What Is The “Protecting Tenants at Foreclosure Act” And Does It Apply To Foreclosures On Multi-Family Properties?

The Statute. The Protecting Tenants at Foreclosure Act (the "Act"), 12 U.S.C. Section 5220, is a 2018 federal law that offers security for renters living in foreclosed properties. The Act imposes certain obligations on "immediate successors in interest" (presumably including lenders/mortgagees) of foreclosed residential properties. These obligations are as follows:

1. A duty to give bona fide tenants "a notice to vacate [of] at least 90 days before the effective date of such notice."
2. A duty to allow bona fide tenants "to occupy the premises until the end of the remaining term of [their leases]."

The purpose of the Act is to ensure that tenants receive sufficient notice of foreclosure proceedings and are not abruptly displaced. The statute was not intended to create a private right of action for evicted residents, however, but merely to serve as a defense against eviction proceedings.

Applicability to certain foreclosures. The Act's language is not crystal clear. For example, the statute does not use terms like “lender” or “eviction.” However, because both of the Act’s obligations seem to presuppose a scenario in which an immediate successor is attempting to force tenants to vacate a foreclosed property (i.e. to evict residents), immediate successors are not required to take action under the Act unless and until they seek to force tenants to vacate. Thus, our conclusion is that the Act will not apply to mortgage foreclosures unless the action seeks to evict/remove residential tenants from the mortgaged property.

Because the goal of the vast majority of a commercial lender’s foreclosures on multi-family properties is to keep the tenants (and thus the income) intact, as a practical matter the Act rarely will apply to a commercial foreclosure. However, if a foreclosing mortgagee ultimately intends to take title to the real estate and terminate the lease rights of the existing tenants, then the Act will apply.

The Act’s obligations come into play where there is "any foreclosure on a federally-related mortgage loan or on any dwelling or residential property after the date of enactment of this title." Courts are split on whether the Act encompasses only foreclosures on federally-related mortgage loans or on all residential property. Because courts have held that immediate successors carry the burden of proving they are not beholden to the Act's obligations, it is safe to assume that the Act casts a broad net and attaches to foreclosures on "any dwelling or residential property." Stated otherwise, immediate successors of foreclosed real property occupied by residential tenants should abide by the Act. Our conclusion is in line with the Act's purpose of protecting renters who live in foreclosed properties, but we have not comprehensively researched the issue across the country.

Notice requirements.

Duty to give bona fide tenants "a notice to vacate [of] at least 90 days before the effective date of such notice."

    Bona fide tenants of foreclosed properties are entitled to a 90-day notice before they may be forced to vacate the premises by immediate successors. This 90-day notice requirement is not subject to exceptions.

    A tenant is "bona fide" where (1) the tenant and mortgagor are not the same individual, (2) the tenant's lease was the result of an arms-length transaction, and (3) the tenant's lease requires unsubsidized rent that is at least fair market value.

Duty to allow bona fide tenants "to occupy the premises until the end of the remaining term of [their leases.]"

    Immediate successors must permit bona fide tenants to reside at the property until their leases have expired. The duty to honor bona fide leases does not negate the 90-day notice requirement, however. If a tenant's remaining lease term is less than 90 days, that tenant is still entitled to 90 days before he or she must vacate the property with proper notice thereof.

    The duty to honor bona fide leases is subject to three exceptions. Immediate successors are not required to honor bona fide leases where: (1) the lease is invalid, (2) the lease is terminable at will, or (3) the property is sold after foreclosure to a purchaser who will occupy the property as a primary residence.

Note: I’d like to thank our associate Alex Layton for his research and input into today’s post.
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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Court Discusses Test For Recovery Of Attorney's Fees In Action Against Guarantor

Lesson. An arbitrary “partial” award of attorney fees to a lender may be reversible error. Trial courts must assess what is a reasonable amount of attorney’s fees, taking into account all services rendered up to the entry of such an award.

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

Legal issue. Whether a trial court’s award of attorney’s fees was unreasonable (too low).

Vital facts. This is my third post about Shoaff. Please review my first and second posts for more information about the liability and damages issues in Lender’s suit against Guarantor.

Procedural history. The trial court granted summary judgment for Lender, but Lender cross-appealed the court’s award of attorney fees.

Key rules. Last week’s post dealt with non-discretionary contract damages. “Unlike the calculations of interest and late fees, the trial court's discretion with respect to attorney's fees is, generally speaking, unfettered by everything except for reasonableness.”

“The determination of reasonableness of an attorney's fee necessitates consideration of all relevant circumstances.” Indiana courts may, but are not required to, consider things like hourly rate, result achieved, and difficulty of the issues.

Holding. The Indiana Court of Appeals reversed the trial court and remanded the case for an assessment of a reasonable amount of fees for “all services rendered in pursuit of the debt” owed by Guarantor to and through the date of the order granting such fees.

Policy/rationale. Lender asserted that the trial court abused its discretion when it limited its award of attorney’s fees to the date of the initial summary judgment entry. Lender sought fees for the subsequent litigation that included additional motions and a second award of damages. The Court noted that “reasonable attorney's fees are guaranteed by the [guaranty].”

The Shoaff opinion stated that the trial court’s failing was its “unexplained” decision to limit fees up to a certain date. That decision was “arbitrary,” rendering the award of fees unreasonable. The Court threaded the discretionary/reasonableness needle as follows:

The trial court is free to evaluate [Lender’s] submissions for the fee amount and assess whether that amount itself is reasonable, and the trial court may, in its discretion, conclude that the amount either is or is not reasonable. But to award partial fees, reasonable or not, is to ignore the plain meaning of the [guaranty], and therefore constitutes an abuse of discretion.

As stated last week, the rules and outcome in Shoaff should apply to actions to enforce promissory notes as well as guaranties.  

Related posts.

• Attorney Fee Awards in Indiana
• Unsettled: Recoverability Of Attorney’s Fees For In-House Counsel
• Indiana Attorney Fee Liens In Commercial Cases

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Before You File, Review For “Personally Identifiable Information” and Redact: Indiana Overview

Most if not all states, including Indiana, have rules requiring the redaction of so-called “personally identifiable information” (PII) before documents may be filed with a court. (Don’t know what “redaction” means? This article helps explain.) Generally speaking, each document should be prepared according to the court’s respective guidelines and jurisdictional/county rules. Examples of these documents include, but are not limited to, complaints for foreclosure, affidavits, judgments, and bankruptcy filings.

Federal rules. For federal court actions, see Federal Rule of Civil Procedure Rule 5.2 and Federal Rule of Bankruptcy Procedure 9037.

Indiana rules. Indiana’s Rules on Access to Court Records (the “Rules”) govern our state court matters. There are only 12 rules, and Indiana practitioners and their staffs should take a minute to review (or re-review) them. For purposes of today’s post, Rule 5(C)(1) is key:

        (C) Personal Information of Litigants, Witnesses, and Children:

            (1) Unless necessary to the disposition of the case, the following information shall be redacted, and no notice of exclusion from Public Access is required:

                (a) Complete Social Security Numbers of living persons;
                (b) Complete account numbers, personal identification numbers, and passwords.

If the information is necessary to the disposition of the case, the document containing the confidential information shall be filed on green paper (if paper filing) or filed as a confidential document (if e-filed). A separate document with the confidential information redacted shall be filed on white paper (if paper filing) or filed as a public document (if e-filing). A separate ACR Form identifying the information excluded from public access and the Rule 5 grounds for exclusion shall also be filed.

Note that Rule 11 provides that lawyers and/or their clients can be subject to sanctions for failing to comply with the Rules. Again, any PII not required in the filing should be redacted.

Examples of PII. The following is a list of the type of information that should be redacted, but the list is not all inclusive:

• Social Security Number(s)

• Taxpayer Identification Number ("TIN")

• Driver’s License Number(s) or other Government identification number

• Loan Originator/ Loan Application Number(s)

• Servicer Loan Number(s)

• Third Party Loan/File Number(s)

• Bank Account Number (may include copy of imaged check)

• Any Financial Account, credit card numbers, Escrow Account Number(s)

• Customer Reference Number(s)

• Mortgage Identification Number ("MIN")

• Mortgage Electronic Registration Systems Number (“MERS”)

• Birthdates

• Insurance Policy Number(s)

• Any Minor Child Information

• Any Images that may include NPPI

• Telephone Numbers

• Bar Codes on Collateral Documents for any of the above numbers, except as may otherwise be required in documents that are filed as part of the public record.

Other tips.

• All information, including attachments and exhibits, should be reviewed for PII (including handwritten information).

• Even if a previously-recorded document, such as a mortgage, contains PII, redaction still should occur.

• With today’s computer software, redactions can (and should) be accomplished electronically.

• We advise redacting with a clearly visible black box to reflect where PII has been removed. The black box should completely cover the PII.

• Be careful not to redact any original loan documents such as an original promissory note.

Credit. I would like to thank my colleague Edward Boll, who helps lead Dinsmore’s default servicing and consumer bankruptcy practice group in Cincinnati. Ed and his team prepared the majority of today’s content.  Thanks for sharing your presentation, Ed.
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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Bank Records Of Non-Party (Third Party) Discoverable In Post-Judgment Collection Action

Lesson. A bank’s records of a non-party to litigation can be subpoenaed in post-judgment collection proceedings if the document request is reasonably calculated to lead to the discovery of concealed or fraudulently transferred assets.

Case cite. Allstate Ins. Co. v. Orthopedic P.C. 2022 U.S. Dist. LEXIS 42485 (S.D. Ind. 2022)

Legal issue. Whether a judgment creditor could obtain the bank records of a non-party in post-judgment collection proceedings.

Vital facts. The Allstate opinion followed the entry of a 460k judgment that Defendant health care providers failed to pay. Plaintiff claimed that Defendants improperly transferred patients to Non-Party provider and that those patients “were then to be billed using the name of a separate entity apparently to avoid detection by [Plaintiff].” Thus, there was a perceived financial relationship between Defendants and Non-Party in which Defendants were transferring assets to avoid collection. In order to investigate the theory further, Plaintiff subpoenaed the bank records of Non-Party.

Procedural history. Non-party moved to quash the subpoena.

Key rules. Allstate was a federal court action, so the federal rules of procedure applied. The Court noted that Rule 69(a)(2) expressly provides that a judgment creditor "may obtain discovery from any person" to aid in execution of a judgment. This applies to discovery to non-parties too. See also, Indiana Trial Rule 69(E).

Indiana federal case law interprets Rule 69 to allow “a judgment creditor to obtain discovery on ‘information relating to past financial transactions which could reasonably lead to the discovery of concealed or fraudulently transferred assets.’”

Discovery to non-parties “may be permitted where [the] relationship between judgment debtor and nonparty is sufficient to raise a reasonable doubt about bona fides or transfer of assets.”

The Court cited the following test for subjecting third parties (aka non-parties) to discovery: “. . . so long as the judgment creditor provides 'some showing of the relationship that exists between the judgment debtor and the third party from which the court . . . can determine whether the examination has a basis.'”

However, a judgment creditor must keep its inquiry “pertinent to the goal of discovering concealed assets of the judgment debtor and not be allowed to become a means of harassment of the debtor or third persons.”

Holding. The trial court denied the motion to quash and ordered Non-Party’s bank to provide the responsive materials.

Policy/rationale. Non-Party contended that the records were irrelevant and beyond the reach of discovery. Non-Party’s main theory was that it had not been sued by Plaintiff and that Plaintiff had not claimed Non-Party was a part of any conspiracy. The Court disagreed and concluded that the subpoena was “an entirely reasonable and appropriate attempt to obtain discovery in support of [Plaintiff’s] efforts to collect on its judgment . . . .” The Court’s rationale was that Plaintiff met the “reasonable doubt” standard by presenting evidence in the form of emails that indicated Defendants may have fraudulently transferred its patients to Non-Party to evade Plaintiff’s collection efforts.

Related posts.

• Fraudulent Transfer Claims Within Post-Judgment Collection Proceedings 
• Plaintiff/Judgment Creditor Gets Cart Before Horse In Indiana Garnishment Effort 

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Part of my practice involves representing parties in post-judgment collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Lender’s Redirection Of Rents Does Not Constitute “Unclean Hands” When Supported By Loan Documents

Note: This is the fourth post about the 410 case, cited below, that grants a lender’s motion for summary judgment against a borrower (and other defendants), despite the defendants’ assertions of multiple defenses and counterclaims. For background and context, here are links to the prior three posts: May 6, May 20 and May 27.

Lesson. A lender’s demand for a tenant to redirect rents from the landlord/borrower will not trigger a claim for “unclean hands” when the action is supported by a loan document.

Case cite. Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether the doctrine of “unclean hands” precluded summary judgment for a lender in a commercial foreclosure action.

Vital facts. Following a loan default, Lender directed the commercial tenant of the mortgaged real estate to make rent payments directly to Lender instead of the borrower/landlord. The tenant evidently complied with the request. In turn, the absence of rental income apparently created a cash flow problem for the borrower that hampered Defendants’ ability to settle with Lender. The problem was that the borrower had previously entered into a Subordination, Non-Disturbance and Attornment Agreement (commonly called an SNDA) as part of the underlying loan documents. In the SNDA, the borrower consented to such direct payments and released the tenant from all liability to the borrower on account of any such payments. (Typically, an assignment of rents will contain similar rights in favor of a lender/mortgagee.)

Procedural history. In response to Lender’s motion for summary judgment, Defendants raised the “unclean hands” defense.

Key rules. The Court in 410 summarized Indiana state and federal court law regarding the doctrine of unclean hands:

The doctrine is designed to prevent a party that behaved inequitably or acted in bad faith from benefitting from that improper behavior. There is no exact formula for applying the doctrine and courts thus generally have discretion when determining whether to apply it. The doctrine is not favored under Indiana law "and must be applied with reluctance and scrutiny."

***

For a defendant to successfully assert the doctrine in Indiana, the defendant generally must show that: 1) the plaintiff's misconduct was intentional; 2) the plaintiff's wrongdoing concerned the defendant and has an immediate and necessary relation to the matter in litigation; and 3) the defendant was injured because of the plaintiff's conduct.

Holding. The Court rejected the unclean hands defense and granted Lender’s motion for summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that Lender “exacerbated” the loan default by taking the rents. The Court easily rejected the theory. The borrower could not, on the one hand, grant Lender rights to the rents in an SNDA while, on the other hand, claim misconduct in asserting such rights.

Related posts.

• Defendants’ “Unclean Hands” Defense Fails In Lender’s Indiana Foreclosure Case
• Commercial Construction Mortgages Stand Tall Over Later-Recorded Mechanic’s Liens In Indiana
• Mortgagee Not Liable For Tragic Drowning

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Pooling And Servicing Agreement Did Not Divest Trustee Of Ability To Foreclose

Lesson. With securitized loans, the trustee on behalf of the trust (the lender) is a “real party in interest” for purposes of filing a foreclosure suit, despite the existence of a special servicer appointed by a pooling and servicing agreement.

Case cite.  Wilmington Tr. Nat'l Ass'n v. 410 S. Main St. LLC 2022 U.S. Dist. LEXIS 21288 (N.D. Ind. Feb. 7 2022).

Legal issue. Whether the special servicer of securitized loan is the only party that can bring a suit to enforce that loan.

Vital facts. The 410 opinion arises out of a $3.0 million commercial loan transaction related to a single tenant retail building, and efforts by the lender to collect on the loan after default. As is typical with securitized debt, the original lender assigned the loan to a trust (the “Trust”), which entered into a Pooling and Servicing Agreement (“PSA”) with a company to service the loan (the “Servicer”). The PSA conveyed the interests in the loan to a bank that acted as the trustee for the Trust (the “Trustee”), thereby putting the Trustee “in the standard role” of a party that could sue. After the loan went into default, the Trustee filed suit to enforce the loan.

Procedural history. This is an Indiana federal district (trial) court decision.  One of the defenses asserted in the action was that the court lacked jurisdiction because the Servicer, not the Trustee, was the “real party in interest.” In other words, the Servicer should have been the named plaintiff. Because the Servicer shared New York citizenship with several defendants, the so-called “diversity of citizenship” requirement for federal court cases of this type was absent. If applicable, the defense would compel dismissal (although the case could be re-filed in state court).

Key rules. Under Rule 17, a "real party in interest" is the “person or entity that possesses the right or interest to be enforced through litigation.” The Court noted further that “the purpose of Rule 17 is to protect the defendant against a subsequent action by the party actually entitled to recover.”

Case law provides that “the terms of a PSA can permit a special servicer to sue in its own name if the special servicer chooses to do so, . . . [but the terms of the PSA do not] divest the trustee for whom that special servicer acts from bringing suit when it is the one that chooses to do so.” The Court relied on law stating that the Trustee, as the holder of the loan for the Trust, could “sue to enforce and collect on those interests.” The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.

Policy/rationale. Defendants contended that the Trustee did not have standing to sue because the “true party in interest” was the Servicer by virtue of the PSA’s provisions giving the Servicer discretion to pursue litigation. The Court disagreed because, even if the Servicer was the party that filed the lawsuit, it would be litigating as the Trustee’s representative under the PSA. The Servicer’s role, “no matter how many duties it may be given,” was to act as an agent for the Trustee related to its interest in the loan. Ultimately, the Trustee had “the true stake in the litigation. . . .”

The Court did not buy the argument that the PSA “dispossessed” the Trustee of the power to initiate suit. The PSA as a whole suggested that the Servicer’s “powers … are only the result of delegated authority from the Trust, not separate authority given solely to [the Servicer]….” 410 suggests that a special servicer under a PSA can be the named plaintiff in a mortgage foreclosure lawsuit. While I’ve seen that approach, the more common practice is for the trustee to bring the case. The 410 opinion supports this approach.

Related posts.

• Trustees Have Authority To Foreclose For Trusts
• Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana’s COVID Orders Interpreted: Interest-Tolling Provisions Not Applicable To Mortgage Loans

Lesson. COVID did not provide a defense to the accrual of interest on mortgage loans in 2020.

Case cite. PNC v. Page, 2022 Ind. App. LEXIS 92 (Ind. Ct. App. 2022).

Legal issue. Whether certain provisions in Indiana’s COVID-related Emergency Orders (defined below) apply to promissory notes and mortgages such that prejudgment interest could be tolled for five months.

Vital facts. Borrower and lender entered into a mortgage loan. The promissory note contained fairly standard language that interest shall accrue after default until the loan balance is paid in full. Borrower defaulted on the loan in November 2017.

In the wake of the COVID pandemic, Indiana’s Governor and Supreme Court entered a series of orders (the “Emergency Orders”) related to the handling of the public health emergency. I wrote about some of these orders in 2020: link. In one of the orders, the Indiana Supreme Court stated:

The Court authorizes the tolling, beginning March 16[, 2020] and until April 6, 2020, of all laws, rules, and procedures setting time limits for speedy trials in criminal and juvenile proceedings, public health, and mental health matters; all judgments, support, and other orders; and in all other civil and criminal matters before the courts of Marion County. Further, no interest shall be due or charged during this tolled period.

Procedural history. Lender filed a mortgage foreclosure action in November 2018. While the case was pending, the pandemic occurred. It was not until June 2021 that the lender sought a default judgment seeking the balance due of principal and interest, which included accrued interest from the date of default through the date of the entry of the judgment. The trial court entered the judgment requested by Lender except that it specifically excluded “interest accruing 3/16/20 – 8/14/20” based on the Emergency Orders, including specifically the provision quoted above. Lender appealed the interest reduction.

Key rules. The well-written PNC opinion cites to plenty of constitutional and statutory support for its decision. The Court also referred to and relied upon its 2021 case, Denman v. St. Vincent Med. Grp., Inc., 176 N.E.3d 480 (Ind. Ct. App. 2021), about which I wrote on 11/24/21 (see related post below). In a nutshell, and in an interesting twist, the Indiana Court of Appeals (the lower court) stated: “because our Supreme Court [the higher court] could not, by rule, change substantive law, the Emergency Orders instruction … cannot be construed to suspend automatic accrual on non-discretionary interest provided by the terms of a private loan instrument and as permitted by statute.”

Holding. The Indiana Court of Appeals reversed the trial court with instructions to award Lender interest from the date of default to the date of the judgment at the rate specified in the promissory note, including the period from 3/16/20 to 8/14/20.

Policy/rationale. The Court’s conclusion is consistent with the practice “of presuming that each branch of our government acts within their constitutionally prescribed boundaries.” PNC, with Denman, settled once and for all the question of whether the accrual of contractual interest was suspended by the Emergency Orders. The decisions were, in my view, the correct ones, and they are great results for lenders. Imagine if all borrowers of any type (consumers or businesses) were free from interest obligations for five months.

Related posts.

• Indiana Supreme Court’s COVID Order Interpreted: Post-Judgment Interest
• Force Majeure And The COVID-19 Pandemic: Impact On Indiana Notes and Mortgages 

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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

The Rooker-Feldman Doctrine Is Alive And Well In The 7th Circuit

In Banister v. U.S. Bank Nat'l Ass'n, 2021 U.S. App. LEXIS 28565 (7th Cir. 2021), the United States Court of Appeals for the Seventh Circuit (that includes Indiana) affirmed an Illinois district court's decision to dismiss on jurisdictional grounds a federal court lawsuit filed by a borrower/mortgagor.  The suit was the borrower's fifth attempt to overturn a state court judgment foreclosing the mortgage on her home.  The plaintiff borrower asserted the defendants committed bank fraud and sought $20MM in damages, together with an order to set aside the sheriff's sale due to the alleged "illegal foreclosure."  The borrower's claims were blocked by the Rooker-Feldman doctrine, which prohibits a federal court action to vacate a state foreclosure order.  To the extent the federal case sought damages, "a federal court could not award them without invalidating the foreclosure judgment—something that only an Illinois appellate court or the Supreme Court of the United States could do."

A recent opinion by the United States District Court for the Northern District of Indiana reached the same result.  Shaffer v. Felts, 2021 U.S. Dist. LEXIS 198114 (N.D. Ind. 2021) held that it "has no jurisdiction to set aside a state-court foreclosure judgment."  One of the lessens in Shaffer is that a federal court complaint "simply invoking the word 'fraud' does not grant a district court jurisdiction to set aside a state-court order."  The opinion cited to the 7th Circuit's 2015 Iqbal decision: 

The Rooker-Feldman doctrine is concerned not with why a state court's judgment might be mistaken (fraud is one such reason; there are many others) but with which federal court is authorized to intervene. The reason a litigant gives for contesting the state court's decision cannot endow a federal district court with authority; that's what it means to say that the Rooker-Feldman doctrine is jurisdictional.

I previously wrote about the Iqbal case here:  Dismissal Of Mortgagor’s Post-Foreclosure Federal Lawsuit: Usually, But Not Always.  

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I represent lenders, as well as their mortgage loan servicers, entangled in loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Supreme Court Clarifies Scope Of Trial Rule 9.2(A) Affidavits Of Debt

The hand wringing over certain pleading requirements for residential mortgage lenders and servicers seeking to enforce loans in Indiana is over effective July 15, 2021. This is because the Indiana Supreme Court amended Trial Rule 9.2(A) and specifically exempted mortgage foreclosures from the affidavit of debt requirements arising out of the 2020 amendment to the rule.

Click here for the Court’s order, which contains the amendment. The following link is to the entire rule on the Court’s system that, as of today, does not reflect the amendment: T.R. 9.2.

For background on this topic, please click on my two prior posts:

• 5/11/17: Claim “On An Account” Vs. Enforcement Of A Loan: Comments On Proposed Amendment to Indiana Trial Rule 9.2(A)
• 11/17/17: Indiana Trial Rule 9.2(A) Officially Amended But Uncertainty Remains

The rule’s new language ends any debate regarding whether the subsections added in 2020 [(A)1) and (A)(2)] apply to mortgage foreclosure actions. (Incidentally, the 2020 amendment never affected commercial or business loans – only consumer debts.)

Somewhat regrettably, the Court did not include language in this year’s amendment to exempt actions to enforce unsecured loans, such as an action on a guaranty or a credit agreement. Having said that, as noted in my prior posts, a strong argument can be made that the affidavits only apply to actions “on account” and not to loans.

Kudos to our Supreme Court for providing clarity to the situation and for the folks behind the scenes who lobbied for the change.
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I represent lenders, as well as their mortgage loan servicers, entangled in loan-related disputes. If you need assistance with such a , please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Another Indiana Court Of Appeals Opinion Regarding Admissibility Of Lender’s Loan and Business Records

Lesson. A lender’s proposed witness who was not present when the original loan documents were executed, or for that matter when any materials relevant to the loan were created, does not in and of itself preclude the witness from testifying or prevent related exhibits from being admitted into evidence.

Case cite. Wells Fargo v. Hallie, 142 N.E.3d 1033 (Ind. Ct. App. 2020)

Legal issue. Whether the lender’s trial witness was competent to testify as to the admissibility of certain loan documents and records.

Vital facts. The lender filed a straightforward mortgage foreclosure action against the borrower claiming a default under the subject loan. The original lender had transferred the loan to the plaintiff lender.

Procedural history. The trial court held a bench trial on the lender’s complaint. The lender called one witness, who worked for the original lender and later the plaintiff lender in the default arena. The lender proffered as exhibits various loan documents and a payoff statement. The borrower objected to the admissibility of the exhibits, asserting that the witness was incompetent to authenticate the exhibits. The trial court granted the borrower’s objection as to all the exhibits but for the payoff statement. The court then entered a “judgment on the evidence” in favor of the borrower that disposed of the case. The lender appealed.

Key rules. Indiana Evidence Rule 803(6) – the business records exception to the hearsay rule – was at issue. In Indiana, the party offering a business record exhibit “may authenticate it by calling a witness ‘who has a functional understanding of the record keeping process of the business with respect to the specific entry, transaction, or declaration contained in the document.’” That witness is only required to have “personal knowledge of the matters set forth in the document,” but the witness “need not have personally made or filed the record or have firsthand knowledge of the transaction represented by it in order to sponsor the exhibit.”

Evidence Rule 902 deals with the admissibility of so-called “self-authenticating” documents. Among the self-authenticating documents listed in Rule 902 are of official records or documents recorded or filed in a public office as authorized by law, if the copies are certified in compliance with law, and commercial paper, to the extent allowed by general commercial law. This rule does not guarantee admissibility but relieves the proponent from the need to provide foundational testimony.

Holding. The Indiana Court of Appeals reversed the trial court and remanded the case for a hearing to allow the lender to proffer exhibits consistent with Indiana’s rules “without a heightened personal knowledge requirement.”

Policy/rationale. The Court of Appeals surmised that the trial court concluded that the lender’s witness “could not testify concerning any document generated in her absence,” such as business records of the organization or original loan documents. The Court rejected the notion of the trial court’s “near-blanket exclusion of exhibits.” The Court reasoned that the lender “should not be precluded from eliciting foundational testimony from a witness on grounds that the witness was not present at the time a document was created.” Moreover, properly-certified documents such as the recorded mortgage should have been admitted at trial without a witness. The same goes for the original promissory note endorsed in blank.

Related posts.

• Lender’s Summary Judgment Affidavit Flawed - Business Records Inadmissible
• Credit Card's Summary Judgment Reversed Due To Flawed Affidavit
• Indiana Court of Appeals Mortgage Foreclosure Opinion, II of III: Liability – Evidence Teachings
• Indiana Court of Appeals Mortgage Foreclosure Opinion, III of III: Damages Evidence After Lenders Merge
• Promissory Notes “Endorsed In Blank” Are Perfectly Fine

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I represent parties involved in disputes about loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Court of Appeals Mortgage Foreclosure Opinion, III of III: Damages Evidence After Lenders Merge

Lesson.  Even if the original lender no longer exists due to a merger, as long as the proper foundation is laid, the necessary liability and damages evidence should be admissible based upon the business records exception to the hearsay rule.

Case cite.  Hussain v. Salin Bank, 143 N.E.3d 322 (Ind. Ct. App. 2020)

Legal issue.  Whether a 41-page damages exhibit offered into evidence by the plaintiff lender was inadmissible hearsay.  More specifically, the question was whether the lender’s witness “lacked the knowledge to lay an adequate foundation for the admissibility of the documents under the business records exception to the hearsay rule.”  The borrowers challenged the testimony of the operative based upon the fact that their original lender had merged into the plaintiff lender.

Vital facts.  Please click here for my first post and here for my second post about Hussain, which was a straightforward mortgage foreclosure action. 

Procedural history.  Following an evidentiary hearing on damages, the trial court granted judgment for the lender for about 243k.  The borrowers appealed.   

Key rules.

Similar to last week, today’s piece addresses Indiana Evidence Rule 803(6)’s business records exception to the hearsay rule.  Last week dealt with a summary judgment affidavit and attached exhibits.  Today’s post concerns the testimony of a live witness and the so-called evidentiary “foundation” to get certain exhibits into evidence.  In Indiana:

[u]nder the business records exception, “a person who has a familiarity with the records may provide a proper business records exception foundation even if he or she is not the entrant or his or her official supervisor.”  To obtain admission under the business records exception, the proponent of an exhibit need only call an individual who has a functional understanding of the business's record-keeping process.  This could be the entrant, the entrant's supervisor, co-workers, a records custodian or any other such person.

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

Policy/rationale.  The borrowers contended that the lender’s damages witness was not qualified to lay the foundation for admission of the damages exhibits because he worked for the plaintiff lender’s predecessor and not directly for the plaintiff.  Among other points, the borrowers relied upon the Holmes decision related to credit card debt, about which I wrote on 1/13/19.  The Court distinguished Hussain from Holmes, however: 

Unlike the circumstances in [Holmes] where the [witness was] attempting to lay a foundation for the records of another business that had sold its accounts, [the witness here] was testifying on behalf of a company for whom he worked that had merged with another.  As [the original lender] no longer exists, [the successor lender] is vested with all the rights, duties and records that previously were [the merged lender’s] under Indiana corporate law. 

Just as importantly, the evidence in Hussain established that the subject loan had been integrated into the plaintiff lender’s software system, about which the witness had personal knowledge.  Among other things, the witness testified that, with respect to the debt, “he personally [ran] the numbers based upon the payments that were made on [the borrowers’] loan and determined that the amount due was consistent with what was reflected in the bank's documents.”  The Court ultimately agreed with the trial court that the witness laid the proper foundation for the damages exhibits under the business records exception to the hearsay rule.

Related posts. 

• Standing: Bank Merger Rule Same For Corporate Entities
• Bank Merger Rule Applied In Indiana Foreclosure/Tax Sale Case
• Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions

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I represent parties involved in foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Court of Appeals Mortgage Foreclosure Opinion, II of III: Liability – Evidence Teachings

Lesson.  In contested motions for summary judgment, lenders should not forget to point to the entire record before the court.  Often borrowers will have admitted key facts in their pleadings or offered detrimental evidence themselves while trying to defend certain elements of the case.

Case cite.  Hussain v. Salin Bank, 143 N.E.3d 322 (Ind. Ct. App. 2020)

Legal issue.  Whether the affidavit in support of the lender’s motion for summary judgment constituted inadmissible hearsay. 

Vital facts.  Please click here for my first post about Hussain that contains some background.  In addition to the “first to breach” argument discussed in that post, the borrowers defended the mortgage foreclosure action on evidentiary grounds.  The plaintiff lender had merged with the original lender.  In support of its summary judgment motion, the lender tendered an affidavit from an employee of the current lender who had also served as a records custodian of the original lender. 

Procedural history.  The trial court granted summary judgment for the lender on liability but ordered a trial on damages.  This post relates to the summary judgment ruling on liability.   

Key rules.

    General rule.  Indiana Trial Rule 56(E) controls the admissibility of summary judgment affidavits and prohibits hearsay while requiring personal knowledge.  Indiana Evidence Rule 801 defines hearsay, which generally means on out-of-court statement offered for the truth of the matter asserted.    

        An exception.  The Court specifically pointed to language in T.R. 56(E) precluding exhibits “not previously self-authenticated….”  In Indiana, “once evidence has been designated to the trial court by one party, that evidence is deemed designated and the opposing party need not designate the same evidence.”

        Another exception.  Ind. Evid. R. 803(6) is the business records exception to the hearsay rule.  (There are many, many exceptions to the hearsay rule.)

Holding.  The Court of Appeals affirmed the trial court’s summary judgment on liability.

Policy/rationale.  The borrowers argued that the lender’s affidavit was based upon inadmissible hearsay and that, without the affidavit, the lender failed to prove a default under the loan.  One of the legal bases of the borrowers’ argument was the Court of Appeals’ holding in the 2019 Zelman case, about which I wrote here, which reversed a trial court’s summary judgment due to a flawed affidavit.  The Court in Hussain was not persuaded by the borrowers’ argument and distinguished its holding in Zelman as follows:

Unlike [Zelman], the [affiant/witness in Hussain] was not an employee of a third party who had purchased the [borrowers’] debt.  He was an employee of [the current lender] that had merged with [the prior lender].  [The witness] was the custodian of the records for [the prior lender], and the designated evidence established that he had acquired knowledge of the [borrowers’] debt by personally examining the business records relating to their loan.  Moreover, [the witness] did not refer to unspecified business records as did the affiants did in … Zelman.  Instead, [his] affidavit specifically identified the promissory note and mortgage to which he referred.

Of equal importance to the outcome in Hussain was the fact that many of the key documents referenced in the affidavit were already of record in the case and thus had been authenticated by the borrowers themselves. 

Therefore, notwithstanding any alleged flaws in [the lender’s affidavit], the [borrowers] admitted that they executed the note and mortgage, along with their failure to pay.  And that evidence was already before the court.  The [borrowers] further admitted that they made payments on the note and they submitted their payment history as part of the designated evidence.  That history demonstrated that they had not made a payment since November 27, 2015, yet the note required payments through September 16, 2023.  That evidence was not disputed, and it established all the required elements for a mortgage foreclosure.  For all these reasons, the trial court did not err in admitting [the] affidavit into evidence.

Related posts. 

• Credit Card's Summary Judgment Reversed Due To Flawed Affidavit
• Lender’s Summary Judgment Affidavit Flawed - Business Records Inadmissible
• Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions

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I represent parties involved in foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Recent Indiana Mortgage Foreclosure Opinion, Post I of III: Liability – First Material Breach Doctrine

Lesson.  Indiana’s “first to breach” defense would appear to be an exceedingly difficult theory for borrowers to establish in most foreclosure cases. 

Case cite.  Hussain v. Salin Bank, 143 N.E.3d 322 (Ind. Ct. App. 2020)

Legal issue.  Whether the lender was precluded from foreclosing based upon its alleged contract breach, which purportedly occurred before the borrowers’ default.

Vital facts.  Hussain involved a typical mortgage loan.  The promissory note had a 15-year term and was secured by the borrowers’ real estate.  From the outset, the borrowers struggled to make payments, and the lender assessed a series of non-sufficient funds fees and late fees.  The loan ended up in the borrowers’ Chapter 13 bankruptcy case that was later dismissed.  The lender then pursued a state court mortgage foreclosure action and filed a motion for summary judgment in the case.

The liability (loan default) aspect of the action surrounded the so-called “first to breach” rule.  Specifically, the borrowers tendered an affidavit stating that the lender (not the borrowers) initially breached the promissory note by assessing a $20 NSF fee to the principal due on the loan.  The borrowers had bounced a check due at the closing of the loan.  Nonetheless, the borrowers contended that the NSF fee amounted to a “unilateral, unauthorized alternation in the terms of the Note by [the lender].”

Procedural history.  The trial court granted summary judgment for the lender on liability.

Key rules.

The Court in Hussain outlined Indiana’s elements for a prima facie case for the foreclosure of a mortgage: 

(1) the existence of a demand note and the mortgage, and (2) the mortgagor's default….  Ind. Code § 32-30-10-3(a) provides that “if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee or the mortgagee's assign may proceed ... to foreclose the equity of redemption contained in the mortgage.”  To establish a prima facie case that it is entitled to foreclose upon the mortgage, the mortgagee or its assign must enter into evidence the demand note and the mortgage, and must prove the mortgagor's default….  Once the mortgagee establishes its prima facie case, the burden shifts to the mortgagor to show that the note has been paid in full or to establish any other defenses to the foreclosure.

The Court cited to Indiana’s “first material breach doctrine,” which provided:

When one party to a contract commits the first material breach of that contract, it cannot seek to enforce the provisions of the contract against the other party if that other party breaches the contract at a later date….  Whether a party has materially breached an agreement is a question of fact and is dependent upon several factors including:

(a) The extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated;

(b) The extent to which the injured party may be adequately compensated in damages for lack of complete performance;

(c) The extent to which the party failing to perform has already partly performed or made preparations for performance;

(d) The greater or less hardship on the party failing to perform in terminating the contract;

(e) The willful, negligent or innocent behavior of the party failing to perform;

(f) The greater or less uncertainty that the party failing to perform will perform the remainder of the contract.

Holding.  The Court of Appeals affirmed the trial court’s summary judgment as to liability.

Policy/rationale.  The Court first pointed to language in the note about how payments are to be applied:  “payments are first to be applied to any accrued unpaid interest, then to principal, and then to any unpaid collection costs.”  The Court reasoned: “the note provides that collection costs will be assessed to the [borrowers], and they do not dispute that the NSF fee is a collection cost.”  Further, the lender had established that it performed its obligations under the loan by funding the principal at closing.  “The $20 NSF fee in no way prevented [the borrowers] from obtaining the benefit of the loan.”  Even more, the evidence established that it was the borrowers who breached by failing to make the initial payment due under the loan and that there was no evidence the lender “committed a material breach of the loan prior to that time.” 

I suspect that, at the trial court level, the proceedings were more involved with regard to the minutia surrounding the theoretical applicability of the “first to breach” rule, but in the end the Court of Appeals was having none of it.  The meatier parts of the Hussain opinion deal with the issues of damages and evidence, and I will address those matters in the coming days. 

Have a great Thanksgiving.  

Related posts.  

• Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures
• Borrower’s “Mutual Mistake” Defense Fails Under Indiana Law 

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I represent parties involved in foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Credit Card's Summary Judgment Reversed Due To Flawed Affidavit

In Zelman v. Capital One, 133 N.E.3d 244 (Ind. Ct. App. 2019), the Indiana Court of Appeals reversed the trial court's summary judgment in favor of a credit card lender based upon the lender's failure to "lay a proper foundation to authenticate the Customer Agreement or credit card statements as business records admissible under Evidence Rule 803(6)'s hearsay exception." 

Respectfully, I don't entirely agree with the Court's analyis, but admittedly I don't handle credit card collection cases.  Nevertheless, the opinion is notable for parties and their counsel who seek summary judgments in debt collection cases.  The Court held:

To support its motion for summary judgment, Bank was required to show that Zelman had opened a credit card account with Bank and that Zelman owed Bank the amount alleged in the complaint.

***

... the Affidavit of Debt did not lay a proper foundation to authenticate the Customer Agreement or credit card statements as business records admissible under [Rule 806].

For the technical details and related law upon which the Court made its decision, please review the opinion.  Key problems surrounded the fact that the affiant was an employee of a third party that had acquired the debt and had not personally examined all of the business records related to the loan.  Again, bear in mind this was not a mortgage foreclosure action or a suit based upon a promissory note.

Zelman is similar to Holmes v. National Collegiate Student Loan Trust, 94 N.E.3d 722 (Ind. Ct. App. 2018) , which dealt with school loan debt and which I discussed on 1/13/19.

Here are some other posts related to Indiana affidavits and summary judgment procedure:

• Must Indiana Affidavits Be Signed Under The Penalties Of Perjury?
• Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment
• Proving You’re The Holder Of The Note

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I represent parties in real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

 

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.   

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 [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page. 

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 [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

The Indiana Lawyer - "Reversal: Bank loses in lengthy foreclosure battle"

The Indiana Lawyer posted this article yesterday about this Indiana Court of Appeals opinion.  I will study the case and write about it next week.  

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

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 [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

  
 

 

Indiana Court 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.

• Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years
• Indiana’s Statute Of Limitations For “Open Account” Claims: Supplier’s Case Too Late
• Indiana 2013 Legislation, Part III: Mortgage Statute Of Limitations Amended

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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 [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

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.

• Indiana's Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures
• Certain Summonses In Indiana Residential Mortgage Foreclosure Cases Deemed Confidential
• Indiana State Courts Cannot Modify (Cram Down) A Mortgage
• Indiana Code 32-30-10.5-8.6: Can Foreclosing Lenders Obtain Provisional Court Orders Requiring Borrowers To Make Monthly Payments?
• Lender Overcomes Borrower’s Allegations Of Misconduct Surrounding Settlement Negotiations

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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 [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Lender Moves For Default Judgment Only To See Its Foreclosure Case Dismissed

Lesson. Technical inconsistencies between the promissory note and the mortgage may not doom the enforcement of the loan.

Case cite. U.S. Bank Trust v. Spurgeon, 99 N.E.3d 671 (Ind. Ct. App. 2018)

Legal issue. Whether a mortgage still can be valid despite the document’s lack of clarity as to the names of the borrowers and the mortgagors.

Vital facts. Plaintiff Lender filed a mortgage foreclosure action seeking an in rem judgment against a Trust. Mr. Forrest Spurgeon, individually, executed the promissory note. He and Delphine Spurgeon, as trustees of the Trust, executed the mortgage to secure the note. The Trust owned the mortgaged real estate but did not sign the note. Only Forrest executed the note.

Procedural history. The Lender filed a motion for default judgment after the Trust failed to appear in the case. Remarkably, the trial judge not only denied the Lender’s motion but dismissed the Lender’s case altogether. The court had a problem with the fact that the mortgage defined the “borrower” as being the Trust, whereas the note defined the borrower as being Forrest. Since the Lender failed to file a note executed by the trustees on behalf of the Trust, but instead relied only on the note executed by Forrest, the trial court on its own volition found that the Lender failed to state a claim upon which relief could be granted. The Lender appealed to the Indiana Court of Appeals.

Key rules. The Spurgeon opinion has a nice summary of Indiana’s rules of contract construction and interpretation. (Notes and mortgages are both contracts.) The outcome of Spurgeon was driven by the Court of Appeals’ application of those rules, which largely are designed to harmonize the language and ascertain the intention of the parties – even in the face of inconsistencies in the wording.

One other important rule is that “one person may furnish collateral or grant a mortgage on the person’s real property to secure the loan of another.” This person is known as a surety. Thus, the name of the borrower in the note and the name of the mortgagor in the mortgage do not necessarily need to be the same for the mortgage to be valid.

Holding. The Indiana Court of Appeals reversed the trial court’s dismissal of the Lender’s case and instructed the trial court to grant the Lender’s motion for default judgment.

Policy/rationale. The Court concluded that the misuse of the word “borrower” in the mortgage did not render the mortgage invalid or unenforceable. There were a number of factors in the Court’s decision, principal among them being: (1) the dates of the note and mortgage were the same, (2) the mortgage referred to a loan amount that mirrored that in the note, (3) the maturity dates in the contracts were identical, (4) the lender was the same in both documents, and (5) the Trust owned the subject real estate at the time of the loan. The Court said that it “is clear from the language of the Mortgage that the Trust, as mortgagor, has granted a security interest in the property held in its name to secure the payment of the debt owed by Forrest Spurgeon pursuant to the Note.” Also significant was that, despite being served with a summons and complaint, the Trust did not appear in the action to contest the Lender’s claims.

Related posts.

• IRISH V. WOODS: Which Surety Was Left Holding the $500,000 Bag?
• Technical Errors In Mortgage Language May Not Be Fatal

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My practice includes representing lenders and their loan servicers in contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Court of Appeals Reduces Appeal Bond In Indiana Foreclosure Case

Lesson. In Indiana, a defendant mortgagor generally will be required to post a bond in order to stay a sheriff’s sale during its appeal of an adverse foreclosure decree. Without a bond and a corresponding order of stay, the sheriff’s sale can occur, and the mortgagor (owner) can lose the real estate even if the mortgagor ultimately prevails on appeal. But the amount of the bond will not be the full value of the property, and trial courts have discretion when setting the bond amount.

Case cite. Brooks v. Bank of Geneva, 97 N.E.3d 647 (Ind. Ct. App. 2018); reaffirmed, 103 N.E.3d 197 (Ind. Ct. App. 2018).

Legal issue. Whether the amount of the appeal bond set by the trial court should have been reduced.

Vital facts. The Brooks case was the subject of my 3/6/19 post: Indiana Court Releases Mortgage On Parents' Farmland Based On Material Alteration Of Kids' Loan. Click for a summary of the facts. Importantly, the judgment against the parents/mortgagors was in rem only, meaning that they were not personally liable for the judgment amount. Only their farmland was at risk.

Procedural history. My prior post details the procedural history of the litigation. For today’s purposes, what is important is that the trial court compelled the parents, who lost at the trial court level and appealed, to post a bond of $285,000 in order to stay execution of the judgment during the appeal. The parents immediately requested the Court of Appeals to reduce the amount of the bond.

Key Rules.

Both the Indiana Rules of Trial Procedure and the Indiana Rules of Appellate Procedure speak to appeal bonds. See, Appellate Rule 18 and Trial Rule 62(D)(2). The appellate rule basically is that a bond is not required for an appeal but is required to stay execution during an appeal. Since a sheriff’s sale is a form of “execution,” the defendant/mortgagor generally must post some kind of bond to prevent the sale. The trial rule, on the other hand, provides the guidelines for setting the amount of the bond, and a key consideration in a foreclosure case is that the bond “secure the amount recovered for the use and detention of the property, the costs of the action, costs on appeal, interests and damages for delay.” 

Indiana case law holds that, in a foreclosure case, the bond can include amounts for the “use” of the real estate during the appeal and “damages for delay.” “Use” generally is measured by the fair rental value. “Damages for delay” has included “things such as waste or depreciation.”   

All that being said, trial courts have discretion in determing the amount of the bond and will not be reversed absent abuse of that discretion.   

Holding. The Indiana Court of Appeals reduced the bond amount to $25,000.

Policy/rationale. The trial court set the bond at $285,000 based upon the value of the mortgaged property of $250,000, plus attorney fees and interest. The Court of Appeals concluded that the trial court did not follow the rules and guidelines above. The Court found that the bank offered no evidence of rental value, while the parents asserted that the farmland could not generate any rental income during the winter months when the appeal was pending. Further, apparently there was no information in the record indicating that either depreciation or waste would occur. The Court based its determination of the bond on (1) the bank’s $15,000 estimate of appellate attorney fees and (2) $10,000 in potential interest during the length of the appeal [8% on the $250,000 property value].

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My practice includes representing lenders, borrowers and guarantors in contested commercial mortgage foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

The Indiana Lawyer: Commercial Courts Update

Earlier this week, The Indiana Lawyer reported that Indiana's commercial court pilot project may become a permanent system on June 1:  Supreme Court deciding commercial courts’ fate.

I wrote about the pilot project and the interim rules in 2016:  link.  

Lender Overcomes Borrower’s Allegations Of Misconduct Surrounding Settlement Negotiations

Lesson. In the wake of an undisputed consumer/residential mortgage loan default, lenders and their servicers generally are not compelled to enter into loan modification agreements with their borrowers. Lenders really must only participate in a settlement conference, if requested, or consider whether a borrower qualifies for a loan mod.

Case cite. Feehan v. Citimortgage, 97 N.E.3d 639 (Ind. Ct. App. 2018).

Legal issue. Whether the lender should have been denied the remedy of foreclosure based upon alleged misconduct during and after a court-ordered settlement conference.

Vital facts. Borrower executed a promissory note that was secured by a mortgage on his real property. Borrower later defaulted under the loan, at which point the lender sent him a “notice and cure” letter. Following the borrower’s failure to cure, the lender filed a mortgage foreclosure action. The parties then became involved in lengthy and somewhat complicated workout discussions following the trial court’s order compelling a settlement conference. Distilled to their essence, the borrower’s contentions were (1) the lender did not participate in the settlement conference in good faith, mainly because a lender rep with settlement authority did not appear in person and (2) the lender refused to consider a loan modification. The opinion (link above) outlines the circumstances in greater detail. There was one other significant fact: the subject loan was a conventional non-government-sponsored enterprise with a private investor, which denied all of the borrower’s loan mod requests based in part on the housing expense-to-income ratio. Thus this was not a HUD loan, which may or may not have triggered different loan mod standards.

Procedural history. The trial court granted summary judgment and a decree of foreclosure in favor of the lender. The borrower appealed.

Key rules.

Ind. Code 32-30-10.5-9 states, in part, that “a court may not issue a judgment of foreclosure until a creditor has given notice regarding a settlement conference and, if the debtor requests a conference, upon conclusion of the conference the parties are unable to reach agreement on the terms of a foreclosure prevention agreement.” (This statute does not apply to commercial foreclosures.)

As with some Indiana counties, St. Joseph County has a local rule that also provides for the scheduling of a settlement conference upon a demand by the borrower.

Feehan cited to a number of cases from Indiana and elsewhere holding that alleged violations of the Home Affordable Modification Program (HAMP) do not give rise to a private right of action by a borrower against a lender or its servicer.

Holding. The Indiana Court of Appeals affirmed the summary judgment in favor of the lender:

[The lender] has satisfied its burden of establishing that, even if another foreclosure-prevention settlement conference was scheduled and a personal representative of [the lender] with the authority to enter a loan modification or make a loan modification offer was present at the conference, [the borrower] is not eligible for or entitled to a loan modification, a loan modification offer, or further consideration of the possible loan modification options.

Policy/rationale. The defendant borrower in Feehan claimed that the Court should have denied the lender the equitable remedy of foreclosure given the lender’s alleged misconduct surrounding the settlement conference and its failure to appropriately process the borrower’s loan mod applications. In response, the Court reasoned that, among other things, the borrower was unable to point to any terms in the loan documents requiring the lender or its servicer to consider, upon a default for non-payment, a loan modification on any certain terms. Indeed the borrower never went so far as to assert that the lender was required to agree to a particular loan modification. In the end, the lender was able to designate evidence establishing that it did consider loss mitigation and loan mod options but determined that the borrower was not eligible.

Related posts.

• Indiana's Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures
  Notices Of Default: Who Should Send The Letter?
• Indiana Federal Court Dismisses Borrower’s Contract Claim Against Lender Because Lender Never Executed The HAMP Trial Period Plan
  
• Indiana Code 32-30-10.5-8.6: Can Foreclosing Lenders Obtain Provisional Court Orders Requiring Borrowers To Make Monthly Payments?
  
• Indiana Upholds Dismissal Of Residential Borrower’s Tort Claims Arising Out Of Alleged HAMP Violations
  
• 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 is to represent lenders, as well as their mortgage loan servicers, entangled in contested foreclosures. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Lender’s Summary Judgment Affidavit Flawed - Business Records Inadmissible

Lesson.  For lenders and servicers filing motions for summary judgment, always remain mindful of the elements of the Evidence Rule 803(6) business records exception to the hearsay rule.  An insufficient supporting affidavit could doom the motion.     

Case cite.  Holmes v. National Collegiate Student Loan Trust, 94 N.E.3d 722 (Ind. Ct. App. 2018)

Legal issue.  Whether, on a motion for summary judgment, the lender proved it owned the subject loan and thus had standing to bring the claim. 

Vital facts.  This case involved what appeared to be a straightforward default under a school loan.  The original lender sold a pool of loans to National Collegiate Funding LLC, which then sold the pool to the plaintiff lender.  The defendant in the case was the student’s father, who co-signed the loan.  There seemed to be no question that the loan was in default.      

Procedural history.  Lender filed a motion for summary judgment.  The trial court granted the motion and ordered the father to pay the debt, plus interest and costs.  The father appealed.

Key rules. 

To make a prima facia case  for summary judgment, the plaintiff lender in Holmes was required to show that the defendant father executed a contract for a loan and that the lender was the assignee of the loan - and thus the owner of the debt.  Indiana law also required the lender to establish that the defendant owed the original lender the amount alleged.

Indiana Trial Rule 56(E) states that affidavits on summary judgment “… shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify as to the matters stated….”

Inadmissible hearsay contained in an affidavit may not be considered in ruling on a summary judgment motion.

Indiana Evidence Rule 803(6) discusses the “business records” exception to the general hearsay rule and outlines the elements of admissibility.

Holding.  The Indiana Court of Appeals reversed the summary judgment for the lender and concluded that it failed to make a prima facia case.   

Policy/rationale. 

The defendant in Holmes contended that the lender’s designated evidence (documents) constituted inadmissible hearsay and, as a result, the lender failed to show that it was entitled to summary judgment.  The Court’s opinion is a technical lesson in evidence and provides an example of how an assignee (a successor-in-interest) can get tripped up in a simple loan enforcement claim.

When Holmes first came down last year, some thought the ruling may have created a real problem for servicers to obtain summary judgment in cases involving loan assignments.  In reality, the plaintiff in the case simply failed to dot the I’s and cross the T’s.  There is favorable case law in Indiana, and across the country, concerning how assignees and successors-in-interest can establish a prima facia case pursuant to the Rule 803(6) business records exception.  But the affidavit in Holmes was deficient as to several key elements, according to the Court: 

Here, the [affidavit] provided no testimony to support the admission of the contract between [defendant] and [original lender] or the schedule of pooled loans sold and assigned to National Collegiate Funding, LLC, and then to [plaintiff], as business records pursuant to Evidence Rule 803(6). There was no testimony to indicate that [the witness] was familiar with or had personal knowledge of the regular business practices or record keeping of [the loan originator or that of plaintiff] regarding the transfer of pooled loans, such that she could testify as to the reliability and authenticity of those documents. Indeed, [the witness] offered no evidence to indicate that those records were made at or near the time of the business activities in question by someone with knowledge, that the records were kept in the course of the regularly conducted activities of either [original lender or plaintiff], and that making the records was part of the regularly conducted business activities of those third-party businesses.

Also noteworthy is that Holmes was not a mortgage foreclosure case.  The school loan in Holmes was not secured, and the opinion does not address one way or another whether there was a UCC negotiable instrument at issue.  Thus the Court did not analyze some of the more conventional ways of proving standing, such as the possession of an original promissory note and/or the recording of an assignment of mortgage.     

Related posts.

• As A Matter Of First Impression, Indiana Adopts Rule That A Debtor Lacks Standing To Challenge An Assignment
• Proving You’re The Holder Of The Note
• Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment
• Bankruptcy Proofs Of Claim And Standing/Loan Assignment Issues
• "Wet Signature" Defense To Indiana Promissory Note Enforcement Action

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My practice includes representing lenders, as well as their mortgage loan servicers, in contested mortgage foreclosure cases.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Post Script: When Can Post-Judgment Collection Efforts Begin In Indiana?

This follows-up last week's post.  Yesterday, I bumped into a lawyer who reads my blog and reminded me that we always must check the local rules of a particular county, including the local smalls claims court rules, for their potential application to a particular situation.  Local rules often supplement, or even trump, the state rules of procedure or case law.  As an example, the Marion County (Indianapolis) Small Claims Court Rules, specifically Rule LR49-SC00-602 provides:

B.  Thirty-Day Rule.  A Motion for Proceedings Supplemental shall not be set until thirty (30) calendar days after the date of judgment, except by order of the Court for good cause shown.

The point is that, in certain Indiana venues, post-collection efforts may not begin immediately.  Thanks to attorney Robert Burt for the feedback on last week's post.  

 

Commercial Foreclosure Refresher: Some Basics

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

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

2.    What did #1 require?

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

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

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

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

3.    Indiana Foreclosure Process And Timing - The Basics

 

As A Matter Of First Impression, Indiana Adopts Rule That A Debtor Lacks Standing To Challenge An Assignment

Lesson. Generally, defendants in foreclosure actions - such as borrowers, guarantors or mortgagors - cannot contest the validity of a loan assignment.

Case cite. Duty v. CIT, 86 N.E.3d 214 (Ind. Ct. App. 2017)

Legal issue. Whether a borrower had standing to challenge the assignment of the loan documents from his original lender to the assignee of the loan.

Vital facts. The borrower executed a promissory note and mortgage in favor of lender Wilmington Finance in connection with the purchase of his home. Later, lender CIT Group filed a foreclosure action against him. Shortly thereafter, the loan was assigned to a Trust. A few months later, the trial court entered a judgment against the borrower, who then filed for bankruptcy. Years later, the bankruptcy stay was lifted, and the borrower sought relief from the judgment. By then the loan was held by yet another Trust (another mortgagee). The borrower essentially claimed that one or more of the assignments of the loan documents were faulty.

Procedural history. Following the entry of the foreclosure judgment against the borrower, the borrower moved the trial court to set aside the judgment on the basis that the entity that filed suit against him had no legal right to enforce the loan documents at the time. The trial court denied the motion, and the borrower appealed.

Key rules. As a fundamental matter, a party to an underlying contract lacks standing to attack problems with the reassignment of that contract. Therefore, the general rule across the country is that a debtor may not challenge an assignment between an assignor and assignee. Before Duty, however, that rule had not been adopted in Indiana. The only recognized exception to this rule is if the subject assignment is “void” (such as being made under duress), as opposed to being “voidable,” but the Court in Duty did not address this distinction, which I’ll defer to another day.

Holding. The Indiana Court of Appeals affirmed the trial court and held that the borrower had no standing to challenge the loan assignment.

Policy/rationale. The Duty opinion cited to a bankruptcy opinion from Pennsylvania for the rationale behind the prevailing rule:

[The underlying contract] is between [Debtor] and [Assignor].  [Assignor’s] assignment contract is between [Assignor] and [Assignee]. The two contracts are completely separate from one another.  As a result of the assignment of the contract, [Debtor’s] rights and duties under the [underlying] contract remain the same: The only change is to whom those duties are owed….  [Debtor] was not a party to [the assignment], nor has a cognizable interest in it. Therefore, [Debtor] has no right to step into [Assignor’s] shoes to raise [its] contract rights against [Assignee].  [Debtor] has no more right than a complete stranger to raise [Assignor’s] rights under the assignment contract.

Related posts.

• Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures
• Successor Bank Has Standing to Enforce
• Proving You’re The Holder Of The Note
• Note Assignment (Allonge) And Mortgage Deemed Valid In Recent Opinion

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I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in contested foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Post-Foreclosure Attack On Writ Of Assistance (Eviction) Dismissed

Lesson. A borrower-mortgagor’s challenge to a lender-mortgagee’s execution of a writ of assistance needs to occur in the state court foreclosure action, not in a subsequent federal court case. Even then, there’s not much the borrower can do about the writ, which essentially is the process to evict the former owner following a sheriff’s sale.

Case cite. Holt v. BSI, 2017 WL 3438192 (N.D. Ind. 2017) (pdf)

Legal issue. Whether a borrower/mortgagor had a viable federal court claim against his lender (the mortgagee) for damages arising out of the manner in which a state court writ of assistance was executed.

Vital facts. A borrower lost a state court mortgage foreclosure action, and his property was sold at a sheriff’s sale. The lender then obtained a writ of assistance in order to take possession of the property. Movers later loaded the borrower’s belongings onto a truck and locked him out of the house. Among other things, the borrower, in this subsequent federal case, claimed that the lender should not have taken possession of his property and that some of his belongings were damaged after they were removed.

Procedural history. The defendants, including the lender/mortgagee, filed a Rule 12(b)(6) motion to dismiss the borrower’s claims.

Key rules. For the rules related to Trial Rule 70(A) writs of assistance, please click on the related blog posts below. One guideline of particular importance here is the Seventh Circuit precedent establishing that “the sheriff has the ‘right and duty’ to execute the writ of assistance immediately upon receiving it,” so the borrower (former owner) cannot claim that the writ was executed without delay.

Holding. In Holt, the U.S. District Court for the Northern District of Indiana granted the defendants’ motions and dismissed the borrower’s case.

Policy/rationale. The borrower alleged that the lender wrongfully seized his property because it executed the writ of assistance while the borrower was contesting the foreclosure. However, the state court had already entered the foreclosure judgment, and the sheriff had already sold the mortgaged property. As such, the borrower “had already lost that dispute.” The foreclosure order entitled the lender to immediate possession of the real estate and directed the sheriff to enter the property and remove the borrower from it.

As to the borrower’s personal property, his complaint did not allege that the lender actually performed the lockout or took the belongings. Rather, an independent contractor performed those acts. Also the Court noted the principle that the borrower “could have avoided his trouble by moving out voluntarily and promptly when [the lender] obtained title to the property as opposed to forcing [the lender] to utilize the sheriff’s department to enforce the court’s decision.” In the end, the Court in Holt concluded that the borrower did not identify a basis upon which the lender could be liable for negligence.

Related posts.

• The Execution Of A Writ Of Assistance Need Not Be “Commercially Reasonable”
• Seventh Circuit:  Indiana Writs of Assistance Do Not Need To Be Executed In A Commercially-Reasonable Manner
• Writ Of Assistance:  Timing And Other Practical Tips

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I represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure cases and related claims. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

 

Restraining Order To Enjoin Sheriff's Sale Denied

Hollowell v. Bornkempt, 2017 WL 3446676 (N.D. Ind. 2017) (pdf) is an Indiana federal court opinion following an Indiana state court foreclosure case wherein the borrower's property was slated for a sheriff's sale.  The pro se borrower filed the federal court action seeking a temporary restraining order (TRO) to prevent the sale.  For the following reasons, the Court denied the borrower relief:

1.    The borrower did not convince the Court that the standard for an injunction was met.  Primarily, the Court found the borrower was not reasonably likely to succeed on the merits of his claims (for FDCPA and TILA) violations.  

2.    The TRO was barred by the Rooker-Feldman doctrine.  

3.    There was no evidence that the borrower gave prior notice to the defendants of the TRO as the law required him to do.

Here are links to two other posts dealing with similar issues:

*    Indiana Federal Court Denies Request For Injunction To Stop Sheriff’s Sale

*    Assets Cannot Be Frozen By An Injunction

Seventh Circuit Affirms Dismissal Of Borrower’s Post-Foreclosure Federal Claims Based On Rooker-Feldman and Res Judicata

Today’s post follows-up mine from 2/26/17: Borrower’s Claims For Violations of RESPA, TILA, FDCPA, RICO And FPRAM, Together With Claims for Various Torts, Dismissed. For an introduction to the case, Mains v. Citibank, 852 F.3d 669 (7th Cir. 2017), please click on that prior article.

The borrower appealed the District Court’s ruling to the Seventh Circuit Court of Appeals. Click here for the Court's opinion, which thoroughly sets up each of the borrower’s contentions and then knocks them out. Mains provides a road map through Indiana state and federal law under circumstances in which a borrower/mortgagor, in the aftermath of a state court foreclosure, pursues fraud-based remedies in federal court against a lender, a mortgage loan servicer and their law firms.

I’ve written about the Rooker-Feldman and res judicata doctrines many times in the past. In fact, this is the second post about a Seventh Circuit Court of Appeals’ decision on the subject – click here for my first post. As to this recent opinion, here are a couple highlights:

1. Federal claims not raised in state court, or that do not expressly require review of the state court decision, may be subject to dismissal “if those claims are closely enough related to a state court judgment.” Is the federal plaintiff alleging that the state court judgment caused his injury?

2. The Seventh Circuit broadly concluded that “the foundation of the present suit is [the borrower’s] allegation that the [prior foreclosure judgment] was in error because it rested on a fraud perpetrated by the defendants…. [The borrower’s] remedies lie [solely] in the Indiana courts.” The Court reasoned that, to delve into any alleged fraud, “the only relief would be to vacate [the state court] judgment … that would amount to an exercise of de facto appellate jurisdiction, which is not permissible.”

The Court found that “in the final analysis, all of [the borrower’s] claims must be dismissed - most under Rooker-Feldman and a few for issue preclusion [res judicata].” The only thing the Court of Appeals changed was that the dismissal should be without, instead of with, prejudice. (As an aside, the borrower appealed the decision to the United States Supreme Court, which denied his request to hear the case – Mains v. Citibank, 138 S.Ct. 227 (2017)).

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I frequently represent creditors and lenders, as well as their mortgage loan servicers, in contested mortgage foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Absence Of Legal Description Dooms Mortgage In Lien Priority Dispute

Lesson. First, if you are in the business of drafting and recording mortgages, make sure they contain legal descriptions of the subject real estate.  Common (street) addresses technically are inadequate to provide notice of a lien.

Case cite.  U.S. Bank v. Jewell, 69 N.E.3d 524 (Ind. Ct. App. 2017).

Legal issue.  Whether the omission of a legal description of the real estate rendered the mortgage insufficient to charge a competing mortgagee with notice.

Vital facts.  This case involved a mortgage lien priority dispute and dealt with Indiana’s bona fide purchaser (BFP) doctrine.  Jewell held a mortgage that it recorded but that failed to contain a legal description.  The mortgage only identified the common address a/k/a the street address.  When the owner later sold the real estate, the buyer obtained financing from a lender, which conducted a title search before ultimately making the mortgage loan.  The evidence established that the lender’s title search did not disclose Jewell’s mortgage.

Procedural history. Jewell filed suit to foreclose its mortgage and named the lender.  The lender filed a motion for summary judgment claiming that it was a bona fide purchaser and was entitled to senior lien status.  The trial court denied the motion.  The lender appealed.

Key rules.  The Jewell opinion contains an excellent summary of Indiana’s rules, exceptions and tests related to the bona fide purchaser doctrine.  The opinion also provides a really good analysis of Indiana’s summary judgment standard, and related burdens of proof, as applicable to our BFP laws. Without regurgitating all of the law from the opinion (see other posts noted below), here are some of the key rules in play in Jewell:

1. Prospective purchasers of real estate must search the grantor-grantee and the mortgagor-mortgagee indexes for the period that the mortgagor holds title.

2. On the matter of “constructive” notice, “a mortgage must be recorded [in the chain of title] in the proper county and must contain an accurate legal description of the property.”

3. In the absence of contructive notice, there is Indiana law supporting the notion that, in certain circumstances, subsequent purchasers may be charged with “inquiry” notice, sometimes called “implied or inferred” notice:

Notice is actual when notice has been directly and personally given to the person to be notified.  Additionally, actual notice may be implied or inferred from the fact that the person charged had means of obtaining knowledge which he did not use.  Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means of knowledge are at hand and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage.  Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself.  Whether knowledge of an adverse interest will be imputed in any given case is a question of fact to be determined objectively from the totality of the circumstances.

Holding. The Indiana Court of Appeals reversed the trial court and granted summary judgment for the lender.

Policy/rationale. Jewell dealt mainly with the inquiry notice matter.  Jewell contended that, had the lender searched the mortgagor-mortgagee index, it would have discovered Jewell’s mortgage.  However, the lender submitted affidavits establishing that it conducted such a search, which did not reveal the Jewell mortgage due to the omission of the legal description.  The problem was that Jewell merely argued that the common address was sufficient to defeat the summary judgment motion.  Jewell’s failure to submit evidence to prove its theory was the deciding factor.

Related posts.

Indiana Court Discusses Whether A Lender Was A “Bona Fide Mortgagee”

BFP Defense Denied, And IRS Lien Prioritized

What Does “Chain Of Title” Mean?
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I frequently represent 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 [email protected] Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Federal Court Concludes That Servicer Is Not A Debt Collector and Did Not Violate The IHLPA

Lesson. Although servicers usually are not the actual owners of residential mortgage loans, they nevertheless may be the proper party to resolve the foreclosure action or to negotiate a settlement. Also, unless the debt was in arrears when the servicer obtained its role, the Fair Debt Collection Practices Act will not apply to communications by the servicer.

Case cite. Turner v. Nationstar, 2017 U.S. Dist. LEXIS (S.D. Ind. 2017) (pdf).

Legal issues. Whether the defendant loan servicer was a “debt collector” subject to the Fair Debt Collection Practices Act (“FDCPA”), specifically 15 U.S.C. 1692e(2)(A). Also, whether the defendant committed a “deceptive act” in violation of the Indiana Home Loan Practices Act (“IHLPA”), Ind. Code 24-9-1 et seq.

Vital facts. For background, click on last week’s post, which also discussed Turner. The borrower claimed that, during a mediation conference, the servicer committed a deceptive act by leading the borrower to falsely think that the servicer owned the loan “such that [borrower] believed he was bargaining with the owner of the loan when he agreed to exchange his counterclaim against [servicer] for a loan modification.” The borrower also alleged that, after the entry of the state court foreclosure judgment, the servicer wrongfully sent the borrower account statements with a debt amount different from the judgment amount.

Procedural history. The defendant servicer filed a motion for summary judgment. Judge Young’s ruling on the motion is the subject of this post.

Key rules.

The IHLPA at I.C. 24-9-2-7(1)(a) defines a deceptive act as:

(1) an act or a practice as part of a mortgage transaction . . . , in which a person at the time of the transaction knowingly or
intentionally:
(A) makes a material misrepresentation; or
(B) conceals material information regarding the terms or conditions of the transaction. . . .

For the FDCPA to apply, “two threshold criteria must be met:” (1) the defendant must be a “debt collector” and (2) the communication by the debt collector forming the basis of the claim “must have been made in connection with the collection of any debt.” 15 U.S.C. 1692a(6), c, e and g.

A “debt collector” is:

any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

Loan servicing agents are not “debt collectors” unless the debt was in arrears at the time the servicer obtained that role.

Holding. The Southern District of Indiana granted summary judgment for the servicer on the IHLPA and FDCPA claims brought by the borrower.

Policy/rationale.

As to the IHLPA action, the Court concluded that the servicer did not conceal “material” information about its role/status because the servicer established that it was the proper party to resolve the foreclosure action. In other words, whether the servicer was or was not the owner of the loan was immaterial in the Court’s view.

Regarding the FDCPA claim, the Court found that the defendant was the agent of the original creditor and acted as the servicer “well before [the loan] was in default.” As such, the servicer did not meet the definition of a “debt collector” under the FDCPA.

Related posts.

Click on the "Fair Debt Collection Practices" category to your right

Loan Servicers As Plaintiffs In Foreclosure Cases (also the Turner dispute)

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Another Indiana Decision Concerning RESPA: Mixed Result For Servicer

Lesson. In defending RESPA QWR cases, first examine whether the subject letter is in fact a QWR. Next, assess whether the borrower suffered any actual damages arising out of the alleged failure to respond.

Case cite. Turner v. Nationstar, 2017 U.S. Dist. LEXIS (S.D. Ind. 2017) (.pdf).

Legal issue. Whether the lender/servicer was entitled to summary judgment on the borrower’s three theories for RESPA violations.

Vital facts. The procedural history and the underlying facts of Turner are quite involved. For purposes of today’s post, which focuses on the REPSA claims, the borrower sent three letters (alleged “QWRs,” see last week’s post) to the defendant’s lawyer seeking information. Letter 1 asked for the name of the owner of the loan. The defendant (a residential mortgage loan servicer) responded to that letter by identifying both the servicer and the owner of the loan. Later, the borrower, following the entry of a state court foreclosure judgment and a denial of a loan modification request, sent Letter 2 asking for the “amount of the proposed monthly payment” under a requested loan modification that had been denied. That information was never provided. The third alleged QWR, Letter 3, surrounded an inquiry into payments the borrower made that had only been partially refunded, despite a request for a full refund. The servicer did not respond to that letter either.

Procedural history. The parties ultimately entered into a Home Affordable Modification Agreement that vacated the foreclosure judgment. Despite the settlement, the borrower filed suit against the servicer in federal court alleging, among other things, violations of the Real Estate Settlement Procedures Act (“RESPA”). The servicer filed a motion for summary judgment that led to Judge Young’s opinion, which is the subject of today’s post.

Key rules.

1. Borrowers may recover actual damages, including emotional distress, caused by a failure to comply with a Section 2605(e) qualified written request, per Section 2605(f)(1)(A).
2. 12 U.S.C. 2605(e)(1)(B) defines a QWR. Case law has interpreted that provision to include “any reasonably stated written request for account information.” However, the duty to respond “does not arise with respect to all inquiries or complaints from borrowers to servicers.” The focus is on the servicing of the loan, not on the origination of the loan or modifications to the loan.
3. 12 U.S.C. 2605(e)(1) and (2) deal with the timing of certain responses to certain QWRs. For example, Section (e)(2)(C)(i) sets a thirty-day deadline for certain servicing requests related to loan mods. See also 12 C.F.R. 1024.41 regarding timing for loss mitigation requests.
4. 12 U.S.C. 2605(k)(1)(D) requires a servicer to provide within ten business days “the identity, address, and other relevant contact information about the owner or assignee of the loan” when requested by the borrower.

Holding. The Southern District of Indiana granted in part and denied in part the servicer’s summary judgment motion. The servicer prevailed on the Section 2605(k)(1)(D) and Section 2605(e)(2) claims about Letters 1 and 2. The Court denied summary judgment on the Section 2605(e)(1) claim for Letter 3.

Policy/rationale. As to Letter 1, the Court noted that the faulty timing of the response to the QWR did not cause actual damages. The distress alleged instead arose out of other factors in the borrower’s life. Letter 2 concerning loss mitigation options did not qualify as a QWR in the first place. Information related to a failed loan mod falls outside of RESPA. However, the Court concluded that Letter 3, a letter request seeking information about the servicer’s refund of payments made to stave off foreclosure, was a viable QWR because the letter involved the servicing of the loan. Since the servicer never responded to that letter, the claim regarding Letter 3 passed the summary judgment stage, although the opinion did not address the matter of damages.

Related posts.

• 7th Circuit Rejects Alleged RESPA Violations Based Upon Inadequate QWR
• Borrower’s Claims For Violations of RESPA, TILA, FDCPA, RICO And FPRAM, Together With Claims for Various Torts, Dismissed

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

7th Circuit Rejects Alleged RESPA Violations Based Upon Inadequate QWR

Lesson. Careful compliance by mortgage servicers should lead to a favorable summary judgment rulings in RESPA cases brought by borrowers.

Case cite. Perron v. JP Morgan Chase, 845 F.3d 852 (7th Cir. 2017).

Legal issue. Whether the lender violated the Real Estate Settlement Procedures Act (RESPA), specifically the statutory duty to respond to a “qualified written request” from the borrower.

Vital facts. The lender erroneously paid the wrong insurer for homeowner’s coverage using funds from the borrowers’ escrow account. However, the borrowers switched insurers without informing the lender. Upon learning of the error, the lender paid the new insurer and informed the borrowers that the prior insurer would be sending a refund. The lender requested that the borrowers remit the refund to the lender so the depleted escrow account could be replenished, but the borrowers failed to do so. As a result, the lender adjusted the monthly mortgage payment to make up for the shortfall, but the borrowers failed to pay the higher amount and went into default. Instead of curing, the borrowers sent a RESPA “qualified written request” to the lender and demanded reimbursement of their escrow. The lender responded to the requests but still got sued.

Procedural history. The borrowers filed an action in federal court alleging that the RESPA responses were inadequate and that they had suffered 300k in damages. The district court granted summary judgment to the lender, and the borrowers appealed to the Seventh Circuit.

Key rules. The Perron opinion provides a great summary of the QWR duties in RESPA, 12 U.S.C. 2601-2617. Here are some of the key legal principles outlined by the Court:

1. Generally, the statute “requires mortgage servicers to correct errors and disclose account information when a borrower sends a written request for information” known as a “qualified written request” or QWR.
2. RESPA gives borrowers a cause of action for actual damages incurred “as a result of” a failure to comply with the duties imposed on servicers of mortgage loans.
3. If borrowers prove the servicer engaged in a “pattern or practice of noncompliance,” then statutory damages of up to 2k are available. Also, successful plaintiffs may recover attorney fees.
4. RESPA does not impose a duty to respond to all borrower inquiries or complaints. The statute “covers only written requests alleging an account error or seeking information relating to loan servicing.”
5. “Servicing” means “receiving … payments from a borrower pursuant to the terms of the loan … and making the payments … with respect to the amounts received from the borrower as may be required by the terms of the loan.” 12 U.S.C. 2605(i)(3). A QWR “can’t be used to collect information about, or allege an error in, the underlying mortgage loan.”
6. Upon receipt of a valid QWR, RESPA requires the servicer to take the following action “if applicable”: (A) make appropriate corrections in the account, (B) after investigation, provide a written explanation or clarification explaining why the account is correct, (C) provide the information requested by the borrower or explain why it is unavailable and (D) provide the contact information of a servicer employee who can provide further assistance. 12 U.S.C. Sec 2605(e)(2).

Holding. The Seventh Circuit affirmed the district court’s summary judgment for the lender.

Policy/rationale. In Perron, the lender “almost perfectly” complied with its RESPA duties by providing a complete account and payment history, as well as a complete accounting of the escrow payments. The only area where the lender fell short was its failure to identify one of the insurers at issue, but the Court noted that the borrowers already had that information. The Court concluded that the borrowers were not harmed by an uncorrected account error or lack of information. “Simply put, [the borrowers] weren’t harmed by being in the dark because the lights were on the whole time.”

Related posts.

Borrower’s Claims For Violations of RESPA, TILA, FDCPA, RICO And FPRAM, Together With Claims for Various Torts, Dismissed
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I frequently represent lenders, as well as their mortgage loan servicers, entangled in consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Trial Rule 9.2(A) Officially Amended But Uncertainty Remains

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.

Indiana Code 32-30-10.5-8.6: Can Foreclosing Lenders Obtain Provisional Court Orders Requiring Borrowers To Make Monthly Payments?

Lesson. In Indiana residential mortgage foreclosure cases, under certain circumstances a court can require a borrower to make monthly payments during the pendency of the foreclosure action. Typically, this happens when the parties are discussing a loan modification or similar workout. Before entering such an order, however, the court must first determine the borrower’s ability to pay.

Case cite. Yeager v. Deutsche Bank, 64 N.E.3d 908 (Ind. Ct. App. 2016).

Legal issue. Whether the trial court abused its discretion by failing to hold a hearing or otherwise obtain data to determine the borrowers’ ability to make monthly payments before it issued its provisional order.

Vital facts. Yeager was a residential mortgage foreclosure case. Borrowers defaulted under a promissory note and mortgage, and lender filed suit to foreclose. During the suit, lender filed a “motion for payment of mortgage, taxes and insurance premiums” in which lender sought a “provisional order,” essentially requiring the borrowers to make their monthly mortgage payment.

Procedural history. The trial court granted lender’s motion without a hearing and before the borrowers even filed a response. The borrowers appealed.

Key rules.

Yeager involved Ind. Code § 32-30-10.5 entitled “Foreclosure Prevention Agreements for Residential Mortgages.” This statute was born in 2009 during the Great Recession and has many provisions regulating the residential foreclosure process, including loss mitigation.

The specific section at issue in Yeager was 8.6(b):

(b) During the pendency of an action to which this section applies, regardless of any stay that is issued by the court under section 8.5 of this chapter, if the debtor continues to occupy the dwelling that is the subject of the mortgage upon which the action is based, the court may issue a provisional order that requires the debtor to continue to make monthly payments with respect to the mortgage on which the action is based. The amount of the monthly payment:

    (1) shall be determined by the court, which may base its determination on the debtor's ability to pay; and
    (2) may not exceed the debtor's monthly obligation under the mortgage at the time the action is filed.

Holding. The Indiana Court of Appeals, with one Judge dissenting, reversed the trial court’s ruling and remanded the case back to the trial court for a factual determination of the borrowers’ ability to pay.

Policy/rationale.

The lender contended that a hearing was not required because the provisional order “did nothing more than direct such matters as permitted by statute.” Further, neither the statute nor any procedural rules required a hearing. Finally, the lender asserted that the order did not harm the borrowers. (Subsection [c] of the statute calls for any payments to be held in trust pending a future court order for disbursement.)

The borrowers countered that the trial court entered the order “ex parte” (without the borrowers being present or heard) in violation of due process. The Court’s opinion suggested that the lack of a hearing may not have been the compelling factor. Rather, the error stemmed from the trial court’s failure to conduct, in some fashion, “any inquiry on which to base its determination of the monthly payment prior to issuing the Provisional Order” in violation of 8.6(b)(1) set out above. The record contained no evidence of the borrowers’ current financial situation.

Related posts.

Certain Summonses In Indiana Residential Mortgage Foreclosure Cases Deemed Confidential

Indiana State Courts Cannot Modify (Cram Down) A Mortgage

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I have represented lenders, as well as their mortgage loan servicers, in connection with consumer finance litigation. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

8 of 9 Consumer Finance Race-Based Claims Against Servicer Dismissed In Recent Indiana Federal Court Case

Lesson. In Indiana, it is difficult to defend mortgage foreclosure actions based upon the mere assertion of consumer finance statutory violations. To avoid dismissal of the claims, courts commonly require plaintiffs to articulate specific facts.

Case cite. Sims v. New Penn Financial, 2016 U.S. Dist. LEXIS 155241 (N.D. Ind. 2016) (.pdf).

Legal issue. There were several in Sims. This case was more about procedural (pleading) requirements than anything.

Vital facts. Plaintiffs bought a home on a land contract. Plaintiffs later discovered that the land contract seller had stopped paying the mortgage loan on the home. The seller’s lender filed to foreclose. To avoid a sheriff’s sale, Plaintiffs sought to assume the seller’s loan, but the servicer of the loan refused to do so until Plaintiffs brought the loan current. In response, Plaintiffs filed suit in federal court against the loan servicer. The essential premise upon which Plaintiffs based their claim was that the servicer declined the loan assumption because Plaintiffs were African-American.

Procedural history. The defendant mortgage loan servicer filed a Rule 12(b)(6) motion to dismiss Plaintiffs’ complaint. The Sims opinion outlines Chief Judge Philip Simon’s ruling on the motion.

Key rules. Plaintiffs asserted nine consumer finance-related causes of action. I’ll address five of them here.

1. Fair Housing Act: A claim under the FHA requires an allegation that the servicer “acted with the intent to discriminate or that its actions had a disparate impact on African Americans.” See generally, 42 U.S.C. 3604.
2. Indiana Deceptive Consumer Sales Act: The IDCSA, Ind. Code 24-4-0.5, has the purpose of encouraging “the development of fair consumer sales practices … and provides that a “supplier may not commit an unfair, abusive, or deceptive act, omission, or practice in connection with a consumer transaction.”
3. Fair Debt Collection Practices Act: The FDCPA generally “prohibits a debt collector from using certain enumerated collection methods in its effort to collect a ‘debt’ from a consumer.”
4. Dodd-Frank Wall Street Reform & Consumer Protection Act: The Court noted that although “there is no doubt that Dodd-Frank creates a private cause of action for whistleblowers, courts have been reluctant to find that Dodd-Frank created any other private cause of action.”
5. Equal Credit Opportunity Act: The ECOA generally prohibits creditors “from discriminating against ‘applicants’ on the basis of race.” 15 U.S.C. 1691(a). And, “if credit is denied or another ‘adverse action’ is taken,” the ECOA “requires creditors to set out its reasons for the action.” An “applicant” is “any person who requests … an extension of credit … including any person who is or may become contractually liable.” 12 C.F.R. 202.2(e).

Holding. The Court granted the servicer’s motion to dismiss on eight of the nine counts asserted by Plaintiffs. The sole count that survived was the ECOA claim. This did not mean that the servicer was liable under that claim – only that Plaintiffs sufficiently pleaded the action so as to notify the servicer of the allegations “and to make the right to relief under the ECOA more than speculative.”

Policy/rationale.

1. As to the FHA claim, the Court concluded that Plaintiffs alleged no “facts” to support the “vague” allegation that the servicer hindered Plaintiffs’ “efforts to assume the mortgage, because of their race and color.”
2. Plaintiffs complained that a letter the servicer sent to Plaintiffs omitted language spelling out that the assumption approval was contingent upon Plaintiffs’ ability to reinstate the loan. The Court reasoned that “there is no plausible IDCSA claim here because the complaint pleads no facts to support the notion that [the servicer’s] omission was ‘unfair, abusive, or deceptive’ in any way.” The servicer’s failure to mention one of many requirements for approval could not “reasonably be viewed as unfair, abusive, or deceptive.”
3. Regarding the FDCPA count, the Court’s rationale was that Plaintiffs’ complaint did not allege a false or misleading representation prohibited under the Act. Further, Plaintiffs were not “consumers” for purposes of the Act because they were never obligated to pay the contract seller’s debt but instead “could walk away from [his] debt at any point.”
4. The Court dismissed the Dodd-Frank claim for the simple reason that a so-called “private right of action” [see post below] did not exist in this context.
5. The ECOA cause of action passed the initial test because Plaintiffs fell under the broad definition of “applicants” requesting an extension of credit. Further, the servicer’s rejection of Plaintiffs’ assumption application theoretically “could constitute an adverse action under the ECOA.” The Court cautioned, however, that “it remains to be seen whether [Plaintiffs] can prove an ECOA violation.” 

Related posts.

• Indiana Upholds Dismissal Of Residential Borrower’s Tort Claims Arising Out Of Alleged HAMP Violations
• Borrower’s Claims For Violations of RESPA, TILA, FDCPA, RICO And FPRAM, Together With Claims for Various Torts, Dismissed

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I have represented lenders, as well as their mortgage loan servicers, in connection with consumer finance litigation.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Supreme Court Order Amending Rules Regarding Service Of Process And Execution Sales

On July 31st, the Indiana Supreme Court entered this Order Amending Rules of Trial Procedure.  The changes become effective 1/1/18.  

The order makes a slight amendment to Rule 4.1(B) dealing with "copy service" and now requires a follow-up mailing of both the summons and the complaint.  For more on service of process matters, including copy service, read my post “Service Of Process” Fundamentals For The Plaintiff Lender.

The order also modifies Rule 69(A) dealing with execution sales and does away with the requirement that the subject real estate must first be appraised and then sell for at least two-thirds of the appraised value.  For a little more information on execution sales, check out my post The Difference Between An Execution Sale And A Foreclosure Sale In Indiana.

Incidentally, I have not yet seen a determination by the Indiana Supreme Court on the proposed changes to Rule 9.2(A) that I discussed in my 5/11/17 post.  

Indiana’s Statute Of Limitations For “Open Account” Claims: Supplier’s Case Too Late

Lesson. The deadline for creditors to file suit on an “open account,” including a guaranty of an “open account,” is six years.

Case cite. Ganz Builders v. Pioneer Lumber, 59 N.E.3d 1025 (Ind. Ct. App. 2016)

Legal issue. Whether a creditor’s claims against a debtor and a guarantor were barred by the statute of limitations.

Vital facts. In 1996, the defendant debtor, a builder, signed an application for a line of credit with the plaintiff creditor, a supplier. The debtor also signed a credit account agreement. The debtor’s president signed a personal guaranty agreement in connection with the arrangement. The last charge against the account was February 21, 2006. In November of 2012, the creditor filed its complaint against the debtor and the guarantor for a failure to make payments under the terms of the agreements.

Procedural history. The parties filed cross-motions for summary judgment against one another related to liability under the agreements and defendants’ statute of limitations defense. The trial court granted summary judgment for the creditor.

Key rules.

• Indiana’s statute of limitations for actions on accounts and contracts not in writing is six years pursuant to Ind. Code 34-11-2-7. I.C. 34-11-3-1 governs the accrual date: “an action brought to recover a balance due upon a mutual, open, and current account … is considered to have accrued from the date of the last item proved in the account on either side.”
• I.C. 34-11-2-9 controls actions based upon promissory notes and other written contracts for the payment of money. Although this statute also has a six-year limitation period, the accrual date is different. See my 3/9/09 post.
• An action upon a contract in writing, other than for the payment of money, must be commenced within ten years. I.C. 34-11-2-11.
• Indiana case law is settled that a written credit card application and/or agreement does not constitute a written contract or a promissory note. Rather, “the contract creating the indebtedness is formed only when the customer accepts the bank’s offer of credit by using the card.” This type of arrangement is materially different than a promissory note or installment loan. As such, Indiana treats a credit card relationship as an “open account” as opposed to being governed by a written contract per se. For more, see my 9/27/10 post.
• The Court in Ganz cited to Black’s Law Dictionary to define an open account as: “an account that is left open for ongoing debit and credit entries by two parties and that has a fluctuating balance until either party finds it convenient to settle and close, at which time there is a single liability.”

Holding. The Indiana Court of Appeals reversed the trial court’s decision and held that the creditor untimely filed its claims against both the debtor and the guarantor.

Policy/rationale. In Ganz, there were fluctuating balances resulting from a series of transactions, and the creditor kept the account open in anticipation of future purchases. The Court thus concluded that the credit arrangement was in the nature of an open account, like a credit card, as opposed to one based upon a written contract or a promissory note – both of which have different statutes of limitations and accrual triggers.

The accrual date under I.C. 34-11-3-1 – “date of the last item proved in the account on either side” – meant the last charge to, or the last payment made on, the account. In Ganz, the last activity at issue was February 21, 2006, meaning that the latest the creditor could file a claim was February 21, 2012. November of 2012 was too late.

Regarding the guarantor, the Court basically approached the two defendants the same. The separate written guaranty still fell under the open account analysis, according to the Court. Although the accrual date arguably may have been slightly different, the same six years applied, so the guarantor, too, prevailed on the defense.

Related posts.

• Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years
• Credit Card Debt's 6-Year Statute Of Limitations Held To Commence When Account Due

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I frequently represent creditors and debtors in business-related collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Claim “On An Account” Vs. Enforcement Of A Loan: Comments On Proposed Amendment to Indiana Trial Rule 9.2(A)

Proposed rule change.  Indiana’s Committee on Rules of Practice and Procedure has before it a proposal to amend Trial Rule 9.2(A). To see the proposed change, click here.  The amendment also has changes to the form affidavit of debt found in Appendix A-2 of the rules.  Application of the added language appears to be limited to actions “on an account” and does not seem to relate to actions involving loans, such as breaches of promissory notes or security agreements like mortgages. Although the amendment does not expressly target mortgage foreclosure cases or the enforcement of UCC security interests, the proposed language arguably leaves the rule open to interpretation as to its scope.  As such, we are respectfully recommending that the Committee clarify the proposed amendment to confirm that the new subsections (A)(1) and (2) are limited to claims “on an account” and do not apply to loans.

What is an action “on an account?”  To my knowledge, and based on some very limited legal research, there is no specific Indiana statutory definition of, or statutory cause of action for, an action on an account.  Black’s Law Dictionary defines “on account,” in part, as “a sale on credit.”  Indiana Practice, Procedural Forms with Practice Commentary (Arthur), Chapter 9, discusses “Complaints-On An Account” and says: “an action on account is one upon which billings have been sent to the other party specifying the goods or services delivered and the amount due….” Section 9.1 identifies the following elements of such an action:

1. A description of the account and the nature of the dealings between the parties;
2. The goods and services were provided to defendant at his request;
3. Defendant is indebted to plaintiff for a specified sum; and
4. The account is due and unpaid.

Not a loan.  An account and a loan are two different animals. Black’s Law Dictionary defines a loan, in part, as “delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest.” Although an account and a loan both might be considered “debts,” they arise out of dissimilar transactions.  With a loan, one party (a lender or a creditor) gives money to another party (a borrower or a debtor).  Obvious examples of this are banks funding the purchase of a car or a house.  On the other hand, an account is born out of one party (seller/vendor) giving, not money, but rather goods and/or services to the other party (buyer/vendee).  A classic example of an account is a hospital bill.

Written contracts.  Certainly a written contract could exist for an account, and the contract conceivably may result in some kind of lien, but ultimately the nature of an account does not involve the transfer of money but rather the provision of goods or services.  But frequently there is not a written agreement - only an invoice or purchase order.  In fact, there may not be any written document at all, like when I mowed lawns in high school.  As such, unlike with promissory notes or mortgages, when a debt arising out of an account is sold or assigned from the original account holder to a third party, proof of the account creditor may be unclear or perhaps non-existent.  This absence of documentation makes the collection of such debts susceptible to fraud, or at least to questions about who is owed the money.

The target.  In our view, the new Rule 9.2(A) seems to focus on a plaintiff’s obligation to establish that it has the right to enforce the debt.  We understand the amendments proposed to Rule 9.2(A) may arise, in part, out of bad actors attempting to collect debts based on an account.  These debt collectors often purchase debt at a discount and specialize in trying to collect it. We further understand that some of these debt collectors may be fraudsters that either don’t actually own the debt or try to collect the debt long after the statute of limitations has run.

Protections unnecessary.  While claims “on an account” arguably need the protections afforded by the new subsection to the rule, claims for breaches of loan documents do not.  Indeed, protections already are in place. Article 3.1 of Indiana’s UCC dealing with Negotiable Instruments (promissory notes), Article 9.1 involving secured transactions, Ind. Code 32-29 (Mortgages), Ind. Code 32-30-10 (Foreclosure Actions), well-settled case law, and a plethora of other rules, laws, and regulations, both state and federal, at present cover questions surrounding proof of standing and the right to enforce.  See, for example, my post Proving You’re The Holder Of The Note. This makes the proposed amendment unnecessary for loans and, even more, contradictory to existing law and procedure, not to mention onerous.  Indeed some of the proposed requirements may not even be possible for certain assignees to meet, such as a listing of all prior owners of the loan.  (The Indiana Supreme Court's opinion in the Barabas case from 2012 that surrounds MERS is instructive here.)       

Solution.  Without clarification that the new rule is limited to claims on an account and thus does not apply to loans, courts will be confused as to how to handle such cases, which could create more problems than the rule seeks to solve. We’ve seen one very simple yet meaningful change that could be made to the proposed amendment.  The mere insertion in Subsection (2) of “and the claim is on account” after the word “if” and before the words “the plaintiff” should be sufficient to clarify that the new rule does not apply to loans.  Even better, if at the end of the proposed amendment, the rule said something like “Subsection (2) does not apply to actions to enforce loans, including but not limited to promissory notes or credit agreements,” then the lending and finance communities should have no issue whatsoever with the amendment.

Call to action.   The Committee invites public comment on the proposed rule amendments.  Those wishing to comment should do so, in writing, not later than May 15, 2017.  That's Monday. Comments may be sent by email to [email protected] or addressed to:

ATTN: Rules Committee
Hon. Mary Willis
Indiana Office of Judicial Administration
30 South Meridian Street, Suite 500
Indianapolis, IN 46204

If you work for a lender or are an Indiana lawyer who represents creditors in commercial or consumer finance, and if you agree with our position, then we invite you to submit a comment by next Monday – even if it’s just to state briefly that you generally agree with the points outlined here.  I’m planning on emailing a link to today’s post directly to the committee’s staff. If you have any questions or comments, please call me at 317-860-5375 or email me at [email protected].  Thanks.  

 

Success Following Trial And Appeal Of Contested Foreclosure, Including Defense Of Constructive Fraud and Bad Faith Claims

In February 2016, my partner Matt Millis and I tried a contested commercial foreclosure case.  Following the four-day trial, the court entered judgment in our clients’ favor.  Click here to see the judgment.  The trial mainly was about the borrower’s counterclaims against our clients, an originator of hard-money commercial mortgage loans and the company that funds the loans, as well as the borrower’s defenses to the foreclosure.

The borrower appealed.  Yesterday, the Indiana Court of Appeals affirmed the trial court’s judgment.  Here is the opinion.  The Court’s opinion summarizes some of the key facts and, of note, addresses two of the borrower’s defenses: (1) that our clients breached a “duty to speak,” which arose out of the borrower’s allegations of constructive fraud, and (2) that our clients violated the “Hamlin Doctrine,” which dealt with the borrower’s assertion that our clients breached a duty to act in good faith.

The Court of Appeals decided that our clients did not breach any alleged duty to speak about certain loan-to-value requirements for the deal.  In other words, the Court found that the judgment was supported by the findings of fact (the evidence at trial) and was not clearly erroneous.  In addition, the Court held that the trial court’s findings of fact supported the conclusion that our clients did not act in bad faith with respect to the fulfillment of a broker’s price opinion contingency.  For more about the case, please read the trial court’s judgment and the appellate court's memorandum decision – links above.

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I frequently represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure actions.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected].  You may also follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to my blog posts via RSS or email as noted on my home page.

Computing Time Deadlines In Indiana: Tax Sale Notice Not 1 Day Late

Lesson. For tax sale notice deadlines, count backwards from the date of the sale to determine when the notice mailing is due.

Case cite. Schafer v. Borchert, 55 N.E.3d 914 (Ind. Ct. App. 2016).

Legal issue. Whether the county timely mailed its notice of tax sale to the owner.

Vital facts. The date of the tax sale was October 3rd. The county mailed the notice of tax sale on September 12th.

Procedural history. Buyer purchased the subject property at the tax sale and filed an action to quiet title following the receipt of the tax deed from the county. The former owner contested the action and sought to set aside the tax deed. The owner’s theory was that the county mailed the notice one day late – twenty days before the sale instead of twenty-one. After a bench trial, the court entered judgment for the buyer and found that, although the notice was one day late, it “substantially complied” with the statutory requirements.

Key rules.

Ind. Code 6-1.1-24-4(a) controlled the notice issue. At the time, the statute provided that the county auditor “shall send a notice of the sale by certified mail to the owner or owners of the real property … at least twenty-one (21) days before the day of the sale….” The current statute – link here – basically says the same thing.

Indiana Trial Rule 6(A) generally controls, in part, how parties determine deadlines in connection with litigation. In Schafer, the Indiana Court of Appeals applied the rule in the context of a tax sale. Rule 6(A) says:

In computing any period of time prescribed or allowed by these rules, by order of the court, or by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed is to be included unless it is:
(1) a Saturday,
(2) a Sunday,
(3) a legal holiday as defined by state statute, or
(4) a day the office in which the act is to be done is closed during regular business hours.
In any event, the period runs until the end of the next day that is not a Saturday, a Sunday, a legal holiday, or a day on which the office is closed….

Holding. The Court of Appeals affirmed the trial court but on different grounds. “It was not necessary for the trial court to reach the issue of substantial compliance….” The notice was in fact timely.

Policy/rationale. Schafer is a counting lesson. The trial court (and the former owner) mistakenly concluded that the clock began to run when the county mailed the notice. However, the statute “places a requirement on the auditor concerning the timing of notice, not the timing of when the tax sale must be held after notice is provided.” In other words, as explained by the Court, the statute does not mandate the sale to be held no fewer than twenty-one days after notice is mailed. Instead, the “act or event” for Rule 6(A) is the date of the sale. As such, “the days should be counted backwards to the date notice is mailed.” Since the sale date was October 3rd, the first day to be counted for the deadline was October 2nd. (See the italics section in the rule above.) Counting backwards from the sale, instead of forwards from the mailing, twenty-one days was September 12th, which is when the county mailed the subject notice.

Related posts.

Court Rejects Property Owner’s Plea To Set Aside Tax Sale

Tax Sale Set Aside: Inadequate Notices To Property Owner

Tax Sale Bullet Strikes Property Owner

Indiana Tax Sale Notices To Mortgagees

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales
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I sometimes represent lenders, as well as their mortgage loan servicers, entangled in disputes arising out of tax sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Must Indiana Affidavits Be Signed Under The Penalties Of Perjury?

A client recently asked me whether its summary judgment affidavit needed to be signed under the penalties of perjury. Given the business records nature of the affidavit (under Evidence Rule 803(6)), the affiant had some heartburn about the nature of his execution.

Trial rule.  The affidavit was for an Indiana state court case, so Indiana state law applied.  The applicable Trial Rule is 11(B). The rule doesn’t directly answer the question, however. Here is the entire section of the rule:

Verified pleadings, motions, and affidavits as evidence. Pleadings, motions and affidavits accompanying or in support of such pleadings or motions when required to be verified or under oath shall be accepted as a representation that the signer had personal knowledge thereof or reasonable cause to believe the existence of the facts or matters stated or alleged therein; and, if otherwise competent or acceptable as evidence, may be admitted as evidence of the facts or matters stated or alleged therein when it is so provided in these rules, by statute or other law, or to the extent the writing or signature expressly purports to be made upon the signer’s personal knowledge. When such pleadings, motions and affidavits are verified or under oath they shall not require other or greater proof on the part of the adverse party than if not verified or not under oath unless expressly provided otherwise by these rules, statute or other law. Affidavits upon motions for summary judgment under Rule 56 and in denial of execution under Rule 9.2 shall be made upon personal knowledge.

The rule begs the question of what “verified or under oath” means.

Case law.  Indiana case law appears to have the answer. Although using the exact language of TR 11(B) is not required, the “chief test of the sufficiency of an affidavit is its ability to serve as a predicate for a perjury prosecution.” Jordan v. Deery, 609 N.E.2d 1104, 1110 (Ind. 1993). In Gaddie v. Manlief (In re H.R.M.), 864 N.E.2d 442 (Ind. Ct. App. 2007), the Indiana Court of Appeals provides a thorough discussion of what is required for a business records affidavit and affidavits generally. The Court determined that a business records affidavit whose affiant stated, “I, Anita Martin, being duly sworn, state as follows” was insufficient to constitute a valid verification as it was inadequate to subject Martin to prosecution for making a false affidavit, and therefore, insufficient to support the accompanying business records. A statement such as “duly sworn upon his oath, alleges and says” with a notarized signature provides a stronger intention to be bound by the penalty for perjury than “being duly sworn,” Id. (citing State ex rel. Ind. State Bd. Of Dental Examiners v. Judd, 554 N.E.2d 829 (Ind. Ct. App. 1990)). The Court did note, however, that Bentz v. Judd, 714 N.E.2d 203 (Ind. Ct. App. 1999), and an older Indiana Supreme Court case, Gossard v. Vawter, 21 N.E.2d 416 (Ind. 1939), found such a verification to still be insufficient. On the other hand, the statement “I affirm the truth of the above statements” met the requirements for verification in a summary judgment affidavit in Hoskins v. Sharp, 629 N.E.2d 1271 (Ind. Ct. App. 1994).

The answer is yes.  Although the rule and the case law may not crystal clear on the exact verbiage needed, the bottom line is that, to ensure affidavits will stand up in court, it is prudent to state, either at the beginning or immediately before the signature, that the affidavit is being given under oath and subject to the penalties of perjury. For what it’s worth, I usually start my affidavits with “Affiant, _____, having first been duly sworn upon his oath, hereby affirms as follows", and I end my affidavits with “I affirm under the penalties of perjury that the foregoing is true and correct to the best of my knowledge, information and belief.”

Here are a couple prior posts related to affidavits:

• Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment
• With Affidavits Of Debt, Remain Mindful Of The Evidentiary Requirements

I’d like to thank our associate Erica Drew for researching this issue. Her work helped me to get this post up before being out on spring break next week.     

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

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

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

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

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

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

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

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

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

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

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

Related posts.

• Reformation:  How A Mortgage With An Erroneous Legal Description Can Be Foreclosed
• Borrowers Sue Lender Over Alleged Wrongs From Loan Modification Agreement
• Recording Deeds In Indiana:  Don't Forget The Sales Disclosure Form

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I frequently represent lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Borrower’s Claims For Violations of RESPA, TILA, FDCPA, RICO And FPRAM, Together With Claims for Various Torts, Dismissed

Following his unsuccessful defense of a state court foreclosure action, a borrower filed a multi-count complaint in federal court against six defendants. Mains v. Citibank, et. al., 2016 U.S. Dist. LEXIS 43874 (S.D. Ind. 2016) (.pdf) is a 34-page opinion by Judge Barker in which she methodically explains why all the counts against all the defendants must be dismissed with prejudice based upon the Rooker-Feldman doctrine.

“At the core” of the borrower’s case, he alleged that the defendants, which included lenders and law firms, (1) wrongfully assigned the subject promissory note, (2) lacked standing to foreclose the subject mortgage and (3) committed fraud against him and the state court. The borrower asserted the following legal claims: (a) Real Estate Settlement Procedures Act [RESPA] violations, (b) Truth In Lending Act [TILA] violations, (c) Ind. Code 32-30-10.5 Indiana Foreclosure Prevention Agreements for Residential Mortgages violations, (d) negligent and intentional infliction of emotional distress, (e) fraud, (f) negligence, (g) Fair Debt Collection Practices Act [FDCPA] violations and (h) violations of the Racketeer Influenced and Corrupt Organizations Act [RICO].  In other words, the borrower threw in everything but the kitchen sink....

Even though the case ultimately was dismissed on jurisdictional grounds, Judge Barker’s court took the time and effort to analyze the substantive legal claims involving RESPA, TILA, I.C. 32-30-10.5, torts, fraud, FDCPA and RICO. If lenders or their counsel face these claims in a similar context (following a state court foreclosure case), the Mains opinion would be a good place to start one’s research.

In the end, this case is another in line of recent federal court cases I’ve discussed that dismisses a borrower’s post-foreclosure claims and defenses. For more on the Rooker-Feldman doctrine, click here for my 8/24/16 post.

UPDATE:  Seventh Circuit Affirms Dismissal Of Borrower’s Post-Foreclosure Federal Claims Based On Rooker-Feldman and Res Judicata

Foreclosing Party, As Owner, May Evict Tenants In Breach

Secured lenders repossessing real estate collateral at a sheriff’s sale normally keep tenants in place to maintain income.  There are instances, however, when a plaintiff lender, or a third-party sheriff’s sale purchaser, may desire to evict a tenant.  Ellis v. M&I Bank, 960 N.E.2d 187 (Ind. Ct. App. 2011) sheds light on a new owner’s rights, following a sheriff’s sale, vis-à-vis tenants. 

Unusual circumstance.  In Ellis, a developer leased the subject real estate to tenants (husband and wife), but then defaulted on its line of credit.  As a result, the developer’s lender foreclosed and ultimately acquired the real estate at a sheriff’s sale.  The court’s decree of foreclosure was against the developer and the husband only, not the wife/co-tenant.  When the lender pursued a writ of assistance to evict the tenants, the wife asserted that her interest in the real estate had not been extinguished in the mortgage foreclosure case.  She was right.   

To terminate, name tenants.  The Court in Ellis noted that, in Indiana, the purchaser at a sheriff’s sale “steps into the shoes of the original holder of the real estate and takes such owner’s interest subject to all existing liens and claims against it.”  Because the lender did not make the wife a party to the foreclosure case, the sheriff’s sale could not be enforced against her.  This is because, in Indiana, “where a mortgagee knows or should know that a person has an interest in property upon which the mortgagee seeks to foreclose, but does not join that person as a party to the foreclosure action, and the interested person is unaware of the foreclosure action, the foreclosure does not abolish the person’s interest.”  See my 10/07/11 and 07/09/10 posts for more on this area of the law.  Because the wife was not named or served in the foreclosure action, the trial court found that her interest was not extinguished by the foreclosure judgment and that the lender’s interest in the real estate remained subject to her leasehold interest. 

How did the lender obtain possession of the real estate from the wife?

Option 1 – strict foreclosure.  One option available to the lender was to terminate the interest of the wife through a strict foreclosure action.  I have written about this remedy, including Indiana’s 2012 legislation, extensively.  Please click on the category Strict Foreclosure to your right for more.  The lender in Ellis did not pursue this option. 

Option 2 - eviction.  The lender elected, as the then-owner of the real estate, to pursue eviction based upon the subject lease agreement.  The eviction action was separate and distinct from the foreclosure action.  The evidence in Ellis was clear that the tenants had breached the lease and that the lender had the corresponding right to terminate.  The trial court entered an order of possession for the lender based on the lease, and the Court of Appeals affirmed. 

Plaintiff lenders, after the entry of the foreclosure decree and sheriff’s sale, usually can evict parties in possession of the subject real estate through the mechanism of a writ of assistance, about which I have written in the past, assuming the mortgage lien is senior to the possessory interest.  That remedy generally is effective only when the targets of the writ of assistance were made parties to the underlying action.  The rub in Ellis was that one of the parties in possession of the real estate (the wife) was not named in the case.  Rather than embarking on what may have been a relatively costly, complicated and lengthy strict foreclosure action, the lender in Ellis chose a simpler approach by filing a straightforward landlord/tenant eviction action based upon the terms of the subject lease.  This turned out to be a good solution to the problem caused by failing to name the wife.

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Part of my practice is to protect the interests of lenders in contested foreclosures.  If you need assistance with such matters in Indiana, please call me at 317-639-6151 or email me at [email protected].  Also, you can receive my blog posts on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Bankruptcy Proofs Of Claim Following A State Court Judgment: Debt Locked In

Lesson.  If a lender obtains a judgment in a foreclosure case, the borrower generally cannot re-litigate the amount of the debt in a subsequent bankruptcy action.  

Case cite.  Harris v. Deutsche Bank, 2016 U.S. Dist. LEXIS 14838 (S.D. Ind. 2016) (.pdf).  Our law firm successfully handled this appeal for one of my servicer clients.  My partner Matt Millis took the lead with the briefing.   

Legal issue.  Whether a bankruptcy court is barred from recalculating a debt amount previously determined by a state court. 

Vital facts.  Lender held a senior mortgage on real estate owned by Debtor, who defaulted on the subject promissory note and mortgage.  Lender, in state court, filed a foreclosure action and obtained a summary judgment after Debtor unsuccessfully argued that Lender improperly calculated the amount due.  One of Debtor’s points was that Lender failed to account for payments the Chapter 13 Trustee made in Debtor’s prior bankruptcy.  Debtor did not appeal the state court’s summary judgment.  Debtor later filed the instant Chapter 13 case, and Lender filed a Proof of Claim based upon debt figures in the state court’s summary judgment order.  Debtor objected to the Proof of Claim and once again argued, among other things, that Lender failed to credit payments made during the prior Chapter 13 action. 

Procedural history.  Debtor appealed the bankruptcy court’s denial of her objection to Lender’s Proof of Claim.   

Key rules. 

The federal Full Faith and Credit Act at 28 U.S.C. 1738 “requires federal courts to give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State….”  In Harris, the doctrine of collateral estoppel (aka issue preclusion) applied. 

In Indiana, when used as a defense, the doctrine has five elements:  (1) a final judgment on the merits, (2) identity of the issues, (3) the party to be estopped was a party or in privity of a party in the prior case, (4) the party to be estopped had a full and fair opportunity to litigate the issue and (5) whether it would be otherwise unfair under the circumstances to permit the use of collateral estoppel. 

Holding.  The district court affirmed the bankruptcy court’s decision.  All of the elements of collateral estoppel had been met.

Policy/rationale.  The state court conclusively decided the amount owed by Debtor to Lender in the prior foreclosure action – after the parties litigated the matter.  There was an identity of the issues between the two cases.  Debtor had a full and fair opportunity to litigate the debt amount in state court.  Permitting the use of collateral estoppel was not unfair under these circumstances.  “If [Debtor] felt that the [state court] erred by disregarding her arguments or miscalculating an amount, she could have sought review by the Indiana Court of Appeals.  For whatever reason, she chose not to do that.”  As such, the law precluded Debtor from re-litigating that issue in the subsequent federal bankruptcy proceedings.   

Related posts. 

• Bankruptcy Proofs Of Claim And Standing/Loan Assignment Issues
• 6 Thing To Remember About Proofs Of Claims In Indiana Bankruptcy Courts
• Dismissing A Borrower’s Post-Foreclosure Federal Court Action For Fraud And Deception: Rooker-Feldman Strikes Again
• Res Judicata, Specifically Claim Preclusion, And How To Dismiss A Borrower’s Post-Foreclosure Case

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I represent judgment creditors and lenders, as well as mortgage loan servicers, in bankruptcy-related litigation.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected].  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.