already written two posts about one of those cases, Collins Asset Group v. Alialy

On 4/5/19, the Court of Appeals issued its opinion in the second case, Stroud v. Stone, 122 N.E.3d 825 (Ind. Ct. App. 2019), which followed Alialy and held that a lender can’t sue over six years after a payment default simply by accelerating the note.  Then, on 6/12/19, in Blair v. EMC Mortgage, 127 N.E.3d 1187 (Ind. Ct. App. 2019), the Court of Appeals followed suit in the third case and concluded that the lender had waited an unreasonable time amount of time to accelerate its note. 

Based upon these three decisions by the Court of Appeals, Indiana law appeared to be settled on the accrual issue.  Specifically, to absolutely safe, in Indiana, a lender’s suit to enforce a promissory note should be filed within six years of the borrower’s last payment.  Or, at a minimum, assuming the note has an optional acceleration clause, the debt should be formally accelerated within six years, and it would be advisable to file suit within a period of time thereafter that is reasonable under the circumstances.

There has been a development, however.  Alialy and Blair are now before the Indiana Supreme Court.  (Stroud is not - officially.)  Under Indiana rules of procedure, the Alialy and Blair opinions have therefore been vacated.  We are left to wait on our Supreme Court’s holding.  I expect an opinion during the first half of 2020, at which point some of the questions raised in my two posts about Alialy should be answered.  Stand by.

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I represent parties in disputes arising out of loans. If you need assistance with a such a 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.


Seller’s Delivery Of Defective Or Non-Conforming Equipment To Buyer/Borrower Did Not Impair Lender’s Rights In the Collateral

Lesson.  A borrower’s complaints about equipment it purchases and pledges as loan collateral do not affect a lender’s rights in the collateral. 

Case cite.  1st Source v. Minnie Moore Resources, 2019 WL 2161679 (N.D. Ind. 2019) (PDF).

Legal issue.  Whether a creditor (lender) lacked an enforceable security interest in debtor’s equipment because the equipment differed from what the debtor (borrower/owner) thought it was purchasing.

Vital facts.  Lender loaned borrower money to buy three pieces of mining equipment worth about 350k.  The loan was secured by the equipment pursuant to a security agreement and a UCC financing statement.  Borrower defaulted on the loan, and lender sued to foreclose on the equipment.  Borrower contended that the equipment was defective, and varied from what the borrower had ordered from the seller.  The seller was not a party to the lawsuit. 

Procedural history.  Lender filed a motion for summary judgment.  1st Source is the summary judgment opinion and order entered by the U.S. District Court for the Norther District of Indiana.

Key rules.  1st Source essentially is about Article 9.1 attachment.

“A security interest will attach and be enforceable when three elements are present: (1) value has been given; (2) the debtor has rights in the collateral; and (3) the debtor has authenticated a security agreement that provides a description of the collateral.”  “Perfecting a security interest is only necessary to make the security interest effective against third parties; a security interest is enforceable “as between the secured party and the debtor” upon meeting the three requirements for attachment.”

The UCC clarifies what is sufficient for a description of the collateral: “a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”  I.C. § 26-1-9.1-108(a).  The Court noted, “that can be done by providing a ‘specific listing’ or a ‘category,’ or by ‘any other method, if the identity of the collateral is objectively determinable.’ Id. § 26-1-9.1-108(b).

Holding.  The Court granted lender’s motion for summary judgment and held that lender was entitled to take possession of and foreclose on the equipment.

Policy/rationale.  Borrower asserted two contentions in support of its argument that the security agreement was unenforceable:  (1) the security agreement did not identify the model years of the equipment and (2) there were discrepancies in the serial numbers between those on the equipment and those identified in the security agreement.  Basically, borrower asserted that the equipment it purchased was slightly older and less valuable than the equipment it intended to buy.    

On the first contention, the Court concluded that the security agreement reasonably identified the collateral.  Evidently there is no law supporting the proposition that a model year must be included in a security agreement to reasonably identify the collateral. 

On the second contention, the promissory note identified each piece of equipment by its name, serial number, and purchase price, and it directed lender to disburse loan proceeds directly to the seller.  The minor numerical error in a serial number “would not create a genuine question as to what equipment the parties intended to serve as collateral.”        

The Court summed up its finding as follows: 

[borrower’s] complaint that the equipment is defective and nonconforming is a dispute for [it] to take up with Interval Equipment Solutions, which sold the equipment.  It does not affect [lender’s] rights in the collateral, so [lender] is entitled to exercise its rights in that collateral.

Related posts. 

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My practice includes the representation of parties in disputes arising out of loans. 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.


Unrecorded Deed Immediately Transferred Ownership

Lesson.  An unrecorded quitclaim deed executed and delivered during owner’s lifetime terminated a beneficiary’s interest under a “transfer on death” deed that had been executed previously.  An Indiana deed generally will effect a transfer regardless of whether it is recorded.

Case cite.  Robinson v. Robinson, 125 N.E.3d 1 (Ind. Ct. App. 2019).

Legal issue.  Whether subsequent, unrecorded quitclaim deed revoked a beneficial interest in real estate that previously had been created by a recorded transfer on death (TOD) deed.

Vital facts.  On October 24, 2014, Mom executed a TOD deed in which the fee simple title in her house would transfer, upon her death, to her kids Rea and Radley as tenants in common.  Mom recorded that deed on November 12, 2014.  Two years later, Mom executed and delivered a quitclaim deed of the house to Rea only, effective immediately.  However, this subsequent deed was not recorded until after Mom died.

Procedural history.  Radley filed a lawsuit seeking to enforce the TOD deed.  The trial court entered summary judgment in Radley’s favor and concluded that Radley and Rea owned the house as tenants in common.  Rea appealed.

Key rules.  Indiana has a statute called the Transfer on Death Property Act (ACT) at 32-17-14.  The Indiana Court of Appeals sliced and diced the Act in terms of its application to the Robinson dispute. 

The TOD deed was valid.  However, Section 19(a) of the Act provides, among other things, that a beneficiary of a TOD deed takes the owner’s interest in the property at the time of the owner’s death and subject to all conveyances made by the owner during the owner’s lifetime.

Indiana Code 32-21-1-15 controls quitclaim deeds.

In Indiana, generally “a party to a deed is bound by the instrument whether or not it is recorded.”

Holding.  The Indiana Court of Appeals reversed the trial court’s summary judgment for Radley and entered summary judgment for Rea.  “As a matter of law, Radley’s contingent interest in the real estate was extinguished before [Mom’s] death.” 

Policy/rationale.  If you have probate and estate issues under the Act, the Robinson opinion has a nice explanation of why the TOD deed did not hold up.  For purposes of mortgage servicing and title issues, the key takeaway is that, as to Radley (one of potential co-owners under the TOD deed), the quitclaim deed to Rea cut off Radley’s beneficial interest - even though the deed was never recorded.  The deed complied with Ind. Code 32-21-1-15.  Title passed.  The fact that the deed had not been recorded was immaterial to Radley’s claim to ownership.

Related posts. 

*Don’t Forget To Record The Deed

*Sampling Of Indiana Deed Law, And Judgment Lien Attachment Issues

*In Indiana, An Unrecorded Mortgage Has Priority Over A Subsequent Judgment Lien

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I represent lenders, loan servicers, borrowers, and guarantors in foreclosure and real estate-related disputes. 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.  


Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why and How

In the event a loan becomes non-performing, commercial lending institutions that hold mortgages in Indiana need to be familiar with deeds in lieu of foreclosure.  They are a form of settlement.

Who.  The parties to a deed in lieu are the mortgagor (generally, the borrower) and the mortgagee (usually, the lender).  Both sides must consent.  Most lawyers will say that it isn't advisable to accept a deed in lieu if there are multiple lien holders.  Lenders will have to negotiate releases of those liens in order to secure clear title.  The better approach may be to proceed with foreclosure, which will wipe out such liens.   

What.  A deed in lieu of foreclosure is a document that conveys title to real estate.  What is unique about this particular deed is that the mortgagor surrenders its interests in the real estate to the mortgagee in consideration for a complete release from liabilities under the loan documents.  The release, among other things, usually is articulated in a separate settlement agreement.  But, a release is not automatic.  

When.  Lenders normally pursue deeds in lieu when there is no chance of collecting a deficiency judgment - the mortgagor is judgment proof.  For example, this option makes sense with non-recourse loans.  Another consideration is when the value of the property unquestionably exceeds the amount of the debt.  If the lender thinks it may be able to liquidate the real estate for more than the borrower owes, pursuing a money judgment may be superfluous.

The parties typically will explore a deed in lieu of foreclosure early on in the dispute - once a determination is made by the lender to foreclose.  Although this is the point in which deeds in lieu are best utilized, in Indiana it's possible to execute the deed right up until the time the property is sold at a sheriff's sale.

Where.  Deeds in lieu are the product of out-of-court settlements.  The process of the securing of a deed in lieu is non-judicial. 

Why.  The fundamental reasons why a lender may want to take a deed in lieu of foreclosure involve time and money.  A deed in lieu grants to the lender immediate possession of the real estate.  Several months, conceivably years, can be saved.  Just as importantly, spending thousands of dollars, primarily in attorney's fees, could be avoided by cutting to the chase with a deed in lieu.  Expediency and expense are the primary factors that motivate lenders to accept a deed in lieu of foreclosure. 

How.  Other than the obvious - executing a deed - there are certain steps a lender should consider taking before it enters into a deed in lieu.  The lender should know whether it is acquiring clear title.  A title insurance policy commitment should be ordered to examine the status of any liens, taxes and other potential clouds on title.  Work also may need to be done to get a handle on the value of the property.  This may include an appraisal, an inspection or an environmental assessment.  These things generally are recommended when evaluating how to proceed with any distressed loan.

    Anti-merger clause:  One potential land mine must be specifically highlighted here.  Without getting too technical, in Indiana there needs to be language in the deed protecting against a merger of the mortgagor's fee simple title and the mortgagee's lien interest, which merger could extinguish the mortgagee's rights under the mortgage.  Without the appropriate language expressing the intent of the parties in the deed, the lender's interest in the property could become subject to junior liens without the right to foreclose.  So, be sure that you or your lawyer inserts an anti-merger clause into the deed.

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My practice includes the representation of parties in disputes arising out of loans. 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. 


Top 10 Foreclosure Blogs

The Founder of Feedspot has advised that Indiana Commercial Foreclosure Law is ranked second in its Top 10 listing of foreclosure-related blogs.  Here is a link to the site's list:  Top 10 Foreclosure Blogs & Websites To Follow in 2019.  Thanks to the folks at Feedspot for recognizing my work. 

Merry Christmas and Happy New Year to those who regularly read, or surf to, this blog.  Let's keep it going in 2020....

John   


Reminder - On 1/1/20, Amended Indiana Trial Rule 9.2(A) Becomes Effective - But Uncertainty Remains

Hard to believe it's already been two years since the Indiana Supreme Court amended Rule 9.2(A).  The amendment goes into effect in matter of days.  Given that the clock is ticking, lately clients and colleagues have been talking about its potential impact, but my understanding is that nothing substantive has changed with the rule since the outcome in 2017. 

With respect to mortgage foreclosures, I'm not sure anyone has a great handle on what to do.  I personally still feel that a strong argument can be made that the affidavits called for under the new rule only need to be filed with complaints articulating an action “on account” and that a mortgage foreclosure, or any other action to enforce a promissory note, is no such action. 

What follows is a verbatim re-print of my 11/17/17 post, which includes a link to my initial post of 5/11/17 on the rule.

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Back in May, I submitted this post: Claim “On An Account” Vs. Enforcement Of A Loan: Comments On Proposed Amendment to Indiana Trial Rule 9.2(A). One of my points was that the proposal left open the question of whether the rule applied solely to accounts, or to both loans and accounts. Indeed my post doubled as a submission to the Rules Committee recommending, among other things, language clarifying that the new rule does not (and should not) apply to loans, other than perhaps credit card debt.

New rule. On October 31st, the Indiana Supreme Court entered its official Order Amending Indiana Rules of Trial Procedure that included amendments to Rule 9.2. Here is the order signed by Chief Justice Rush. Regrettably, the amendment did not incorporate our proposed limiting language or otherwise resolve the matter of whether a plaintiff must file the new affidavit of debt in mortgage foreclosure cases. For reasons spelled out in my May 11th post, a strong argument still can be made that the affidavits only need to be filed with complaints articulating an action “on account” and that a mortgage foreclosure, or any other action to enforce a promissory note, is no such action. Admittedly, however, the situation remains clouded.

Consumer debts only. One critical change the Supreme Court made from the proposed rule was to limit the pleading requirement in Section (A)(2) to consumer debts. The rule’s requirement for the new affidavit applies only “if … the claim arises from a debt that is primarily for personal, family, or household purposes…” This is a common phrase in the law that identifies consumer claims and that excludes commercial/business debts. See my 12/18/09 and 11/16/06 posts. Thus the Supreme Court’s insertion of that language definitively means that Rule 9.2(A)(2) does not apply to commercial foreclosures or to the collection of business debts.

Effective date. It will be interesting to see how lawyers and judges interpret and apply Rule 9.2(A)(2), which is brand new. Again, and meaning no disrespect whatsoever, I think the Supreme Court left the scope of that subsection open for debate. We have time to digest this further as the amendment does not take effect for over two years - until January 1, 2020.

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My practice includes the representation of parties in disputes arising out of loans. 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. 


Domesticating Foreign Judgments Under Indiana's New Electronic Filing System

If you own a money judgment entered in a state other than Indiana, and if you believe that the judgment debtor (the defendant) has assets in Indiana that might be available to satisfy the judgment, then you can take steps to domesticate that “foreign judgment” in Indiana and enforce it through the Indiana court system. 

Indiana’s StatuteIndiana Code § 34-54-11 provides the procedural roadmap for Indiana’s domestication process.  First, you must wait 21 days after the judgment was entered in the original jurisdiction before filing in Indiana.  Once the 21 days have passed, you need to file a copy of the foreign judgment, authenticated in accordance with 28 U.S.C. 1963 or any applicable Indiana statutes, in the clerk’s office of any Indiana county.  Generally, it makes sense to file in a county where some or all the judgment debtor’s assets are located.  At the same time, you will need to file an affidavit, executed by the judgment creditor (the plaintiff), which states (a) the name and last known address of the judgment debtor and (b) the name and address of the judgment creditor.  Finally, you will need to mail notice of the filing of the foreign judgment to the judgment debtor and file proof of that mailing with the clerk of the Indiana court.

Electronic Filing Glitches.  All of this should be a fairly straightforward process, but under Indiana’s relatively new electronic filing system, there are a couple of potential problems to avoid if your goal is to seek the court’s help in enforcing your domesticated judgment or, in other words, if you anticipate so-called proceedings supplemental.

    Tip 1:  Always file your case under the “MI” designation if you plan to use the Indiana court to execute on the judgment.  

        If your purpose for domesticating the foreign judgment is to enlist the help of the Indiana court in executing on the judgment, as opposed to merely perfecting a judgment lien on real estate, it is essential that you choose the “MI” (miscellaneous) case type during the electronic filing process.  This can be confusing because the list of available case types indicates that foreign judgments should be filed under the “CB” (court business) case type.  You should not choose the “CB” filing type.

        “CB” filings are used for informational purposes only.  We have learned that, if you file your case under a “CB” designation, you will be notifying the Indiana court that you own a judgment, but you will not be able to enlist the court’s help in executing on that judgment.  In other words, no further proceedings may be conducted in that action (lawsuit).  If your goal in domesticating the foreign judgment is to initiate proceedings supplemental and, ultimately, to reach the judgment debtor’s Indiana assets in order to satisfy the judgment, a “CB” filing will get you nowhere.    

    Tip 2:  Always check to make sure that your judgment is reflected on the court’s docket as a final judgment.

        Once you have followed the steps established in I.C. 34-54-11-2, your foreign judgment has the same effect and is subject to the same procedures as any other judgment entered by an Indiana court.  However, you want to ensure that your judgment is formally “of record” and thus creates a perfected lien on any real estate owned by the judgment debtor in that county.  The judgment thus needs to be officially entered on the court’s docket.  In Indiana, this docket is known as the “CCS” or the chronological case summary.  You want the judgment to pop up on public record searches and provide the requisite notice to the world that there is an unsatisfied money judgment against the debtor/defendant.  Here is an example.

    The rub.  Before electronic filing, staff at the county court’s or clerk’s offices manually entered domesticated judgments into an actual hard copy index (public record).  Now, under electronic filing, our experience is that such manual entry no longer occurs in many if not all counties.  It seems that there is no established automatic mechanism for 21st Century judgments to make their way into an official judgment docket.  Therefore, in order to ensure that your judgment can be found in a title or debtor search, we recommend that you follow-up with the clerk of the court to ensure someone takes the final step of creating the entry of judgment on the CCS so that it is visible online.  We have had cases where this has not occurred as a matter of course and have had to either ask that it be done by phone or file a motion to prompt the court to take the final step. 

As a practical matter, the previously established laws and systems simply have not caught up electronic filing.  We would expect this glitch to be sorted out by the Indiana General Assembly or the Indiana Supreme Court at some point down the road, however. 

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I'd like to thank my colleague Jere Rosebrock for her valuable research, investigation and input into this post. Among many other things, Jere helps me and others at the Firm to domesticate foreign judgments for our clients and out-of-state counsel.  If you need assistance with a similar matter, please call us 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.


In Property Revitalization Case, Court Declines To Impose Receivership On Owner Of Common Areas

Lesson. A receivership can be a powerful remedy but only will be granted in unique situations, unless it is a mortgage foreclosure case.

Case cite. Towne & Terrace v. City of Indianapolis, 122 N.E.3d 846 (Ind. Ct. App. 2019).

Legal issue. Whether a receiver should have been appointed in a nuisance/unsafe property case.

Vital facts. Towne & Terrace involved a dispute between the City of Indianapolis (City) and Town and Terrace (T&T), a corporation that developed a condominium complex at 42nd and Post in 1964. Due to crime in the area, in 2014 the City filed a public nuisance suit against T&T for, among other things, safety-related concerns in the complex, including poor conditions in the common areas. The litigation later evolved into a receivership proceeding in which both sides sought the appointment of a receiver for various purposes. The litigation was complicated by the fact that, at the time of the courts’ decisions, the City owned portions of the property, T&T owned portions (mainly common areas), and third parties owned other portions. Please read the opinion for a more in-depth summary of the factual and legal issues in the case, of which there were many. One element of the case dealt with the trial court’s effort to create a public-private partnership to rebuild and recreate “a safe and thriving T&T neighborhood.”

Procedural history. This post relates to the trial court’s order granting the City's motion to appoint a receiver over the property owned and controlled by T&T within the complex.  The trial court ordered both the City and T&T to pay for the receiver’s services, which were to upgrade, repair, and restore the common areas in the complex.

Key rules. Indiana Code 32-30-5 is our state’s general receivership statute. Subsection (7) [aka the “catch all” provision] provides that a receiver may be appointed in cases “as may be provided by law or where, in the discretion of the court, it may be necessary to secure ample justice to the parties.”

Indiana common law provides that "a receiver should not be appointed if the plaintiff has an adequate remedy at law [basically, money damages] or by way of temporary injunction.”

Holding. The Indiana Court of Appeals reversed the appointment of a receiver over T&T, specifically the property T&T owned.

Policy/rationale. T&T did not own any structures in the complex. Thus, T&T’s involvement was limited to common areas that it managed. There was no evidence that those common areas were “so deteriorated that they contribute to the undesirable activities at the complex….” Moreover, T&T had not violated any ordinances or statutes. Because the “extreme necessity” for a receiver did not exist, the Court declined to appoint one. My guess is that an unstated rationale in play was that T&T did not want to fund the receivership and was able to convince the Court of Appeals that it should not have to. Receivers do not work for free.

Related posts.

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My practice includes the representation of lenders and borrowers, as well as receivers, entangled in real estate-related cases. 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.


Indiana's Mortgage Foreclosure Redemption Laws

I attended the American Legal & Financial Network’s informative and productive “Foreclosure Intersect” Conference in Dallas this week. One of the many issues that struck me was how wide ranging the country’s redemption laws are. This is due, in part, to the fact that, unlike Indiana, twenty-six states have non-judicial foreclosures. Even judicial foreclosure states have different laws regarding when and how to redeem. Anyway, I thought a quick reminder about Indiana’s right of redemption was in order.

Pre-sale. If a borrower defaults, and if a secured lender exercises its rights under a mortgage to foreclose, the borrower still is able to avoid losing the real estate collateral. This is because, in Indiana, borrowers have a right of redemption. “Redeem” means “to buy back. To free property from mortgage . . . by paying the debt for which it stood as security.” Black’s Law Dictionary. Redemption (basically, a payoff) is the way for a borrower to keep the property, end the litigation and free itself of the lender’s mortgage interest.

Indiana Code § 32-29-7-7 “Redemption by owner before sheriff’s sale” outlines this right:

Before the [sheriff’s] sale under this chapter, any owner or part owner of the real estate may redeem the real estate from the judgment by payment to the:

(1) clerk before the issuance to the sheriff of the judgment and decree; or
(2) sheriff after the issuance to the sheriff of the judgment and decree;

of the amount of the judgment, interest, and costs for the payment or satisfaction of which the sale was ordered. If the owner or part owner redeems the real estate under this section, process for the sale of the real estate under judgment may not be issued or executed, and the officer receiving the redemption payment shall satisfy the judgment and vacate order of sale . . ..

Post-sale. There is, however, no post-sale right of redemption for a borrower/owner/mortgagor. I.C. § 32-29-7-13 states: "There may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter [Section 7 noted above and 32-9-8 noted below]." Well-settled Indiana case law provides that "a foreclosure sale cuts off a mortgagor's rights of redemption." Patterson v. Grace, 661 N.E.2d 580, 585 (Ind. Ct. App. 1996); Overmyer v. Meeker, 661 N.E.2d 1271, 1275 (Ind. Ct. App. 1996); Vanjani v. Federal Land Bank of Louisville, 451 N.E.2d 667, 672, n.1 (Ind. Ct. App. 1983).

Basically, a borrower must pay the debt amount (pre-judgment) or the judgment amount (post-judgment) before the sheriff’s sale. Otherwise, in Indiana. the right to redeem terminates with the sale. In Re Collins, 2005 Bankr. LEXIS 1800 (S.D. Bankr. 2005). “Once a sheriff’s sale takes place, a mortgage-debtor is no longer the title holder . . ..” Id. Judge Coachys concluded, in Collins, that a sheriff’s sale is complete when the hammer falls and that the actual delivery of the sheriff’s deed is purely ministerial. Id.  At the sale, when the sheriff's deputy or the auctioneer says "Sold!" the party's over.

Post-sale exception. There is narrow exception to the post-sale rule, but the exception does not apply to borrowers. As explained in detail in my April 12, 2012 post, certain lienholders mistakenly omitted from the foreclosure process have limited remedies under I.C. § 32-9-8

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I represent lenders, loan servicers, borrowers, and guarantors in foreclosure and real estate-related disputes. 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.   


Marion County (Indianapolis) Sheriff's Sale Website And Other Tidbits

Shame on me for not more quickly updating the link to the Marion County Civil Sheriff's foreclosure sale website to your left (under the heading "Indiana Courts/Govt.").  We're good now.  Marion County has a slick new website with lots of useful information about the local sheriff's sale process.  The site also has links to many critical form documents.    Any party or lawyer navigating through a sheriff's sale in Indianapolis should study this website.  Click here for the full site.

As a reminder, in Indiana, mortgage foreclosures are judicial or, in other words, through the court system.  As a general proposition, real estate collateral must be sold, pursuant to a judge's decree, by the county civil sheriff's office.  Although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific rules and procedures vary by county.  I once presented at a foreclosure-related seminar, and one of my co-presenters accurately stated, in essence, that there are 92 counties in Indiana and therefore 92 different sets of rules applicable to sheriff's sales. 

My advice is to call or visit the local civil sheriff's office to confirm the hoops through which you must jump, and when, to start and finish a successful sheriff's sale.  Many if not most counties now have websites similar to Marion County's that are very helpful or at a minimum provide contact information.  Despite information that may be available on the internet, I've found it to be invaluable to talk to, and form a working relationship with, the sheriff's staff member who will be handling your sale.

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My practice includes the representation of parties involved in, or who wish to bid at, sheriff's sales.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com.  You can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on the top left of my home page.


Third In Rem Foreclosure Action Barred Due to Rule 41(E) Dismissal Of First Action

Lesson. Once a lender files an Indiana mortgage foreclosure suit, the lender should move the case along and prosecute it to the end. In the event a post-filing loan modification, workout or intervening bankruptcy occurs, however, the lender should either dismiss the case without prejudice or get an order staying the action. Otherwise, the lender runs the risk of a dismissal for failure to prosecute that could prevent subsequent efforts to foreclose the mortgage, especially in the absence of a new default.

Case cite. Mannion v. Wilmington Savings Fund, Case No. 19A-MF-446.  See, The Indiana Lawyer - "Reversal: Bank loses in lengthy foreclosure battle".

Legal issue. Whether the dismissal of an in rem foreclosure action under Ind. Trial Rule 41(E) bars a subsequent in rem foreclosure on the same note and mortgage.

Vital facts. In this residential case, the borrower filed for bankruptcy in 2007. The borrower received a personal discharge from the mortgage debt in February 2009 and made no further payments on the loan. In April 2009, lender’s predecessor filed an in rem foreclosure action against the borrower, or more specifically the borrower’s property. Due to a failure by the lender to take any action in the case, the trial court dismissed the suit in April 2011 under Rule 41(E). A second action was filed in 2012 and dismissed in 2017 at the plaintiff’s request. Then, in April 2018, the current lender, an assignee of the mortgage loan, filed a third in rem foreclosure action.

Procedural history. The parties filed cross-motions for summary judgment in the third case. The trial court ruled in favor of the lender and entered a decree of foreclosure. The borrower appealed.

Key rules. Under Rule 41(E), a dismissal for a failure to prosecute is “with prejudice.” Unless the order of dismissal states otherwise, the dismissal operates as an adjudication on the merits.

Indiana law is settled that a dismissal with prejudice “is conclusive of the rights of the parties and res judicata as to the questions that might have been litigated.”

Indiana’s doctrine of res judicata “serves to prevent repetitious litigation of disputes that are essentially the same.”

Holding. The Indiana Court of Appeals reversed the trial court’s summary judgment for the lender and instructed the trial court to enter judgment for the borrower.

Policy/rationale. Since the order of dismissal in the first foreclosure action was not limited and did not otherwise indicate that it was “without” prejudice, the order was deemed an adjudication on the merits.

The lender in Mannion argued that the first and third foreclosure actions were not the same “because they [were] based on different acts of default and because they [sought] different amounts.” The Court surmised that the lender was trying to argue that a “new and independent default” had arisen since the dismissal of the first case. The Court rejected that contention and reasoned that, because the borrower’s personal liability under the mortgage loan had been discharged in bankruptcy, “both foreclosure actions were based upon the nonpayment of the mortgage due to the [borrower’s] discharge in bankruptcy.” The increase in the amount of the debt through growing interest and attorney fees was immaterial.

The bottom line was that the relief sought in both cases was the same and based on the same default.  So, the borrower got to keep his property free and clear of the mortgage. The Court rationalized the outcome, in part, by saying “the creditor created the situation as a direct result of its failure to prosecute, and … the [dismissal order] should have its full res judicata effect….”

Related posts.

Following Rule 41(E) Dismissal For Failure To Prosecute, Can A Second Suit Be Filed?
Following A Dismissal, Lenders Generally Are Able To Refile Foreclosure Actions Based On New Defaults
An “In Rem” Judgment Limits Collection To The Mortgaged Property

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I represent lenders, loan servicers, borrowers, and guarantors in loan and real estate-related disputes.  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.


IBJ.com: Marion County reschedules canceled tax sale for early 2020

The Indianapolis Business Journal is reporting that Marion County (Indianapolis) has canceled its fall real estate tax sales (with a combined value of at least $6MM) due to a clerical error.  The 2019 sales will occur 2/14/20.  Here is the story.  Click here for a post of mine from earlier this year talking about Indiana tax sales and notice-related issues.  The "clerical error" leading to the postponement of the sales appears to be related to perfecting the statutory notice required for the sales to be valid.  Better to have a do over now instead of dealing with potentially hundreds of tainted sales later.    


Indiana Court Finds That Ex-Wife Held A Judgment Lien, Not A Security Interest, On Ex-Husband’s Farm

Lesson. Property settlement agreements in divorce cases can create judgment liens on real estate owned by the spouse holding title to the real estate post-dissolution. If an owner intendeds for the ex-spouse only to be a secured creditor, then the divorce court must specifically eliminate the application of Indiana’s judgment lien statute in connection with any approved settlement agreement.

Case cite. Kobold v. Kobold, 121 N.E.3d 564 (Ind. Ct. App. 2019)

Legal issue. Whether, post-divorce, wife held a judgment lien on the marital farm as opposed to a secured interest.

Vital facts. The marital property of the spouses included a farm. The couple got divorced and entered into a property settlement agreement (PSA), which provided that husband would keep the farm while making “equalization payments” to wife for her pro rata share of the farm’s value. Husband signed a promissory note for the full amount of the equalization payments. The note, which did not have an acceleration clause, granted husband the right to sell the marital assets. On the other hand, the PSA stipulated that wife could sell the farm to satisfy the debt if husband defaulted under the note. Husband failed to make any equalization payments, so wife obtained a court order permitting her to sell the farm – which she did over husband’s objection. Husband wanted to go a different direction with the farm’s liquidation. As you might suspect, there is more to the story, so read the opinion for a full report.

Procedural history. The trial court approved the sale of the farm to a third party to satisfy various secured creditors and ordered the net proceeds to be paid to each spouse pursuant to the PSA. The court based its ruling on the premise that wife held a judgment lien on the farm. For a variety of reasons, husband appealed.

Key rules. The outcome in Kobold turned on whether wife held a judgment lien under Ind. Code 34-55-9-2 versus a secured interest under the dissolution security statute at Ind. Code 31-15-7-8.

In divorce cases, when one receives a money judgment against another, the judgment lien statute creates an automatic lien on the indebted party’s real estate. This is so even when one spouse agrees to pay the other in installments, which was the case in Kobold.

A trial court can overcome the presumption of a judgment lien, however, if the trial court “specifically eliminates” application of the judgment lien statute and finds that a settlement agreement creates a security interest under Ind. Code 31-15-7-8.

Holding. The Indiana Court of Appeals affirmed the trial court’s finding that wife held a judgment lien against the farm. This gave wife “the right to attach the judgment to the debtor’s property [the farm].” In turn, that lien “empowered [wife] to sell the farm to procure the full amount of the equalization payments.”

Policy/rationale. Husband contended that the trial court impermissibly modified the PSA by permitting wife to sell the farm. More specifically, husband argued that the trial court erred in concluding “that the dissolution decree gave [wife] a judgment lien … [granting wife] the right to refuse to release the judgment lien unless she was paid in full on the promissory note.” The Court of Appeals concluded that, although the record was not crystal clear, the trial court did not specifically eliminate the application of the judgment lien statute so as to overcome the wife’s presumptive judgment lien arising out of the PSA. As the holder of a judgment lien, wife, not husband, “had the right to negotiate a sale of the real estate.”

While I’m no divorce lawyer, and don’t pretend to understand fully how a settlement agreement with a promissory note constitutes a judgment lien, I see the justice in the Kobold's result. The Court stated that wife’s sale of the farm for $1.63MM, which was more than the appraised value of $1.56MM, “appears to have made the best of a bad situation” by paying off husband’s creditors, including the wife, and paying husband $500,000.

Related posts.

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I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. 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.


Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b)Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure saleUnlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

As an asideCan The SBA's Right Of Redemption Be Purchased After A Sheriff's Sale?


Indiana No-Nos: Confessions Of Judgment And Cognovit Notes

Does Indiana allow “confessions of judgment?”  Some states permit these, but Indiana is not one of them.

Definition.  Black’s Law Dictionary defines a “confession of judgment,” in part, as:

The act of a debtor [borrower] in permitting judgment to be entered against him by his creditor [lender], for a stipulated sum, by a written statement to that effect . . . without the institution of legal proceedings of any kind . . ..

These essentially allow a judgment to be entered without a lawsuit. 

Cognovit note.  A confession of judgment goes hand in hand with a “cognovit note”.  The Indiana Court of Appeals has cited to the following common law definition of such a note:

[a] legal device by which a debtor [borrower] gives advance consent to a holder’s [lender’s] obtaining a judgment against him or her, without notice or hearing.  A cognovit clause is essentially a confession of judgment included in a note whereby the debtor agrees that, upon default, the holder of the note may obtain judgment without notice or a hearing. . .  The purpose of a cognovit note is to permit the noteholder to obtain judgment without the necessity of disproving defenses which the maker of the note might assert . . .  A party executing a cognovit clause contractually waives the right to notice and hearing. . . .

Jaehnen v. Booker, 800 N.E.2d 31 (Ind. Ct. App. 2004).  Indiana has codified the definition of a cognovit note at Ind. Code § 34-6-2-22.  As you can imagine, cognovit notes and confessions of judgment can be powerful loan enforcement tools for lenders. 

Prohibited.  Cognovit notes and confessions of judgment are prohibited in Indiana.  In fact, a person who knowingly procures one commits a Class B misdemeanor pursuant to I.C. § 34-54-4-1.  The Jaehnen Court suggested there is an “evil” associated with of obtaining judgment against a borrower without service of process or the opportunity to be heard. 

An aside.  The Jaehnen case addressed the issue of whether a party is precluded from enforcing a promissory note merely because it contained a cognovit provision.  The Court noted that the plaintiff did not avail himself of the specific cognovit provision in the note.  He sought payment only after filing a complaint, providing for service of process and allowing the defendant the opportunity to hire an attorney and to be heard.  The Court held that the illegal provision did not destroy the overall negotiability of the note.  In other words, cognovit paragraphs may be deleted by the plaintiff/lender/payee without destroying the right to a judgment on the note in a standard lawsuit. 

Don’t be confused.  Indiana has a statute entitled “Confession of judgment authorized” at I.C. § 34-54-2-1.  However, the authorized confession of judgment is a different animal than what I discuss above.  The statute states:

Any person indebted or against whom a cause of action exists may personally appear in a court of competent jurisdiction, and, with the consent of the creditor or person having the cause of action, confess judgment in the action. 

This confession of judgment is not a unilateral filing by a creditor but rather an event arising within a standard lawsuit following notice and an opportunity to be heard.

But compare.  New York Confession Of Judgment From Cognovit Note Enforceable In Indiana.


Properly Filed Lis Pendens Notices Do Not Slander Title

Lesson. The filing of a lis pendens notice to protect one’s unrecorded interest in real estate will not give rise to liability for slander of title provided there was a basis for filing the notice.

Case cite. RCM v. 2007 East Meadows, 118 N.E.3d 756 (Ind. Ct. 2019)

Legal issue. Whether a lis pendens notice, filed by the buyer during litigation about a real estate purchase agreement, constituted slander of title.

Vital facts. The dispute in RCM involved a purchase agreement for a $9MM apartment complex located in Indianapolis. Lawsuits in both Texas and Indiana were filed relating to an alleged breach of the agreement, alleged fraud and an earnest money claim. The buyer filed lis pendens notices in Indiana for the pending Texas and Indiana lawsuits. Following the dismissal of the Texas case, and while the seller was negotiating with a third party for the sale of the property, the seller in the Indiana action asserted a slander of title claim against the buyer for not releasing the lis pendens notice.

Procedural history. After a bench trial, the seller prevailed on the underlying claims associated with the purchase agreement and the earnest money, but the trial court found in favor of the buyer on seller’s slander of title claim. Seller appealed.

Key rules. Ind. Code 32-30-11-3 spells out the requirements for a lis pendens notice in Indiana.

Parties with a claim to title of real estate under a contract for the real estate’s purchase “ha[ve] the kind of interest that requires filing a lis pendens notice under the statute to protect third parties.”

Indiana law is settled that “statements made in a properly-filed lis pendens notice are absolutely privileged … and defendants who file such a notice may not be held liable for slander of title.”

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

Policy/rationale. Seller contended that buyer slandered seller’s title to the real estate by filing a lis pendens notice when buyer knew it would not be able to perform under the purchase agreement. (Seller also claimed that buyer had waived the privilege defense, but the Court rejected the claim on procedural grounds.)

Lis pendens notices “provide machinery whereby a person with an in rem claim to property which is not otherwise recorded [like a purchase agreement] may put his claim upon the public records, so that third persons dealing with the [seller] … will have constructive notice of it.”

The Court reasoned that, since both parties had filed lawsuits regarding their interests in the real estate subject to the purchase agreement, buyer was actually “required” by law to file a lis pendens notice. It follows that the buyer’s notice was proper and therefore absolutely privileged.

Related postsYour Source For Indiana Lis Pendens Law
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I represent parties in real estate-related disputes. 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.


Indiana Has Two Statutes Of Limitations For Promissory Notes

This follows-up my last post, Indiana Court of Appeals Adopts Reasonableness Test For Promissory Note Statute of Limitations, where there was cliffhanger about an alternative statute of limitations that may have altered the outcome of the lender's case, which was dismissed based upon the expiration of the six-year statute of limitations.

Statute #1.  The subject of my previous post, the Alialy decision, hinged solely on the Court's application of the statute of limitations located under Title 34, which involves civil procedure.  Specifically, Ind. Code 34-11-2-9 “Promissory notes, bills of exchange, or written contracts for payment of money” simply states:

An action upon promissory notes … must be commenced within six (6) years after the cause of action accrues….

As summarized in my post, the Alialy opinion arguably - depending upon one's interpretation - holds that, even if notes have optional acceleration clauses, under IC 34-11-2-9 the "cause of action accrues" within six years of the last payment or, alternatively, six years after acceleration if the lender accelerated the note within six years of the last payment.  (This is my current read on the outcome, not the expressed conclusion of the Court.)

Statute #2.  On appeal, the lender in Alialy asked the Court to look at the statute of limitations under Indiana's Uniform Commercial Code governing negotiable instruments, which include promissory notes.  Ind. Code 26-1-3.1-118 “Statute of limitations” reads:

… an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

The Court never entertained the merits of the lender's argument but instead determined that the theory had been waived on procedural grounds.  So, we are left to wonder whether the UCC's statute of limitations may have changed the result in Alialy.  

Wondering. I have not taken a deep dive into the UCC question or researched the case law interpreting Section 118.  I also will not pretend to know what lender's counsel's theory was.  Again, unfortunately the Court did not address the merits.  My best guess is that the lender wanted to seize on the expanded language in the UCC's statute of limitations that provides "if a due date is accelerated, within six (6) years after the accelerated due date."  That terminology, which seems to spell out when the cause of action accrues, does not exist in IC 34-11-2-9.  Under the UCC, therefore, the lender's acceleration date, and not the date of the last payment, may control when the clock on the six years starts ticking.  Because the difference between the two statutes is quite subtle, it's difficult to say whether that reasoning would have carried the day in a scenario like Alialy.  We may need to wait for a future appellate opinion.    

If you have any comments or insights on the issue, please submit a post below or email me.  I would be curious as to others' thoughts.  To confirm, the question is not whether the statute is six years.  The question is - in cases of optional acceleration, when does the cause of action accrue or, in other words, when does the clock starts ticking on the six years.

NOTE:  The Alialy case currently is before the Indiana Supreme Court on the lender's appeal.  Thus the opinion of the Indiana Court of Appeals that is the subject of this post has been vacated.  Once our Supreme Court rules on this issue, I will update my blog.  I expect an opinion during the first half of 2020, at which point some of the questions raised in my two posts about Alialy should be answered.  

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I represent parties in disputes arising out of loans. 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.

  
 

 


Indiana Court of Appeals Adopts Reasonableness Test For Promissory Note Statute of Limitations

Lesson. To be absolutely safe, in Indiana a lender’s suit to enforce a promissory note should be filed within six years of the borrower’s last payment. At a minimum, assuming the note has an optional acceleration clause, the debt should be formally accelerated within six years, and it would be advisable to file suit within a period of time thereafter that is reasonable under the circumstances.

    NOTE:  This case currently is before the Indiana Supreme Court on the lender's appeal.  Thus the opinion of the Indiana Court of Appeals that is the subject of this post has been vacated.  Once our Supreme Court rules on this issue, I will update my blog.  I expect an opinion during the first half of 2020.  

Case cite. Collins Asset Group v. Alialy, 115 N.E.3d 1275 (Ind. Ct. App. 2018), rehearing, Collins Asset Group v. Alialy, 121 N.E.3d 579 (Ind. Ct. App. 2019)

Legal issue. Whether the statute of limitations barred a lender’s action to enforce a promissory note.

Vital facts. Borrower signed a 25-year promissory note on June 29, 2007 that was secured by a junior mortgage. After the senior lender filed a mortgage foreclosure action, Borrower stopped paying on the junior note. Borrower’s last payment was July 28, 2008. Plaintiff Lender, an assignee (successor-in-interest) of the junior mortgage loan, accelerated the promissory note (declared the note due and payable in full) on October 24, 2016 and filed suit seeking to collect the accelerated debt on April 26, 2017. It does not appear that the action sought to foreclosure the junior mortgage but simply sought a money judgment under the note. Significantly, the note contained an “optional acceleration clause,” meaning Lender had the right to declare the entire debt due and payable after default.

Procedural history. The trial court granted Borrower’s motion to dismiss based upon the statute of limitations at Indiana Code 34-11-2-9. Lender appealed to the Indiana Court of Appeals.

Key rules. I.C. 34-11-2-9 says that actions under promissory notes for payment of money “must be commenced within six (6) years after the cause of action accrues.” Indiana case law holds that “an action to recover a debt must be commenced within six years of the last payment.”

However, Indiana common law further provides that, if the installment contract contains an optional acceleration clause, then the statute of limitations to collect the debt “does not begin to run immediately upon the debtor’s default.” Rather, the statute begins to run “only when the creditor exercises the optional acceleration clause.”

Here’s the rub: the Court in Alialy cited to a 2010 Indiana Court of Appeals opinion for the proposition that lenders should not be permitted to wait an “unreasonable amount of time to invoke an optional acceleration clause” following a default: “a party is not at liberty to stave off operation of the statute of limitations inordinately by failing to make a demand.”

Holding. The Court affirmed the order dismissing the case.

Policy/rationale. Here is how the Court rationalized its conclusion:

[Lender’s] acceleration option was exercised a full two years after [its] cause of action was barred by the statute of limitation. As [Lender’s] attempt to exercise the acceleration clause did not prevent the six-year statute of limitation from taking effect and expiring, [Lender’s] acceleration clause cannot be given effect and its Complaint is barred.”

Respectfully, I’m not convinced that the Court’s logic was sound, but I can understand the result.

What is the takeaway from Alialy, which seems to establish some kind of potentially-challenging (for creditors) reasonableness standard for certain statute of limitations scenarios? Besides the basic idea that lenders should act sooner, it seems to me that the outcome in Alialy could have been avoided had Lender accelerated the debt within six years of the default (non-payment). Even if Lender did not file suit at that time, Lender would have taken at least some action against Borrower to enforce the note. So, for example, if Lender had accelerated by July 2014, instead of waiting until October 2016, Lender’s April 2017 suit may have survived.

(Lender sought to apply a different statute of limitations under Indiana’s version of the UCC at I.C. 26-1-3.1-118. The Court determined that Lender had waived the argument. I will study that statute further and may post about it later.)

Related posts.

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I represent parties in disputes arising out of loans. 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.


No Harm No Foul – 7th Circuit Dismisses RESPA Case

Lesson. A mortgage loan servicer can achieve summary judgment in a RESPA qualified written request case if the borrower fails to establish that the statutory violations caused any actual damage.

Case cite. Moore v. Wells Fargo, 908 F.3d 1050 (7th Cir. 2018)

Legal issue. Whether a borrower can recover RESPA-based damages “when the only harm alleged is that the response to the borrower’s qualified written request did not contain information … to help him fight a state-court mortgage foreclosure he had already lost.”

Vital facts. The plaintiffs in the Moore case were a borrower/mortgagor (Borrower) and his wife, and the defendant was the mortgage loan servicer (Servicer). The opinion thoroughly details the background of the loan, the default, the state court foreclosure and the plaintiffs’ bankruptcy case. This post focuses on Borrower’s RESPA qualified written request (QWR), which Borrower sent to Servicer about two months before a scheduled sheriff’s sale of the Borrower’s house. Two days before Servicer’s response was due, plaintiffs filed the subject federal court case against Servicer, apparently as part of an effort to delay the sale.

Servicer timely responded to the QWR, which included 22 “wide-ranging” questions, with a three-page letter and 58 pages of enclosures. The response addressed most but not all of Borrower’s questions. About six weeks later, the plaintiffs’ house was sold at a sheriff’s sale. Borrower alleged that he suffered damages, including emotional distress injuries, arising out of the fact that he had to fight the state court foreclosure case without certain information requested from Servicer.

Procedural history. The district court granted Servicer’s summary judgment motion, and plaintiffs appealed to the Seventh Circuit.

Key rules. The Real Estate Settlement Procedures Act (RESPA) at 12 U.S.C. 2601 “is a consumer protection statute that regulates the activities of mortgage lenders, brokers, servicers, and other businesses that provide services for residential real estate transactions.”

Section 2605(e) “imposes duties on a loan servicer that receives a ‘qualified written request’ for information from a borrower.” Among other things, Section 2605(e)(2) requires servicers, upon receipt of a QWR, to do one of three things within 30 days: (1) correct the account and notify the borrower, (2) explain why a correction is not needed, or (3) provide the requested information or explain why it cannot be obtained.

Subsection (f) provides a private right of action for actual damages that result from any violations of Section 2605. However, RESPA does not provide relief for “mere procedural violations … [only] actual injury” caused by the statutory violations.

Holding. The Seventh Circuit affirmed the district court’s summary judgment in favor of Servicer.

Policy/rationale. The Court noted that the policy behind RESPA is “to protect borrowers from the potential abuse of the mortgage servicers’ position of power over borrowers, not to provide borrowers a federal discovery tool to litigate state-court actions.” The Court concluded that, even assuming an incomplete response to the QWR, Borrower did “not present any evidence that there is a material dispute regarding any harm he suffered due to this violation.” The opinion in Moore tackles each item of Borrower’s alleged damages, including out-of-pocket expenses and emotional distress injuries, so please review the decision for additional information.

Related post.

Borrower’s Failure To Prove Actual Damages Leads To Summary Judgment In RESPA Case
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Part of my practice involves defending mortgage loan servicers in lawsuits brought by borrowers/consumers. 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.


7th Circuit Prevents Lender From Enforcing Promissory Notes Held By Third Parties

Lesson. Lenders must always prove that they are entitled to enforce their promissory notes under the applicable UCC provisions.  Normally, this is a simple excercise, but creative financing like that in the Tissue v. TAK case can complicate the issue.

Case cite. Tissue v. TAK 907 F.3d 1001 (7th Cir. 2018)

Legal issue. Whether the plaintiff, which was not in possession of the originals, was nevertheless entitled to enforce the subject promissory notes against the defendant.

Vital facts. The Tissue case involved an unconventional and fairly complicated transaction. The Plaintiff entered into an agreement to sell a tissue mill located in Wisconsin to an affiliate of the Defendant. A piece of the financing fell through, rendering Plaintiff unable to pay off certain secured creditors of the mill.  This obstacle prevented Plaintiff from being in a position to deliver clean title to the buyer.

To bridge the gap, the parties entered into a kind of seller financing, whereby the Defendant (as a de facto borrower, as well as the purchaser of the property) issued four promissory notes payable to the Plaintiff (as a de facto lender, as well as the seller of the mill) totaling $16MM over three years.  Plaintiff, in turn, delivered the promissory notes to the secured creditors as substitute security. With the original notes in hand, pledged as security to replace their liens in the mill, the creditors released their security interests, and the transaction closed. My reading of the opinion is that, in a contemporaneous side deal, the Plaintiff itself promised to pay the debts owed to the secured creditors as documented by the notes. The Court summed things up as follows:  “this meant that the [creditors] who released their security in the tissue mill had the credit of both the [Plaintiff] and the [Defendant] behind the notes’ promises.”

Of course, everything fell through, and the Plaintiff sued the Defendant to, among other things, collect on the four promissory notes. As a consequence of the failed transaction between the Plaintiff and the Defendant, the money owed to the prior lienholders had not been paid by either party, and those creditors had not returned the original promissory notes to either the Defendant or the Plaintiff. Therefore, Plaintiff did not possess any of the original notes at the time it filed suit against the Defendant. Please read the opinion for more detail on the facts and background, as well as other legal issues relevant to the outcome.

Procedural history. Tissue is an opinion from the Seventh Circuit Court of Appeals arising out of a judgment entered by the United States District Court for the Eastern District of Wisconsin. Despite the fact that Wisconsin law controlled, the pertinent Uniform Commercial Code sections of Wisconsin and Indiana are similar. Plus, Indiana is in the 7th Circuit, so the decision affects parties doing business in Indiana.

Key rules. The key statute was Wis. Stat. 403.301 dealing with negotiable instruments. Here is Indiana’s version: Ind. Code 26-1-3.1-301:

"Person entitled to enforce" an instrument means:

(1) the holder of the instrument;
(2) a nonholder in possession of the instrument who has the rights of a holder; or
(3) a person not in possession of the instrument who is entitled to enforce the instrument under IC 26-1-3.1-309 or IC 26-1-3.1-418(d).

A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

Holding. The 7th Circuit affirmed the district court and concluded that, since the Plaintiff was not the holder of the notes, it was not entitled to enforce them against the Defendant.

Policy/rationale. The Plaintiff “was not entitled to enforce the notes because it is not their holder, is not in possession of them, and is not entitled to enforce them [under the statutory exceptions.]"  The notes had not been lost, stolen or destroyed. The notes had not been paid by mistake by anyone. In the end, only the holders, or nonholders in possession, could enforce the notes – which the Plaintiff was neither.

Further, because the notes replaced liens against the tissue mill, the creditors needed the notes as security until the debts were repaid. If the Plaintiff “had paid the notes as promised, and thus retired the loans, then it would recover the notes from the [creditors] and be able to enforce them” under the UCC.

As a side note, the Plaintiff tried to make hay out of the fact that the creditors could not enforce the notes either because the Plaintiff did not endorse the notes before delivering them in pledge as collateral. The Court reasoned that “this may well be true,” but that fact did not get the Plaintiff around its own statutory prohibitions. In the end, the Court simply was not going to “leave the [creditors] in the lurch and [grant the Plaintiff] all of the notes’ benefits.” Interestingly, the courts protected the prior lienholders in the tissue mill, even though it appears that those creditors were not parties to the case.

Related posts.

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I represent creditors and debtors entangled in loan-related disputes. 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.


County Sale Agent SRI Not Liable To Tax Sale Purchaser In Wake Of Overturned Sale

Lesson. A chagrined tax sale purchaser, whose tax deed is set aside for notice-related deficiencies, cannot sue the county’s sale contractor for alleged lost profits.

Case cite. M Jewell v. Bainbridge 113 N.E.3d 685 (Ind. Ct. App. 2018)

Legal issues. Whether a tax sale purchaser can sue the county’s sale agent for breach of a contract that the agent had with the county; whether the tax sale purchaser was fully compensated for its alleged losses.

Vital facts. Plaintiff tax sale purchaser (Purchaser) bought a property at a county real estate tax sale, which was later overturned by the court based upon notice-related failures in the sale process. Purchaser received a statutory refund of the amount it paid for the property plus some interest and other items totaling about $7,000.

Defendant SRI is a company that contracted with the county to perform certain services related to tax sales. Those services included preparing and mailing notices to owners with delinquent real estate taxes. One of the reasons this particular sale was overturned was that “the [county] auditor and SRI failed to perform the additional research” necessary to substantially comply with the statutory notice requirements under Indiana’s tax sale laws. Purchaser sued SRI claiming that it suffered nearly $800,000 in damages for lost profits from the failed sale.

Procedural history. The trial court granted summary judgment for SRI. Purchaser appealed.

Key rules. Generally, only parties to a contract have rights under the contract. The Jewell opinion outlines many of Indiana’s rules that govern when so-called “third-party beneficiaries” can sue under a contract. Purchaser claimed it was a third-party beneficiary under the SRI/county contract.

Tax sale purchasers in Indiana buy at their own risk. “There is no warranty in tax sales.”

“The remedy for purchasers at invalid tax sales or holders of invalid tax deeds is wholly statutory.” Ind. Code 6-1.1-25-10 and 11 detail the refund procedure.

Holding. The Indiana Court of Appeals affirmed the trial court and held that (a) Purchaser was not a third-party beneficiary of the SRI/county agreement and thus had no standing to sue SRI for breach of contract and (b) regardless, Purchaser had been fully compensated for its losses under the applicable statute.

Policy/rationale. Regarding the third-party beneficiary issue, the Court reasoned that the county and SRI did not intend to protect tax sale purchasers under their agreement. “It is not enough that the performance of the contract would be of an incidental benefit to [Purchaser].” Regardless, Purchaser’s remedy was statutory, and the Court concluded that Purchaser had been made whole. Purchaser identified “no statutory or common law authority that it [was] entitled to lost profits rather than the statutory refund amount.”

Related posts.

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I am sometimes engaged to represent parties in connection with contested tax sales. 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.


Mortgage Loan Servicer Sued For Race Discrimination After Denying Loan Assumption

Lesson. Creditors cannot discriminate against an applicant for a credit transaction based on race, but a plaintiff applicant needs to put forth evidence of discrimination in order to survive a creditor’s motion for summary judgment.

Case cite. Sims v. New Penn, 906_F.3d_678 (7th Cir. 2018)

Legal issue. Whether there was sufficient evidence of racial discrimination to avoid the entry of summary judgment against the Plaintiffs.

Vital facts. Plaintiffs, an African-American couple, bought a house that was subject to a mortgage that secured a loan to the seller. The loan later went into default. Upon learning of the mortgage and the default, the Plaintiffs tried to assume the loan in order to avoid a foreclosure sale. This went on for years. The mortgage contained language that purchasers of the mortgaged property could assume the loan if the loan servicer (a) received information to evaluate the purchasers “as if a new loan were being made” and (b) determined that the assumption “would not impair its security.”

At one point in time, the defendant loan servicer advised the Plaintiffs of what was needed in order to apply for a loan assumption, and the servicer postponed a foreclosure sale to give the Plaintiffs an opportunity to submit the required paperwork. The servicer contended that the Plaintiffs did not submit a proper application. In addition, the servicer required that the loan be made current before an assumption could occur but refused to disclose information about the status of the loan without the seller/mortgagor’s written consent, which evidently never occurred. In the end, the servicer did not approve a loan assumption.

The Plaintiffs alleged that the loan servicer denied the loan assumption based upon race. They alleged that they were treated rudely. The Plaintiffs also claimed that an African-American employee of the servicer told them over the phone: “[t]hese people, you know how they treat us.”

Procedural history. The Plaintiffs sued the loan servicer in federal court and alleged race discrimination under the Equal Credit Opportunity Act, 15 USC 1691-1691f (ECOA). The United States District Court for the Northern District of Indiana entered summary judgment for the defendant loan servicer, and the Plaintiffs appealed to the Seventh Circuit.

Key rules. The ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race….” Section 1691(a)(1).

Holding. The Seventh Circuit affirmed the district court’s ruling.

Policy/rationale. The Plaintiffs argued that the defendant loan servicer discriminated against them when the servicer prohibited the Plaintiffs from assuming the loan. Specifically, the Plaintiffs claimed that the servicer delayed the application process and required them to first make all of the seller/mortgagor’s overdue payments as a condition of assumption, which condition was not required by the mortgage.

The Court concluded that the Plaintiffs’ “evidence of racial discrimination [was] too speculative to establish a dispute of material fact.” For the Plaintiffs to survive summary judgment, they needed to put forth more evidence than the employee’s alleged statement, which the Court found to be “vague and require[d] too much speculation to conclude that their race motivated [the servicer] to require them to satisfy [the seller’s] outstanding loan payments.” Further, the Plaintiffs did not tender any proof to dispute the servicer’s evidence that the Plaintiffs never produced a complete application.

As an aside, there was a question as to whether the ECOA applied in the first place because the Plaintiffs were trying to assume credit rather than “extend, renew or continue” credit.

Related posts.

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I sometimes represent mortgage loan servicers in foreclosure-related litigation. My firm also has employment lawyers who defend race discrimination cases. 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.


Enforcement Of Wisconsin Judgment In Indiana Defeated

Lesson. When enforcing an out-of-state judgment in Indiana, the law presumes that the foreign judgment is valid. That presumption can be overcome with proof that the plaintiff failed to properly serve the defendant with a summons and complaint in the original case.

Case cite. Troxel v. Ward, 111 N.E.3d 1029 (Ind. Ct. App. 2018)

Legal issue. Whether, following the entry of a judgment in Wisconsin, an Indiana order authorizing the sale of the Defendant’s stock was void because the Plaintiff served the Wisconsin summons and complaint at the Defendant’s former dwelling.

Vital facts. Defendant allegedly executed a guaranty of a $653,000 promissory note, which was in default. Troxel was about the Plaintiff’s efforts to collect on the guaranty in both Wisconsin and Indiana, and the related efforts by the Plaintiff to serve the Defendant with a summons and complaint. One of the compelling factors was that the Plaintiff served Defendant at his former residence in Indiana.

Procedural history. The Plaintiff obtained a judgment in Wisconsin and then sought to enforce the judgment in Indiana under I.C. 34-54-1. The Indiana trial court recognized the judgment and then, at the Plaintiff’s request, entered an order for the sale of the Defendant’s stock in a separate company for the purpose of satisfying the judgment. When the Defendant got wind of the judgment and stock sale, he filed a motion to set aside the judgment in the Indiana court.

Key rules.

Troxel set out the following general rule and its fundamental exception:

The United States Constitution requires state courts to give full faith and credit to the judgments of the courts of all states. U.S. Const. art. IV, § 1. However, an out-of-state judgment is always open to collateral attack for lack of personal or subject-matter jurisdiction. Thus, before an Indiana court is bound by a foreign judgment, it may inquire into the jurisdictional basis for that judgment; if the first court did not have jurisdiction over the parties or the subject matter, then full faith and credit need not be given.

A judgment entered without jurisdiction is “void.”

Importantly, the defendant/judgment debtor bears the burden of rebutting the presumption that a foreign judgment, which is regular and complete on its face, is valid.

Troxel spells out various trial rules applicable to service of a summons and complaint, including Trial Rule 4.1(A)(3). The Court noted that, under Indiana law, “service upon a defendant’s former dwelling [aka usual place of abode] is not sufficient to confer personal jurisdiction.” (This Indiana service rule applied to the original action in Wisconsin.)

Holding. The Indiana Court of Appeals reversed the trial court’s sale order.

Policy/rationale. The Plaintiff argued that the Wisconsin judgment was presumed to be valid and that the Defendant failed to overcome the presumption. The Court of Appeals disagreed and cited to evidence in the record that, a few weeks before he was served with process, the Defendant had moved from the service address. Because the Wisconsin court did not have personal jurisdiction over the Defendant when it entered judgment, the judgment was void. It followed that all the Indiana orders also were void.

Related posts.

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Judgment creditors sometimes engage me here in Indiana to enforce judgments entered in other states. 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.


Residential Borrower Denied Second Settlement Conference

Lesson. If borrowers fail to appear at a court-ordered, pre-judgment settlement conference that they requested, then their post-judgment request for a second conference will be denied. Borrowers – appear at the conference. Lenders – move toward a judgment if borrowers fail to comply with the court’s settlement conference order.

Case cite. El v. Nationstar Mortgage, 108 N.E.3d 919 (Ind. Ct. App. 2018)

Legal issue. Whether the trial court abused its discretion in denying a borrower’s motion for a second, post-judgment settlement conference.

Vital facts. El was a standard residential mortgage foreclosure case. The summons and complaint served upon the borrower contained the appropriate notices to the borrower regarding her rights, including the right to a settlement conference with the mortgage company. The borrower appeared in the action pro se and requested a settlement conference. However, she failed to show up at the court-ordered conference. She also failed to submit certain settlement-related documents required by court's order.

Procedural history. Following the settlement conference, which the lender attended, the lender filed a motion for an in rem summary judgment against the borrower. The trial court granted the motion. The borrower then moved for a second settlement conference. The trial court denied the motion, and the borrower appealed.

Key rules. Ind. Code 32-20-10.5, entitled “Foreclosure Prevention Agreements for Residential Mortgages,” outlines the rules and procedures surrounding the facilitation of settlement conferences and loan modifications. In particular, Section 10 outlines in detail rights and responsibilities of the parties and the courts with regard to settlement conferences.

Although Section 10 “contemplates the possibility of” a second settlement conference, the trial court’s decision on the matter is discretionary:

For cause shown, the court may order the creditor and the debtor to reconvene a settlement conference at any time before judgment is entered. 

Holding. The Indiana Court of Appeals affirmed the trial court’s decision.

Policy/rationale. The El opinion indicates that both the lender and the trial court complied with the statutory requirements of I.C. 32-20-10.5. The borrower did not. The Court of Appeals noted that the borrower filed her second motion two months after judgment had been entered. Interestingly, the Court went so far as to say the trial court had no discretion to reconvene the settlement conference because the case had already been resolved. The Court also stated that the borrower did not show any “cause” for a second bite at the apple.

Related posts.

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Lenders and mortgage loan servicers sometimes engage me to handle contested foreclosure cases. 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.


Indiana General Assembly Update

This follows up my April 12th post Indiana General Assembly: Nothing Cooking This Year.  The sheriff's sale notice legislation I mentioned last month got new life but ultimately did not pass.  The Indiana Lawyer mentions that development (see, "Newspapers survive scare" section) and others in its article this week entitled What lawmakers did — and didn’t do — in the 2019 session.


Seventh Circuit Reminds Us That Federal Law, And Not Indiana State Law, May Apply To Some Successor/Alter-Ego Claims

Lesson. If you’re trying to collect a judgment in federal court based upon veil-piercing theories, make sure you’re applying the correct legal standard. If the underlying claim arises out of a federal statute, Indiana’s state law tests may not apply. Although similar in nature, the standards are not the same and require a different analysis.

Case cite. McCleskey v. CWG Plastering 897 F.3d 899 (7th Cir. 2018)

Legal issue. Whether Indiana state law versus federal law standards controlled the outcome of plaintiff’s successor and alter ego claims against defendant.

Vital facts. As discussed here before (see below), corporate veil piercing cases tend to be very fact sensitive, and McCleskey is no different. Please review the opinion for a summary of the operative evidence. The Court examined whether a son’s plastering business should be liable for a judgment previously entered against the plastering business of the son’s father. The judgment stemmed from the father’s failure to make certain payments to a union. The Court noted, among other things, the “inconvenient fact” that the son went into business the same day that the $190,940.73 judgment was entered against his father’s company.

Procedural history. The district court (the trial court) granted summary judgment for the defendant (son), and the plaintiff appealed.

Key rules. Generally, cases resting on federal ERISA and NLRA statutes, including 29 U.S.C. § § 1132, 1145 and 29 U.S.C. § 185(a), respectively, “are within the federal court’s subject-matter jurisdiction and typically governed by federal law.”

Under federal law, both alter ego and successor liability “incorporate a scienter [intent or knowledge of wrongdoing] component coupled with an analysis of similarities between the old and new entities.” The “notice of the obligation” by the new entity is key to successor liability. In McCleskey, liability for alter ego required more, however: “a fraudulent intent to avoid collective bargaining obligations.” The McCleskey opinion spells out the other key factors that courts consider.

Holding. First, the Court found that federal post-judgment standards of collection applied. Second, the Court concluded, “the district court was too quick to grant summary judgment” in the defendant’s (the son’s) favor.

Policy/rationale. In fact-sensitive cases like McCleskey, I find it best to defer to the Court’s opinion for any detailed application of the evidence to the law. Every case is different (and blog posts can only be so long….) Importantly, the judgment arose out of the plaintiff’s action under a collective bargaining agreement. For today’s purposes, the significant takeaway is that federal courts have their own body of law in this veil-piercing arena. Admittedly, the federal standards should never apply to a commercial mortgage foreclosure action, which cases are based on state contract and foreclosure law. Nevertheless, if you’re a party chasing money in federal court or defending a non-foreclosure collection claim in an Indiana federal forum, you should be mindful that the Indiana standards, about which I’ve written previously (see below), might not apply.

Related posts.

Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part I

Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II
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I have experience representing parties entangled in post-judgment collection actions. 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.