Pro Hac Vice Admission In Indiana And The Role Of Local Counsel

You’re an out-of-state lawyer with a client who needs to enforce a loan in Indiana.  You’re not licensed to practice in the state, and no one in your firm is admitted in Indiana.  You don’t want to relinquish control over the case, but instead wish to be in charge of representing your long-standing client in its important matter.  What you need is to be admitted pro hac vice in the Indiana court.  

More Latin.  “Pro hac vice” in English means “for this turn; for this one temporary occasion.”  Black’s Law Dictionary.  In the legal context, the phrase refers to the limited admission to practice in a court.  Admission pro hac vice is governed by the Indiana Rules for Admission to the Bar and the Discipline of Attorneys, including specifically Rule 3, which was substantially amended in 2007. 

The 7 hoops.  Indiana’s rules require prospective pro hac vice admitees to jump through a number of hoops.  The rules mandate filings with both the Clerk of the Indiana Supreme Court ("Clerk") and with the particular trial court.  According to Rule 3(2)(a), here’s what needs to be done:

  1. Hire a member of the bar of the State of Indiana to act as co-counsel and ensure he or she has an appearance on file.
  2. Pay the Clerk a registration fee of $180.  See, Rule 2(b).  The registration fee must be paid annually until the proceeding has concluded.  See, Rule 3(2)(c). 
  3. Provide the Clerk with a copy of the Rule 3(2)(a)(4) Verified Petition for Temporary Admission ("VPTA") that will be filed with the trial court. 
  4. Procure from the Clerk a temporary admission attorney number and payment receipt. 
  5. File the VPTA with the trial court, co-signed by Indiana co-counsel, setting forth the nine specific disclosures articulated in Rule 3(2)(a)(4). 
  6. Obtain from the trial court an order granting the VPTA.
  7. File with the Clerk a Notice of Temporary Admission that includes a statement of good standing issued by the highest court in each jurisdiction in which the attorney is admitted to practice law, a copy of the VPTA and a copy of the order granting the VPTA.   

After successfully jumping through these hoops, counsel may file an appearance in the trial court.

Further handling of the case.  Beware of Rule 3(2)(d), which mandates that all papers filed in the cause of action be co-signed by the Indiana co-counsel.  On the other hand, unless ordered by the trial court, local counsel need not be personally present for court appearances. 

Indiana's philosophy.  Here is an excellent article entitled Taking the vice out of pro hac vice:  temporary admission and local counsel from the October, 2006 issue of Res Gestae, the official publication of the Indiana State Bar Association.  Donald R. Lundberg, the Executive Secretary of the Indiana Supreme Court Disciplinary Commission at the time, is the author.  The article describes the January 1, 2007 changes to the rules.  It also explains why Indiana co-counsel cannot be a “potted plant,” but instead must play a meaningful role in the case, particularly with written submissions.  In response to those who feel that Indiana’s procedural requirements for admission pro hac vice may be burdensome, Mr. Lundberg makes a great point:  “would you rather take the bar exam?”

The General and the Lieutenant.  My standard approach to serving as local counsel is based on the notion that, as with most cases, there needs to be a General and a Lieutenant.  Someone - one person – should be in charge, and others should follow that person’s orders.  Otherwise, the “too many cooks in the kitchen” syndrome develops, followed by reduced efficiency and increased costs to the client.  Usually, but not always, my primary purpose as local counsel is to support the out-of-state lawyer – to be a Lieutenant – regardless of the age or experience of the non-Indiana attorney.  Most good local counsel set their egos aside and do as little (or as much) as the lead counsel wants.  To me, the main objective of any out-of-state, lead attorney should be to hire a responsive, cost-effective role player with local knowledge of the law and procedures.  Certainly I’m always ready, willing and able to be lead counsel, and there are times when the referring attorney hires me to serve in that capacity.  But most of the time, out-of-state Generals simply want a local Lieutenant, which is fine with me.


Dismissal Of Mortgagor’s Post-Foreclosure Federal Lawsuit: Usually, But Not Always

A mortgagor’s federal suit attacking a prior state court foreclosure almost always will be dismissed.  At issue is the Rooker-Feldman doctrine, which I’ve discussed several times here.  Unlike the other cases, the Seventh Circuit Court of Appeals overturned, in part, the district court’s dismissal in Iqbal v. Patel, 2015 U.S. App. LEXIS 3241 (7th Cir. 2015)Iqbal tells us that there may be unique situations where a mortgagor could survive dismissal for the purpose of pursuing a claim for money damages against a mortgagee. 

Borrower’s theory.  In Iqbal, the plaintiff bought a gas station and contracted with defendant S-Mart for gasoline.  The plaintiff then hired Mr. Patel, another defendant, to operate the business.  The plaintiff selected Mr. Patel on the recommendation of another defendant, Mr. Johnson, S-Mart’s president.  Mr. Patel allegedly ran the business but did not pay for the gasoline.  As a result, S-Mart obtained a judgment against the plaintiff, who guaranteed the contract.  To settle, the plaintiff gave S-Mart a promissory note and a mortgage on the business premises.  The plaintiff later defaulted on the note, resulting in a state court judgment and a foreclosure sale of the mortgaged property.  The plaintiff filed the federal lawsuit claiming that Patel and Johnson “acted in cahoots to defraud him out of this business.” 

Rooker-Feldman.  The defendants moved to dismiss the plaintiff’s case based on the Rooker-Feldman doctrine.  The Seventh Circuit stated that the doctrine will not bar a federal suit seeking damages for fraud that caused an adverse state court judgment.  In other words, the law permits a claim for damages for alleged unlawful conduct that misled the state court into issuing the judgment in the first place.  The doctrine will, however, bar the suit to the extent it seeks to set aside the judgment.  Here is what the Seventh Circuit said in Iqbal:

If a plaintiff contends that out-of-court events have caused injury that the state judiciary failed to detect and repair, then a district court has jurisdiction – but only to the extent of dealing with that injury.

Distinction.  Iqbal was not a standard borrower versus lender mortgage loan foreclosure.  The case was a commercial dispute in which the plaintiff claimed the defendants conducted a racketeering enterprise that pre-dated the state court judgment.  Distilled to its essence, the plaintiff’s case was that the defendants conspired to take over his business.  The foreclosure was the plan all along.  The Court held:

Because [the plaintiff] seeks damages for activity that (he alleges) predates the state litigation and caused injury independently of it, the Rooker-Feldman doctrine does not block this suit.  It must be reinstated.

The plaintiff in Iqbal could not set aside the sheriff’s sale and get the mortgaged property back.  Yet, he lived to fight another day on his damages claim, although the Court suggested that the plaintiff still may lose.  Claim preclusion (res judicata) could lead the trial court to determine that the plaintiff was required to bring his theories as counterclaims in the original state court case instead of waiting to sue after the fact. 


Sheriff’s Sale Credit Bid: Ensure Post-Judgment Damages Are Readily Ascertainable And Undisputed

If, as a lender, you tender a full credit bid at your sheriff’s sale, make sure you don’t unwittingly overbid.  If you do, you later could be forced to pay cash to cover the difference.  This is what happened in Stoffel v. JPMorgan Chase, 2014 Ind. App. LEXIS 34 (Ind. Ct. App. 2014)

Setting.  Stoffel arose out of a post-sale motion by a borrower/mortgagor to compel the plaintiff lender/mortgagee to pay an alleged surplus.  In Indiana, the sheriff must pay any surplus back to the mortgagor.  The borrower in Stoffel wanted to recover the alleged “difference between the face amount of the judgment and the amount bid at the sheriff’s sale,” even though the sheriff did not hold any excess sale proceeds. 

Foreclosure judgment.  The lender and the borrower in Stoffel entered into an agreed foreclosure judgment that awarded the amount of the debt, together with “any additional costs of collection, expense, and disbursements incurred from the date of the [lender’s pre-judgment affidavit of debt] to the date of the Sheriff’s Sale, including, but not limited to, Sheriff’s Sale costs, disbursements for real estate taxes, bankruptcy fees and costs, and disbursements for hazard insurance premiums.”  These additional items could not be specified until the sale. 

Credit bid.  The lender submitted a winning “credit bid” (a/k/a “judgment bid”) in the amount of $152,121.72.  The Court noted that a “credit bid” is made “by the judgment creditor in which no money is exchanged.”  The bid is not backed up by cash but rather the amount of the judgment.  The lender in Stoffel believed that the judgment amount was enough to cover its bid. 

Post-sale proceeding.  At a hearing on the borrower’s motion, the lender explained how its credit bid had been calculated.  The lender offered documents to verify certain post-judgment recoverable costs incurred by the lender.  The trial court denied the borrower’s motion, and the borrower appealed. 

Evidence.  The Court of Appeals pointed out what usually happens when amounts need to be added to a judgment after the fact: 

We acknowledge that judgment creditors routinely include post-judgment costs and expenses in their sheriff’s sale bids and demonstrate those calculations by affidavit.  In a typical case, the judgment creditor’s post-judgment costs and expenses are easily determined and the mortgage foreclosure proceeding ends with the issuance of a sheriff’s deed.  And where, as here, post-judgment costs and expenses are awarded in the foreclosure judgment, there is no question that the judgment creditor is entitled to recover those costs and expenses, which are usually readily ascertainable and undisputed

The problem in Stoffel was that the judgment included elements that were not really “readily ascertainable and undisputed.”  After delving into a technical discussion about the inadmissibility of the lender’s evidence, the Court concluded that much of the evidence was inadmissible.  For example, to prove certain facts, the lender simply tendered a letter instead of a sworn affidavit. 

Shortfall.  The lender paid the price, albeit a small price, for its technical error.  The Court studied the terms of the judgment and applied the limited amount of admissible evidence to those terms.  The Court calculated the amount of the judgment at the time of the sheriff’s sale and held that the lender overbid.  Ironically, in a case where the borrower owed the lender $152,121.72, the Court entered a post-sale judgment against the lender in the amount of $374.58. 

Takeaway.  Lenders and their counsel should articulate damages elements within the judgment with as much simplicity and clarity as possible.  Any contingent amounts should be written so the sheriff and the trial court can later plug and chug the numbers with ease - eliminating room for interpretation or proof hurdles.  For example, lenders must pay any delinquent real estate taxes before the sale.  Frequently, the amount of the tax liability is unknown at the time of the judgment and will not be paid until the day before the sale.  Judgments can (and should) grant an award for tax advancements, which will be readily ascertainable and undisputed.  On the other hand, the less ascertainable and more disputed the post-judgment damages items are, the more lenders set themselves up for scrutiny and proof problems later. 


Another Federal Court Dismisses A Borrower's Case Following A State Court Foreclosure

The U.S. District Court for the Northern District of Indiana, in Eslick v. Wells Fargo, 2013 U.S. Dist. LEXIS 174476 (.pdf), dismissed a borrower's federal lawsuit, which followed an adverse judgment in state court.  At issue once again was the Rooker-Feldman doctrine about which I discussed on 12/19/13, 4/25/14, 6/20/14, 7/18/14 and 11/30/14

In Eslick, as with virtually all the other opinions, the Court pointed out that:

the claims alleged by Plaintiff [borrower] all arise out of the earlier state court foreclosure action....  Under the Rooker-Feldman doctrine, federal district courts do not have subject matter jurisdiction over claims seeking review of state court judgments.

Since the Plaintiff did not assert any independent basis for federal jurisdiction, the claims were barred.  In short, you don't get a federal court do-over after you lose in state court.      


Lien Priority Dispute: 2005 Mortgage v. 2000 Land Contract

The Indiana Court of Appeals, in Lunsford v. Deutsche Bank, 966 N.E.2d 815 (Ind. Ct. App. 2013), begins its opinion with this legal principle:  “. . . first in time is first in right . . . .”  In Indiana property and debt collection law, this means “a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds . . . .”  This rule doomed a land contract buyer (vendee) in his priority dispute with a lender (mortgagee).

The operative dates.  In Lunsford, the owner of the real estate entered into a land contract to sell on August 28, 2000, but the buyer failed to record the land contract until March 8, 2006.  On August 25, 2005, the owner obtained a mortgage loan, and the lender recorded the mortgage approximately six months before the recordation of the land contract.  The owner subsequently defaulted on the mortgage loan, resulting in the lender’s foreclosure suit. 

Priority dispute.  The issue in Lunsford was whether the land contract should have been foreclosed as a junior and subordinate interest to the lender’s mortgage.  In other words, was the land contract buyer’s claim to the real estate subject to the lender’s mortgage, even though the land contract predated the mortgage by five years?

Mortgage superior.  The Court in Lunsford swiftly dispensed with the land contract buyer’s priority contention.  Since the lender recorded its mortgage six months before the buyer recorded its land contract, the mortgage was senior in priority.  Further, since the lender made the buyer a party to the foreclosure action, thereby giving him the opportunity to assert his junior interest in the real estate, the trial court’s foreclosure decree was conclusive as to the buyer.  The Court affirmed the trial court’s summary judgment in favor of the lender accordingly.  Moral:  Don’t Forget To Record.

Different outcome.  While Lunsford appears to be a straight forward case, the Court of Appeals actually reached the opposite result in the 2007 Pramco opinion I discussed here.  The Pramco Court leaned on principles of equity and focused on, among other things, the amount of payments that the land contract buyer had made before the lender’s foreclosure suit.  The Pramco opinion was much more factually involved, while the land contract facts in Lunsford really were not addressed.  Note that the prevailing land contract buyer in Pramco was represented by counsel, whereas the losing buyer in Lunsford was pro se

 


Trustees Have Authority To Foreclose For Trusts

The world of securitization and mortgage-backed securities has resulted in many mortgage loans, both residential and commercial, being held by trusts instead of conventional banks or lending institutions.  As such, instead of seeing a mortgage foreclosure suit’s caption as "Local Bank v. Borrower, LLC," we see something like "Bank, as Trustee, for 2007 Mortgage Pass-Through Certificates Series 2007-H47 Trust v. Borrower, LLC."  (For background on today’s mortgage industry, see the Indiana Supreme Court’s Citimortgage opinion involving MERS.)  The Indiana Court of Appeals opinion in Lunsford v. Deutsche Bank, 966 N.E.2d 815 (Ind. Ct. App. 2013) tackles the question of whether the trust itself, as opposed to the trustee, needs to be a party to the foreclosure suit.

Another “standing” theory.  The defendant in Lunsford contended that the plaintiff didn’t have authority to enforce the underlying promissory note and mortgage.  The named plaintiff was “Deutsche Bank Trust Company Americas as Trustee.”  Deutsche was trustee for “RALI Series 2005-QS15 Trust.”  Normally we see the full name of the trust in the caption of the case, but for some reason only the trustee was identified in Lunsford.  The defendant asserted that the trustee had not joined an indispensable party because it failed to name the trust in the action.  See, Ind. Trial Rule 17(A)(1).  The contention was similar to the standing and “real party in interest” arguments made over the last several years.  (See:  10/25/13.)  The Court reminded us that the purpose of the standing rules “is to ensure that the party before the court has the substantive right to enforce the claim being asserted.”  For instance, if the court awards a money judgment, the system needs to ensure the plaintiff is the party entitled to the money.

Trustee rules.  The Court concluded it was not necessary for Deutsche Bank to name the actual trust as a party to the action.  Ind. Trial Rule 17(A) states that a “trustee . . . may sue in his own name without joining with him the party for whose benefit the action is brought . . . .”  Ind. Code § 30-4-3-15 provides that (paraphrasing) “trustees may maintain in their representative capacities civil actions for remedies against a third party that they could maintain in their own right if they were the owner.  In short, Deutsche Bank, the trustee, had the authority to enforce the loan documents in Lunsford.

Lunsford tells us that it is perfectly fine for the trustee to be the plaintiff in suits that foreclose mortgages held by trusts.


Standing: Bank Merger Rule Same For Corporate Entities

The Court in Beneficial Financial v. Hatton, 998 N.E.2d 232 (Ind. Ct. App. 2013), the case I discussed last week, applied a version of the bank merger rule about which I wrote on 01/25/13 and 09/19/14

Motion to dismiss.  The borrower in Beneficial sought dismissal of the lender’s foreclosure complaint on the theory that the subject promissory note and mortgage were not executed by the plaintiff but rather by its predecessor-in-interest.  The borrower claimed that the law required the lender to attach loan assignment documents to establish standing and thus proceed. 

Merger rule.  The Court concluded that the borrower’s argument was without merit.  Pursuant to Ind. Code § 23-1-40-6(a)(2), when a corporate merger takes effect, title to all real estate and other property owned by each corporate party to the merger is vested in the surviving corporation.  So, a surviving corporation assumes the assets of the assumed corporation as a matter of law.  “This obviates the necessity of creating a separate instrument reflecting the change in ownership of each such . . . asset.” 

No assignments needed.  In Beneficial, no loan assignment document, such as an endorsement, an allonge or an assignment of mortgage, existed.  But the lender was not required to supply such documentation, apart from some proof of the corporate merger itself.  The lender attached to its complaint a certificate of merger issued by the Indiana Secretary of State establishing, among other things, that the lender was the surviving entity, which the Court concluded was sufficient to prove the lender’s interest in the mortgage. 

Beneficial is a slightly different spin on the bank merger rule previously addressed in this blog, but the result is the same.  Assignment documents are not required to establish standing by a successor corporation. 

 


Reformation: How A Mortgage With An Erroneous Legal Description Can Be Foreclosed

Lenders and their foreclosure counsel might be faced with a mortgage with a legal description of the subject real estate that is erroneous.  I’ve seen everything from innocuous typos to descriptions of an entirely separate parcel.  Is foreclosure still a possibility?  Yes.  Beneficial Financial v. Hatton, 998 N.E.2d 232 (Ind. Ct. App. 2013) explains how. 

Approach.  In Beneficial, foreclosure counsel discovered an error in the legal description.  Both the lender and the borrower agreed that the original mortgage identified a parcel of property that neither party intended to mortgage.  So, in addition to filing the standard foreclosure complaint, counsel added a cause of action for “reformation.”  The borrower filed a motion to dismiss, arguing that the mortgage was ineffective “due to the error in the legal description.” 

Reformation law.  Indiana law on reformation is well-settled.  Here are the primary points: 

• Reformation is an equitable remedy to relieve the parties of mutual mistake or fraud.

• In cases involving mutual mistake, the party seeking reformation must establish (1) the true intentions of the parties, (2) that a mistake was made, (3) that the mistake was mutual, and (4) that the instrument did not reflect the true intentions of the parties. 

The Court in Beneficial stated that, to prevail, it was incumbent upon the lender to prove that its original intent, and that of the borrower, “was to describe a different piece of real estate than that which was in fact described in the mortgage instrument.” 

Proving intent.  The tricky thing in these cases can be in proving intent.  Sometimes the borrower is out of the picture, and sometimes the current plaintiff/mortgagee wasn’t the original lender.  Meeting the burden of proof can be difficult.  The Court in Beneficial provided some guidance.  Courts look to the parties’ conduct during the course of the contract negotiations and closing.  The Court hinted that evidence in favor of reformation could include, for instance, (1) the real estate appraisal from the origination file, (2) the HUD-1 settlement statement, (3) the loan application and (4) the loan approval form.  Courts will examine evidence that would be compelling on the question of the identity of the real estate that the parties originally intended to be mortgaged. 

Dismissal overturned.  The Court of Appeals reversed the trial court’s dismissal in Beneficial, reasoning that if the lender “were not allowed to proceed beyond the filing of a complaint merely because the description of the property is erroneous, then the viability of any mortgage reformation action . . . is called into question, and indeed perhaps rendered impossible.”  The Court gave the lender the opportunity to prove that a mutual mistake occurred in its mortgage with the borrower.  If the lender were subsequently able to establish that the mortgage’s legal description was a mistake, and that a different description was intended, then the trial court would be compelled to reform (correct) the mortgage, thereby opening the door to foreclosure of the reformed mortgage on the correct real estate.


Rooker-Feldman Doctrine Inapplicable To Some Claims, Says Indiana Court

The Rooker-Feldman doctrine generally will bar a borrower’s post-foreclosure federal court case against a lender.  I’ve written about this doctrine on four prior occasions, so for background and the basics click hereHochstetler v. Federal Home Loan Mortgage, 2013 U.S. Dist. LEXIS 99403 (N.D. Ind. 2013) (.pdf) is different from the other cases about which I’ve written because the Court found that three of the plaintiff borrower’s claims could not be dismissed pursuant to Rooker-Feldman “because they assert independent claims for relief.”  The implication is that the Court felt that the three claims were not "inextricably intertwined" with the prior state court foreclosure action.

FDCPA.  The borrower, in this residential/consumer case, made claims under the Fair Debt Collection Practices Act, which provides relief “that can be granted without setting aside the judgment of foreclosure,” said the Court.  If and only if the alleged violations of the FDCPA were completed before the state court judgment, the Court could provide relief for such violations.  Thus Rooker-Feldman did not bar this cause of action in Hochstetler.

TILA.  The borrower also asserted claims under the Truth in Lending Act, another consumer protection statute (not applicable in commercial cases).  See, 15 USC 1640(a)(1).  In Hochstetler, the borrower alleged that the lender misrepresented the terms of the mortgage before the signing of the mortgage.  The Court concluded that the claim could not be denied under Rooker-Feldman.  (I respectfully question this result, given the other opinions describing the doctrine.)

Intentional infliction of emotional distress.  The Court held that this cause of action also passed the Rooker-Feldman test because the borrower asserted a claim for relief “outside the scope of the state court judgment.”  (Again, I wonder about the correctness of this holding given the scope of the doctrine as presented in other cases.)

Dismissed.  The borrower averred a handful of other claims that were dismissed via Rooker-Feldman.  Further, despite passing the Rooker-Feldman test, the Court dismissed the borrower's FDCPA, TILA and IIED claims based upon Rule 12(b)(6) for the failure to state a claim for relief.  So, the lender ultimately was able to achieve a dismissal of the entire case.          


Borrowers/Guarantors Beware: Federal Magistrate Judge Strikes Undeveloped Affirmative Defenses

 

The Cincinnati Ins. Co. v. Kreager Bros., 2013 U.S. Dist. LEXIS 85743 (N.D. Ind. 2013) (.pdf), provides an entrée to the basics of affirmative defenses, which workout professionals may hear their foreclosure lawyers mention during the course of litigation.  The result in Kreager was surprising and is a lesson for defense attorneys, particularly those practicing in the Northern District of Indiana. 

Definition.  Generally, an affirmative defense is a defense for which the proponent bears the burden of proof and which, in effect, admits the essential allegations of the opposition’s claim, but asserts additional matter(s) barring relief.  Defendants must plead affirmative defenses in their answers to complaints.  See Fed. R. Civ. P. 8.

Procedural background.  The plaintiff in Kreager brought an action for the defendant’s default on a promissory note.  The defendant, in its answer to the plaintiff’s complaint, asserted four affirmative defenses, which can be found on pages 1 and 2 of the opinion.  The listed defenses were recognized affirmative defenses under Indiana law and were well written.   Nevertheless, the plaintiff moved to strike the defenses, under Rule 12(f), for an alleged failure to comply with Rule 8(a), which deals with pleading requirements. 

Pleading rules.  Under Rule 12(f), courts may strike from a pleading certain matters.  Although such motions generally are disfavored, “they may be granted if they remove unnecessary clutter from a case and expedite matters, rather than delay them.”  Affirmative defenses will be stricken “only when they are insufficient on the face of the pleadings.”  Federal pleading requirements require grounds for the court’s jurisdiction and must contain enough facts that the relief is plausible on its face.  “Bare legal conclusions” are insufficient, and affirmative defenses must involve a “short plain statement” of all material elements. 

Insufficient.  I must confess that the four affirmative defenses articulated in Kreager, a federal not a state court case, were generally consistent with custom and practice that I have observed, and frankly are not unlike my own approach to pleading affirmative defenses in answers to a complaint.  In Kreager, the plaintiff sought to have the affirmative defenses stricken.  The Court granted plaintiff’s motion.  While the affirmative defenses were concise, the Court found that they did not have “any surrounding factual support.”  “Boilerplate defenses without any support anywhere in the pleadings do not comply with Rule 8(a).” 

Successful tactic.  Plaintiff’s tactics in Kreager were a bit unusual because a determination of the viability of affirmative defenses probably could have been adjudicated in plaintiff’s subsequent motion for summary judgment.  But, the plaintiff and its lawyers decided to deal with the affirmative defenses at an early stage and were successful in doing so.  It was a good move in this particular case and before this particular Magistrate Judge (Andrew P. Rodovich).  For lawyers who represent secured lenders in foreclosure actions venued in federal court, Kreager represents an example of a procedural tactic one might want to consider.  For lawyers representing borrowers and guarantors, Kreager suggests that you might provide more beef when pleading affirmative defenses.  Boilerplate language, again something I admittedly have been guilty of and which would likely pass muster in state court, may subject you to an order to strike in federal court. 

Summary judgment on note.  As an aside, a year later (.pdf) the Court in Kreager granted summary judgment to the plaintiff.  The opinion cited to some good points of law:  (1) “a promissory note is a written promise by one person to pay another person, absolutely and unconditionally, a certain sum of money at a specific time,” (2) “an unconditional promissory note is a negotiable instrument rather than a contract,” and (3) “to enforce a negotiable instrument, the plaintiff must show that the instrument was endorsed and delivered” (see, Ind. Code § 26-1-3.1-201).


Bank Merger Rule Applied In Indiana Foreclosure/Tax Sale Case

In my 1/15/13 post, Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions, I discussed the Indiana Court of Appeals decision in CFS v. Bank of America, 962 N.E.2d 151 (Ind. Ct. App. 2012)CFS supported the idea that a predecessor bank in a mortgage foreclosure action need not assign its loans to the successor bank in order for the surviving bank to have legal standing to foreclosure a mortgage.  Such a transfer occurs as a matter of law by virtue of the merger/acquisition itself pursuant to 12 U.S.C. § 215(a)(e).

Last week's post, Secured Lender Loses Mortgage Due to Indiana Tax Sale, talked about the Iemma case, which dealt with whether a tax deed should have been set aside.  As a part of its analysis, the Court in Iemma cited to and relied upon the CFS opinion. 

In Iemma, Chase was the successor-in-interest to the original lender/mortgagee as identified in the subject mortgage on file with the county.  LRB, the tax sale purchaser in Iemma, argued, among other things, that Chase was not entitled to notice of the tax sale because Chase's status as a mortgagee was not recorded.  Essentially, LRB's contention was that Chase should have recorded an assignment of mortgage showing that Chase, not the predecessor bank, was the current holder of the mortgage.  Although Chase ultimately lost the case, Chase won on this particular point.  The Court held:

Under federal law pertaining to bank mergers, Chase was not required to file anything or to give public notice of its interest in the [real estate] because [the predecessor bank/original mortgagee] had alreay done so, and Chase acquired [the predecessor's] interest as a matter of law.

The main point of this post is to remind secured lenders and their counsel that the rule in 12 U.S.C. § 215(a)(e) is out there and that Indiana courts follow the principle that successor-by-merger banks don't need to record assignment documents.  They can, but they don't have to.

 


Federal District Court Flushes Another Borrower’s Post-Foreclosure Case

My research turned up another Indiana federal court opinion regarding the Rooker-Feldman doctrine, which I have discussed on three prior occasions (most recently, Another Rooker-Feldman Knock-Out:  Federal Court Ends Post-Foreclosure Lawsuit).  Roberts v. Cendant, 2013 U.S. Dist. LEXIS 80210 (S.D. Ind. 2013) (.pdf) is a fourth recent opinion in which the Court granted a defendant mortgagee’s motion to dismiss a pro se plaintiff’s federal court action. 

The law.  With regard to the applicability of Rooker-Feldman, the Court stated “the fundamental question is whether the injury alleged by the federal plaintiff resulted from the state court judgment itself or is distinct from that judgment.”  The doctrine prevents federal courts from exercising subject-matter jurisdiction where federal claims were “tantamount to a request to vacate the state court’s judgment of foreclosure.”  In Roberts, the Court concluded that the success of the plaintiff’s statutory and constitutional claims required “evaluation of the state court’s judgment” in the underlying foreclosure action.  The plaintiff borrower’s core argument was that the lender never had standing, but “the underlying action necessarily concluded that the [foreclosing lender] had standing to foreclose.”

Foreclosure firm.  One thing that distinguished Roberts from the cases in my prior posts was that the borrower named in his federal court suit the law firm that handled the state court foreclosure case.  Judge Magnus-Stinson held that “the Rooker-Feldman arguments are equally effective at barring the claims against . . . [the foreclosure firm/lawyers], and the Court dismisses the claims against them as well.” 

Dismissed.  The Court ultimately held:

Accordingly, because the success of [borrower’s] statutory and constitutional claims require evaluation of the state court judgment in the foreclosure action, and those claims can only succeed if the Court were to conclude that the state court acted erroneously in finding that [lender] had standing to foreclose and granting judgment in favor of [lender], the Rooker-Feldman doctrine bars the Court from exercising subject-matter jurisdiction in this matter.

The Rooker-Feldman doctrine is a powerful and well-recognized defense – at least in Indiana – for lenders to obtain a quick and inexpensive exit to what, in the final analysis, really are frivolous claims brought by disgruntled pro se (unrepresented) borrowers. 


Indiana Deficiency Judgments: Separate Action Not Applicable

 

Last week, an out-of-state lawyer and reader of my blog asked a question I’ve received several times previously – whether Indiana has a separate process for post-sheriff’s sale deficiency suits.  In this instance, he was reading my 4/22/08 post, How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sherriff’s Sale?, and had some follow-up questions. 

My definition.  The terminology “deficiency judgment” refers to the amount of the judgment remaining after deducting the price paid at the sheriff’s sale or, more generally, the difference between the debt amount and the value of the collateral securing the debt.

Indiana’s process.  It’s my understanding that some states require post-sale deficiency actions.  Not in Indiana.  Here, a judgment entered in a mortgage foreclosure action typically is comprised of two elements.  The first is a money judgment on the promissory note and/or guaranty, and the second is a decree of foreclosure based on the mortgage.  The deficiency is a product of the sheriff’s sale.  In Indiana, a deficiency judgment isn’t really a technical or statutory term.  More than anything, the words simply describe the net amount owed by a borrower or guarantor following a sheriff’s sale.

One judgment.  So, as to Indiana, unlike some other states, a personal judgment (against a borrower or a guarantor) for any post-sale deficiency actually occurs before the sheriff’s sale takes place.  There is no second procedural step or subsequent process to establish a deficiency judgment.  In fact, as noted in my 8/1/08 post Full Judgment Bid = Zero Deficiency, ultimately there may be no deficiency (residual money judgment) if the sheriff’s sale price meets or exceeds the amount of the judgment. 


Another Rooker-Feldman Knockout: Federal Court Ends Post-Foreclosure Lawsuit

Coe v. Mortgage Electronic Registration Systems, 2013 U.S. Dist. LEXIS 71912 (S.D. Ind. 2013) (.pdf) is the basis for my third post on the Rooker-Feldman doctrine.  For more on the doctrine, and the other two opinions addressing it, click on:  (1) Rooker-Feldman Doctrine:  Dismissing A Borrower’s Post-Foreclosure Federal Court Case and (2) Borrower’s Federal Court Claims, Following State Court Foreclosure, Dismissed.  Essentially, if a borrower's subsequent federal court action is "tantamount to a request to vacate the state court's judgment of foreclosure," then, as in Coe, the federal courts will bring a swift end to the borrower's case.


Following A Dismissal, Lenders Generally Are Able To Refile Foreclosure Actions Based On New Defaults

In Indiana, if a mortgage foreclosure action gets dismissed, even with prejudice, the lender usually has the right to file another action if there is a subsequent and separate loan default.  The Indiana Court of Appeals in Deutsche Bank v. Harris, 2013 Ind. App. LEXIS 150 (Ind. Ct. App. 2013) touches upon this rule.

Procedural posture.  For a multitude of reasons not pertinent to this post, the trial court in Harris dismissed the lender’s foreclosure case, pursuant to Indiana Trial Rule 41(E), for an alleged failure to prosecute.  The appeal explored whether the trial court abused its discretion in denying the lender’s Trial Rule 60(B) motion for relief from the adverse judgment.  The main point here is that the trial court dismissed, with prejudice, the lender’s mortgage foreclosure suit, and even went so far as to enter an order quieting title per the borrower’s counterclaim. 

Reinstitution possible.  The Court of Appeals reversed the trial court’s decision for a number of reasons, one of which was the borrower’s “incorrect argument that the [lender] could not reinstitute an action under the Note and Mortgage based upon a new default.”  Indiana case law provides that, where the initial foreclosure action by the lender was dismissed with prejudice pursuant to Trial Rule 41(E), a lender is not barred from initiating successive foreclosure actions for “subsequent and separate” alleged defaults by a borrower under a promissory note.  “Subsequent and separate alleged defaults under notes create a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action,” the Court said. 

Upshot.  The Court of Appeals held that the lender “would not be precluded from later filing a claim under the Note and Mortgage for subsequent and separate alleged defaults” by the borrower.  Based on that and other reasons, the Court reversed the trial court’s entry dismissing the lender’s lawsuit, and the Court remanded with instructions that the trial court reinstate the lender’s cause of action. 

Impact of rule.  Without doing more exhaustive research, it is not entirely clear to me, based upon the Harris opinion alone, whether the “right to refile” rule is limited to dismissals under Trial Rule 41(E).  The opinion did not specify whether (or not) the rule also applies to other dismissals, for instance those under a borrower’s motion to dismiss under Trial Rule 12(B)(6) or motion for summary judgment under Trial Rule 56. 

In my view, a technical, procedural dismissal will not, in Indiana, prevent lenders from suing on future loan defaults.  The dismissal of a lender’s mortgage foreclosure action should not, in and of itself, terminate a mortgage or release the borrower from obligations under a promissory note.  For that to occur, my opinion is that a court would need to enter a specific judgment or decree reaching that conclusion, and would need legal justification to do so.  A mere dismissal of a foreclosure lawsuit, without some corresponding adjudication on the merits that the mortgage is terminated and/or that the note is cancelled, should not bar a lender from subsequently trying to foreclose. 

UPDATES:

Following Rule 41(E) Dismissal For Failure To Prosecute, Can A Second Suit Be Filed?

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

 


Borrower’s Claims Of Negligence, Unconscionability And Quiet Title Negated

The Seventh Circuit Court of Appeals put an end to a borrower’s tactics to overcome a mortgage loan default in Jackson v. Bank of America Corporation, 711 F.3d 788 (7th Cir. 2013).  The case provides some good law for lenders/mortgagees.  Specifically, the opinion addresses the claims/defenses of negligence, fiduciary duty, unconscionability and quiet title.  Interestingly, the mortgagee had not yet filed a foreclosure action.  Apparently the borrower attempted a preemptive strike by filing his own lawsuit to thwart any future loan enforcement suit by the mortgagee. 

Negligence/fiduciary duty.  The borrower first contended that the mortgagee “negligently evaluated . . . the ability [of borrower] to repay the loan,” including specifically the utilization of gross income rather than net income.  In Indiana, claims of negligence involve three elements:  duty, breach of duty and injury proximately caused by breach.  To meet the first (relationship-related) element, the borrower contended that the mortgagee owed him a fiduciary duty.  The Court noted that, under Indiana law, such a duty generally does not arise between a lender and a borrower.  “A mortgage contract does not, on its own, create a confidential relationship between a creditor and a debtor.”  Accordingly, the Seventh Circuit affirmed the District Court’s dismissal of the borrower’s negligence claim. 

Unconscionability.  The second assertion of the borrower was that the mortgage was “unconscionable” and should be set aside.  Under Indiana law, an unconscionable (and thus unenforceable) contract is one that “no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.”  The Court rejected the borrower’s claim with a nice discussion of unconscionable-related contract law in Indiana.  The Court’s opinion touched upon the borrower’s suggestions that the mortgagee committed fraud based on the borrower’s lack of “specialized knowledge” required to evaluate whether the loan was in his best interests.  The Court reasoned that the borrower had “not shown how this contract, which is so similar to untold numbers of other mortgage refinancing contracts, could possibly be one that ‘no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.’” 

Quiet title.  The borrower’s quiet title claim was odd, and the Court disposed of  it with brief comments.  From what I can gather, the borrower’s claim was an attempt to extinguish the mortgage from the chain of title.  The borrower’s effort to pound a square peg in a round hole did not survive the mortgagee’s motion to dismiss.  The opinion on this point is not particularly educational, primarily due to what the Court noted to be the borrower’s attempt to “cut new turf” in Indiana quiet title law.  The Seventh Circuit did not allow any new turf to be cut.

Jackson is yet another recent Indiana opinion that helps lenders with early dispositions of borrowers’ attempts to delay the inevitable.  And, federal courts appear to be more receptive than state courts to Rule 12(b)(6) motions to dismiss. 

(Please forgive the absence of posts lately.  My day job has put me on the road a lot this Spring and thus away from my blog.)


Borrower’s Federal Court Claims, Following State Court Foreclosure, Dismissed

This will supplement my December 19, 2013 post:  Rooker-Feldman Doctrine:  Dismissing A Borrower’s Post-Foreclosure Federal Court CaseLucas v. JPMorgan Chase Bank, 2013 U.S. Dist. LEXIS 33672 (N.D. Ind. 2013) (.pdf) is another case applying the Rooker-Feldman doctrine.  As with the cases addressed in my prior post, the Court in Lucas also dismissed Borrower’s federal court case. 

Timetable.  Here is what happened in Lucas: 

8/9/10  Lender filed state court mortgage foreclosure action

9/9/11  Borrower filed separate lawsuit in state court against Lender

10/11  Lender filed motion to dismiss Borrower’s state court suit

12/06/11  State court entered default judgment against Borrower in original foreclosure action

2/12  State court dismissed Borrower’s state court suit

8/31/12  Borrower filed federal court lawsuit against Lender

Lender’s motion to dismiss.  Borrower’s federal court action basically claimed that Lender wrongfully attempted to enforce the subject promissory note.  Lender filed a motion to dismiss “because to award relief in [Borrower’s] favor the Court would have to review and reverse the two underlying [state court] judgments.” 

Rules/policies.  The Court in Lucas utilized the same legal principles addressed in my prior post.  Essentially, lower federal courts lack jurisdiction to review the decisions of state courts in civil cases.  One of the policies behind the Rooker-Feldman doctrine is to prevent “a state-court loser from brining suit in federal court in order effectively to set aside the state-court judgment.”  The Lucas opinion, like my prior post, delved into the “inextricably intertwined” test that may, in certain instances, apply to a court’s analysis of the doctrine. 

Conclusion.  The Lucas Court found that Borrower’s complaint ran afoul of the doctrine.  Borrower filed the federal case after two state courts ruled against her.  “She now requests this Court to review – and, in effect, undo – these two judgments from Indiana state courts.”  The Court concluded it had no jurisdiction to do so. 

Reasoning.  The Court said that the Rooker-Feldman doctrine divested it of jurisdiction to hear the claim in Borrower’s complaint.  Here were the Court’s reasons:

Because the [state court] in the first action implicitly determined that the [Lender] was able to enforce the promissary note at issue, the Complaint appears to be a direct challenge to the [state court’s] Default Judgment and Decree of Foreclosure.  Further, the [state court] in the second action dismissed the [Borrower’s] claim for wrongful foreclosure, suggesting that the Complaint is also a direct challenge to the state court decision in that action.  The [Borrower] does not actually request this Court to overturn either [state court] decision.  However, the Court finds that her Complaint is inextricably intertwined with the previous state court judgments because it is ‘in essence’ a request that this Court ‘review the state-court decision[s].’  Moreover, the Court finds that the [Borrower] had opportunity to bring the claims in her Complaint as part of the foreclosure action or as part of her second state court filing. 

As previously stated here, a losing borrower in state court generally can only appeal.  Borrowers cannot get second bites at the apple in federal court. 


Borrowers Sue Lender Over Alleged Wrongs From Loan Modification Agreement

Stender v. BAC Home Loans, 2013 U.S. Dist. LEXIS 30353 (N.D. Ind. 2013) (.pdf) provides a nice summary of how an Indiana federal court dealt with a lender’s efforts to promptly dismiss an assortment of causes of action brought by borrowers in connection with an alleged loan modification agreement. 

Specifics.  The plaintiff borrowers were mortgagors on two separate properties, and the defendant lender was an assignee of the loans.  The plaintiffs had defaulted on the mortgages but claimed that the defendant had agreed to a loan modification agreement.  The gravamen of the plaintiffs’ complaint was that the defendant refused to honor the modification agreement.  The plaintiffs sought damages for breach of contract, negligence, intentional infliction of emotional distress. 

Procedural maneuver.  The procedural context in Stender was important.  The defendant answered the complaint but promptly filed a motion for judgment on the pleadings under Fed. R. Civ. P. 12(c).  A motion for judgment on the pleadings essentially is an effort to get the court to dismiss the case at the outset.  A motion for judgment on the pleadings should not be confused with a motion for summary judgment, which as explained here deals with evidence, as opposed to mere allegations.  In Stender, the defendant moving party relied solely upon the allegations outlined in the complaint and any exhibits attached thereto.  Prevailing on such a motion normally is quite difficult because courts accept the factual allegations as true and look for “facial plausibility” of an alleged claim.  On summary judgment or, certainly, a trial, courts dig much deeper into actual evidence (testimony and exhibits).  In short, prevailing on Rule 12 motions is rare.   

Breach of contract, statute of frauds.  The defendant first asserted that the breach of contract count should be dismissed based upon Indiana’s statute of frauds, a subject I have discussed here previously.  The statute of frauds basically provides that the party against whom the action is brought (the defendant) must sign the alleged agreement that has been breached.  See, Ind. Code §  32-21-1-1(b).  In Stender, the defendant did not sign the loan modification agreement but did sign a cover letter, which plaintiffs contended satisfied the signature requirement.  The question was whether “the signature requirement of the statute of frauds must be satisfied with a pen-and-ink signature at the end of a contract.”  If so, then defendant would be correct that the lack of such signature on the loan modification documents was fatal to plaintiffs’ contract claim.  “But if the signature requirement can be satisfied in other ways, then the defendant’s argument fails.”  The Court denied the defendant’s motion because the defendant failed to demonstrate that the signature requirement had not been satisfied.  In other words, the Court wanted to see the evidence pertaining to the defense. 

Negligence, economic loss doctrine.  The defense associated with the negligence claim surrounded Indiana’s economic loss doctrine, which precludes liability based on certain theories, such as negligence, that seek purely economic loss (any pecuniary loss unaccompanied by any property damage or personal injury).  The Court granted the defendant’s motion and rejected the plaintiff’s argument that intangible alleged harms, such as injuries to credit scores and reputations, could be remedied with a claim for negligence.  The plaintiffs’ claims were purely economic in nature and, as such, Indiana law barred them. 

Intentional infliction of emotional distress.  The Court also dismissed the plaintiffs’ distress claims for similar reasons, namely that Indiana courts generally do not permit such claims based upon contractual or economic harm.  Although the plaintiffs’ allegations that the defendant lured them into signing loan modification agreement suggested that perhaps defendant was dishonest or acted with selfish economic motivation, “plaintiffs’ allegations do not permit any plausible inference that defendant’s intention was to harm plaintiffs emotionally.” 

In the end, the Court negated plaintiffs’ common law tort claims for negligence and emotional distress, which really have no place in a contract action such as Stender.  As to the statute of frauds defense to the breach of contract claim, however, the Court felt it was premature to rule.


Indiana Foreclosures Can Occur Outside Of Probate

This is a short follow-up to my March 19th post:  Indiana’s Claims Deadlines Against An Estate Of A Deceased Borrower.  As my partner Amy VonDielingen pointed out, an additional statute, Ind. Code 29-1-14-16, has some bearing on foreclosures.  The provision, entitled "Liens and mortgages, enforcement; sale of real estate; exception," specifies a waiting period before one can commence a mortgage foreclosure action and requires that the personal representative of the estate be a party to any foreclosure.  

The statute does not require a secured lender to timely file a claim in the estate, however, which was one of the matters addressed in my prior post.  Amy and I both continue to believe that in rem mortgage foreclosure claims (judgments as to the real estate, not the individual) can be brought outside of probate proceedings.


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

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

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

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

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

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

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

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

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


Indiana No-Nos: Confessions Of Judgment And Cognovit Notes

An out-of-state client recently asked whether Indiana allows “confessions of judgment.”  Some states permit these, but Indiana is not one of them.

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

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

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

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

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

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

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

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

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

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

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


Successor Bank Has Standing to Enforce

Throughout the recent economic downturn and wave of foreclosure cases, “lack of standing” has been the most common, but not necessarily the most successful, defense asserted by borrowers in mortgage foreclosure cases.  The theory came into vogue with the 2007 Boyko opinion, about which I wrote six years agoPichon v. American Heritage, 2013 Ind. App. LEXIS 10 (Ind. App. 2013) succinctly rejects the defense based upon the given facts.

Details.  Pichon is a very involved appellate opinion following a trial that dealt with at least nine separate issues, one of which was whether the plaintiff had standing to enforce a $650,000 promissory note.  The plaintiff, American Heritage Banco, Inc. (AHB), was the successor-in-interest to First National Bank of Fremont (FNBF).  AHB had acquired FNBF following a merger.  The note in question was payable to FNBF.  The defendant borrower alleged that AHB was not the real party in interest.  The trial court concluded that AHB had standing to enforce the note because it occupied the status of “holder” of the note.

Standing-related statutes.  The Indiana Court of Appeals agreed with the trial court.  There were two Indiana statutes relevant to the Pichon opinion.  First, I.C. § 26-1-3.1-301 states that a “person entitled to enforce instrument” means the “holder” of the instrument.  Second, I.C. § 26-1-1-201(20) defines “holder,” which includes one in possession of a negotiable instrument (a) if that instrument is payable to an identified person and (b) if the identified person is in possession. 

Ruling.  For purposes of the trial, the parties stipulated that FNBF was merged into AHB.  Pursuant to that merger, AHB was the successor to FNBF.  In Pichon, the subject note expressly stated that it was payable to FNBF or “its successors and assigns,” and AHB had possession of the note.  As such, the Court of Appeals affirmed the trial court’s conclusion that AHB had standing to enforce the note.

Related posts.  Here are links to some other posts that relate to the standing defense: 

Happy Holidays everyone.


Rooker-Feldman Doctrine: Dismissing A Borrower’s Post-Foreclosure Federal Court Case

Having lost to a lender in a state court foreclosure action, a borrower might try to file a separate lawsuit against that lender in federal court.  In such instances, lenders and their counsel should be aware of the Rooker-Feldman doctrine, which the United States District Court for the Northern District of Indiana addressed in two separate opinions late last year:  Fogarty Street v. Mortgage Electronic Registration System, 2012 U.S. Dist. LEXIS 163804 (N.D. Ind. 2012) (.pdf) and Canen v. U.S. Bank, 2012 U.S. Dist. LEXIS 177992 (N.D. Ind. 2012) (.pdf).  Generally, a losing borrower in state court can only appeal.  Do-overs in federal court are not allowed.

The situation.  Fogarty and Canen followed mortgage loan defaults and state court actions to foreclose.  In both cases, the lender had already obtained a state court judgment and foreclosure decree.  Instead of appealing, the borrowers filed new lawsuits in federal court asserting a plethora of claims attacking the lenders’ actions in the prior foreclosure cases and/or the servicing of the underlying mortgage loans.  The question was whether the federal court cases should be dismissed.  Rule 12(b)(1) authorizes the dismissal of complaints “that bring no actionable claim within the subject matter jurisdiction of the federal courts.” 

The doctrine.  The Rooker-Feldman doctrine “deprives federal courts of subject matter jurisdiction where a party . . . sues in federal court seeking to set aside the state court judgment and requesting a remedy for an injury caused by that judgment.”  The law prevents lower federal courts from reviewing state court judgments.  Generally “a litigant dissatisfied with the decision of the state tribunal must appeal rather than file an independent suit in federal court.” 

Two instances.  The Rooker-Feldman doctrine bars federal claims in two instances.  The first is when a plaintiff requests the federal court to overturn an adverse state court judgment.  Those cases are easy to spot because plaintiff’s claims were “actually raised in the prior state court action.”  The second, and more challenging, instance involves claims that were not raised in state court and/or do not on their face require review of a state court’s decision.  Here, the test is whether the federal court claims “are inextricably intertwined with the state court determinations.” 

If the court determines that a claim is inextricably intertwined, [the court] must then inquire whether the plaintiff did or did not have a reasonable opportunity to raise the issue in state court proceedings.  If the plaintiff could have raised the issue in state court, the claim is barred under Rooker-Feldman.

Inextricably intertwined.  The Fogarty and the Canen cases provide illustrations of the “inextricably intertwined” concept.  In Fogarty, the borrower’s claims of “fraud based robo-signing, voidable transfers of mortgage notes based on lack of authority, and lack of authority due to a lender no longer being in business . . . could and should have been raised in the state court foreclosure proceedings.”  In Canen, the borrower asserted a variety of theories why the Court should rescind the underlying loan.  But, “the precise issue decided in the foreclosure action was that one or more of the Defendants had a valid security interest in the house and could take possession of it upon [the borrower’s] nonpayment . . ..  [R]escinding the loan effectively required [the Court] to vacate the state court foreclosure judgment, which is exactly the sort of action the Rooker-Feldman doctrine forbids.” 

Exception.  Courts recognize very limited occasions for defendants to sue plaintiffs after the entry of a state court judgment.  The Canen opinion shed some light on what might be excluded from the applicability of the Rooker-Feldman doctrine, such as when borrowers allege wrongdoing independent of the prior state court foreclosure action.  The doctrine does not apply when plaintiffs are not attacking a state court judgment or when federal claims do “not depend on a determination that the state court erred in deciding the previous action.”  But, such a claim cannot attack or otherwise seek to set aside the state court decree.  The federal court case truly needs to be an entirely separate and distinct matter.  Without doing more research, I honestly can’t envision such a case in the context of a lender/borrower relationship or a foreclosure. 


Indiana Foreclosures: How Long Do They Take?

One question I often get is:  how long does the foreclosure process take in Indiana?  I posted about this back in November, 2006.  With the benefit of seven more years of experience and dozens of more cases, I’ve refined my answer.  As outlined below, commercial foreclosures can take anywhere from five months at the absolute earliest to several years. 

Judicial state.  The first thing to understand is that Indiana is a judicial foreclosure state.  A foreclosure requires a lawsuit, a judgment and a sheriff’s sale.  The process officially starts with the filing of a complaint.  (In residential cases only, Indiana law has pre-suit notice and settlement conference mandates.)

Timing.  Predicting the timing largely depends upon whether and to what extent the borrower contests (defends) the proceeding. 

Uncontested:  5 months minimum.  If a business borrower does not contest a foreclosure, the process can move relatively quickly.  Below are the major steps and an estimated timeline.  Five months is about as fast as things will go.  Realistically, the process will take longer.

Day 1:  Filing of the Complaint.

Day 7+:  Service of process on defendant - can occur in 7 to 10 days, but difficulties perfecting service are not uncommon.  This simple step can take several weeks

Day 28/31:  Motion for default judgment - can be sought 21 to 24 days after service of process.  A summary judgment may be preferable to a default judgment, but that should not alter the timing in an uncontested case.

Day 60:  Entry of judgment and decree of foreclosure - should occur in under 30 days.

Day 90:  Praecipe for sheriff’s sale, including notice of same - by statute, cannot be filed until three months after the Complaint.

Day 150:  Sheriff’s sale - happens about 60 days from Praecipe, depending on the county.

Contested:  8+ months minimum.  The steps in a contested case essentially will be the same as those above, except that the court will hold a hearing on the summary judgment motion that will necessarily delay a ruling.  Having said that, with the vagaries of litigation, it’s virtually impossible to conclusively estimate how long a case may last.  Each one is different and driven by a wide variety of factors.  Much depends upon how clear the default and the damages are, and how aggressively each party pushes its position.  An eight-month contested foreclosure is optimistic.  A year is not unusual.

Be prepared for delays.  The timing will be impacted by the docket of a particular court and/or the schedule of an individual civil sheriffs’ office.  Moreover, defense attorneys can prolong the matter by seeking (and obtaining) multiple extensions of time, serving requests for discovery and vigorously challenging a motion for summary judgment.  In the event of a trial, meaning that the court denied summary judgment, a resolution of the case will be deferred many months if not years.  Also remember that defendants can appeal an unfavorable ruling.  Finally, a borrower/mortgagor can stop a sheriff’s sale by filing for bankruptcy protection at any time before the sale begins. 

Even with the best loan documents and great facts, the Indiana foreclosure process, perhaps to the delight of borrowers and certainly the chagrin of lenders, has the potential to be a lengthy and expensive undertaking. 


Proving You’re The Holder Of The Note

An assignee of a loan (purchaser of a promissory note and mortgage) must establish in any foreclosure action its status as the current holder (owner).  In a foreclosure action, a defendant borrower or guarantor sometimes will defend the case by asserting that the plaintiff assignee lacks standing to enforce the loan.  Collins v. HSBC Bank, 2012 Ind. App. LEXIS 452 (Ind. Ct. App. 2012) provides a road map for plaintiff assignees to defeat such arguments and to obtain summary judgment.

Set up.  In 2004, the borrower in Collins executed and delivered to his original lender a promissory note evidencing a loan for the purchase of real estate.  To secure repayment of the note, borrower executed a mortgage.  The original lender later sold/assigned the loan.  In 2007, borrower stopped making payments, at which time the plaintiff in Collins, as holder (owner) of the note at the time, filed a foreclosure complaint and obtained summary judgment in its favor.  Defendant borrower appealed the trial court’s grant of summary judgment.  The issue in Collins was whether the trial court erred in not concluding that there was a factual question regarding plaintiff’s status as the holder/owner of the promissory note.

Evidence.  The promissory note attached to the plaintiff’s complaint was not endorsed from the original lender to the plaintiff.  In connection with its summary judgment motion, the plaintiff tendered an affidavit, with a copy of the note, but failed to attach an endorsement, allonge or assignment.  However, the plaintiff later submitted an affidavit that attached a copy of the original note, which included an endorsement by the original lender to the plaintiff lender.  In addition, at the summary judgment hearing the plaintiff produced the original promissory note.  (Production of the original loan docs is not required to succeed on summary judgment, but in my view is the ultimate trump card to any standing defense.) 

Law.  Borrower maintained that, among other things, plaintiff’s complaint and first affidavit required the trial court to deny summary judgment and to weigh the evidence at trial as to whether the plaintiff was the owner of the note.  But the record on appeal disclosed that the plaintiff presented the original note, with borrower’s inked signature, together with the endorsement from the original lender to the plaintiff.  According to the Indiana Court of Appeals, that was enough to establish plaintiff’s right to enforce.  See, Ind. Code §§ 26-1-3.1-204(c) and 301(1), and 1- 201(20)(A).  The Court in Collins affirmed the trial court’s summary judgment accordingly: 

The evidence shows not only that [plaintiff] is in possession of the original note but also that the original note was endorsed to [plaintiff].  There exists no better evidence to establish that [plaintiff] is the present holder of the note entitled to enforce the note under Indiana law.

The Collins opinion is good law for assignees attempting to enforce their loans.  The case also highlights the importance for prospective assignees to obtain, in the loan purchase transaction, the original loan documents and assignments.  While that’s not always possible, presentation of the original note and mortgage can be definitive proof that you’re the holder/owner of the loan.


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

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

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

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

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

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


Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment

A motion for summary judgment is a pre-trial mechanism to reduce a lender’s mortgage foreclosure complaint to a judgment and decree.  McEntee v. Wells Fargo Bank, 970 N.E.2d 178 (Ind. Ct. App. 2012) illustrates how such a motion can be defeated if the plaintiff lender does not, in its supporting affidavit, explain how the borrower defaulted on the promissory note.

Payment dispute.  McEntee involved a borrower and a national bank.  The disagreement began when the borrower submitted a check to the lender for his monthly payment that he post-dated to the due date.  The lender negotiated the check before that date, and payment of the check resulted in a checking account overdraft fee to the borrower of $112.50.  The borrower then deducted that amount from his next loan payment.  Things escalated into a mortgage foreclosure suit and a counterclaim for emotional distress damages. 

Defense.  The lender filed a motion for summary judgment, and the trial court granted the motion.  On appeal, the borrower argued, among other things, that the lender improperly deposited post-dated checks before the due date for each payment.  The borrower designated as evidence in response to the motion for summary judgment several letters he sent to the bank regarding the payment dispute.  The borrower’s theory was that the lender improperly handled his payments and that, if his mortgage was in default, such default was the result of lender’s conduct.

Basic law.  McEntee provided: 

if a mortgagor defaults in the performance of any condition contained in a mortgage, the mortgagee or the mortgagee’s assign may proceed in the circuit court of the county where the real estate is located to foreclose the equity of redemption contained in the mortgage.  Ind. Code § 32-30-10-3(a).  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. 

“Not enough.”  With its summary judgment motion, the bank submitted an affidavit to prove, among other things, the borrower’s default.  According to the Court, the affidavit stated only that “the conclusory averment . . . that ‘according to [the lender’s] records, the [borrower is] in default and that said default has not been cured.’”  In Indiana “conclusory statements are generally disregarded in determining whether to grant or deny a motion for summary judgment.”  The Court held that this conclusory statement was “not enough” to support the lender’s motion.  The lender did not show that the borrower defaulted in his performance under the note, but instead established only that the borrower and the lender were engaged in an ongoing payment dispute. The lender’s “designated evidentiary materials [did] not establish that [borrower] failed to pay the amounts due on the note.”

Provide some detail.  The cliché that “the devil is in the details” applies here.  The Court in McEntee reversed the trial court’s summary judgment and never had to address the merits of the payment dispute.  This is because the only evidence supporting summary judgment was the lender’s conclusory allegation that there was a default.  The lesson is that there should be some detail concerning the nature of the payment default and the timing of it.  At least some of the key facts, beyond parroting the default language in the promissory note, must be given so as to establish that there has been a breach under the loan document. 


Indiana State Courts Cannot Modify (Cram Down) A Mortgage

Can a borrower convince an Indiana state court to modify or “cram down” a mortgage over the objection of the lender?  According to the Court of Appeals in Nationstar Mortgage v. Curatolo, 2013 Ind. App. LEXIS 284 (Ind. Ct. App. 2013), the answer is “no.” 

Framework.  Nationstar was a residential mortgage foreclosure case.  Five different settlement conferences occurred that, in part, led to the borrower’s allegations of bad faith and request for sanctions.  In the final settlement conference, the trial court issued an order finding that (a) the lender acted in bad faith and (b) the terms of the mortgage were to be modified so as to reduce the principal and interest owed.  This is commonly known as “cramming down” the mortgage.

Settlement conference.  The negotiations in Nationstar and resulting order arose out of a series of I.C. § 32-30-10.5 settlement conferences.  (See my May 19, 2011 post about the 2011 legislation.)  Indiana law mandates settlement conferences in residential foreclosures (but not in commercial cases).  Nationstar provides a nice discussion of the purpose of I.C. § 32-20-10.5:

• The statute is designed to “avoid unnecessary foreclosures” and to facilitate “the modification of residential mortgages in appropriate circumstances.” 
• The purpose of this statute is to “modify the foreclosure process to encourage mortgage modification alternatives.”
• A lender generally must give a defendant borrower notice of the right to participate in a settlement conference, and the borrower then has thirty days to notify the court if he or she intends to partake. 
• If the lender and borrower ultimately agree to enter into a “foreclosure prevention agreement,” the court may dismiss or stay the foreclosure action as long as the borrower complies with the terms of the agreement. 
• Even if the parties agree upon a final agreement, the foreclosure action shall be dismissed or stayed “at the election of” the lender. 
• Although the statute gives the court the right to stay the action pending the negotiation process, the statute does not give the trial court the authority to enter a final order modifying the mortgage agreement.
• Importantly, the statute does not mandate that lenders and borrowers enter into foreclosure prevention agreements.  A lender is under no obligation to enter into a foreclosure prevention agreement.

Some general mortgage law.  Nationstar identifies a couple important principles of Indiana mortgage law:

• Since mortgage agreements are based upon the parties’ mutual intent, those parties both must agree to any permanent modification. 
• When interpreting mortgage agreements, courts are bound to give effect to the plain meaning of the language of the mortgage.  Courts cannot make a new contract for the parties or ignore or eliminate provisions of such instruments.

Issue.  To my knowledge, Nationstar addressed for the first time in Indiana the question of “whether the trial court had the authority to modify the mortgage agreement without the consent of both parties.”  In other words, can an Indiana state court unilaterally change the terms of a mortgage? 

No authority.  The Court in Nationstar concluded that the trial court lacked authority to modify the mortgage.  “The trial court acted in excess of its authority when it ordered the modification.”  The Court remanded the case to the trial court with instructions to allow the foreclosure action to proceed.  Trial court judges cannot effectively rewrite the terms of a mortgage.  At most, they can force settlement discussions, but in the end “a lender is under no obligation to [settle], ill-advised as its refusal to do so may be.” 

(NOTE:  This post is not a comment upon whether, or to what extent, a federal bankruptcy court may or may not modify a mortgage or “cram down” payments.) 


Indiana 2013 Legislation, Part III: Mortgage Statute Of Limitations Amended

This is my third and final post about the relevant Indiana legislation arising out of this year’s session.  At issue is House Bill 1079 and Indiana Code § 32-28-4-1 through 3, which deal with the expiration of mortgage liens, together with the statutes of limitations applicable to foreclosure actions.  Today’s post will supplement my September 3, 2010 post that touches upon the prior statutory language.  (For more on statutes of limitations, including the statute applicable to promissory notes, please read my March 9, 2009 post.) 

Lien expiration/bar date.  There are two components to the provisions in I.C. § 32-28-4.  The first deals with the expiration of a mortgage lien (general rule).  The second involves the deadline to file a foreclosure action (exception to general rule).  In either instance, the applicable time period is the same.  (HB 1079 and I.C. § 32-28-4 also apply to vendor’s liens, which were the topic of my August 7, 2012 post.)

I.C. § 32-28-4-1:  maturity date identified.  As of July 1, 2012, the general rule is that a mortgage lien expires ten years after the maturity date stated in the recorded mortgage.  The exception is if the mortgagee files a foreclosure action within that ten-year period. 

I.C. § 32-28-4-2(a):  maturity date not identified.  If the recorded mortgage does not identify a maturity date (articulated as when “the last installment of the debt secured by the mortgage lien becomes due”), then the expiration of the mortgage depends on the date of the mortgage.  If the parties created the mortgage before July 1, 2012, the lien expires 20 years after the mortgage execution date, unless the mortgagee files a foreclosure action within that 20-year period.  If the parties created the mortgage after June 30, 2012, the mortgage lien expires 10 years after the mortgage execution date, unless the mortgagee files a foreclosure action within that 10-year period.  (Please note that amended I.C. §§ 32-28-4-1(b) and (c) deal with instances in which there is no date of execution in the document.) 

I.C. § 32-28-4-3:  affidavit of maturity date.  Indiana law provides a remedy for situations in which a mortgage fails to identify a maturity date.  The solution is to record an affidavit stating a maturity date.  Such filing triggers the application of 10-year/20-year rules. 

Retroactive?  The General Assembly placed an effective date on the amendment of July 1, 2012.  As a matter of law, post-2012 mortgages omitting a maturity date will expire in 10 years, unless a Section 3 affidavit is recorded.  It’s my understanding there was some confusion about whether a prior change in the law (from 20 years to 10 years) could have applied to pre-2012 mortgages.  The concern was that mortgages over 10 years old suddenly expired with the enactment of the law.  I’m told that, through some litigation that has since been dismissed, the Indiana Attorney General has opined that retroactive application of the date change would be unconstitutional.  In practice, therefore, the 10-year rule does not apply to pre-2012 mortgages (without maturity dates). 

Pointers.  The critical lesson here is that secured lenders should always identify a maturity date in an Indiana mortgage.  Additionally, parties holding mortgages would be wise to examine their Indiana mortgage portfolios to ensure that all mortgages have a maturity date defined.  If the mortgage omits such date, mortgagees should take steps to record the necessary affidavit to protect their lien. 


 


Discrimination Allegations Unavailing For Borrower In Post-Foreclosure Eviction

Today’s post follows-up on a theme from my February 15th post with respect to evictions following a sheriff’s sale.  That post dealt with eviction of tenants.  Today’s post, regarding United States of America v. Cotton, 2012 U.S. Dist. LEXIS 341 (N.D. Ind. 2012) (rtclick/save target as for .pdf), deals with mortgagors/owners. 

Backdrop.  Borrower owned real estate subject to a bank’s mortgage and a junior mortgage held by the United States Department of Agriculture (“USDA”).  Due to a failure to make payments, the bank filed a foreclosure action against the borrower and obtained a summary judgment that authorized a sheriff’s sale.  At the sale, third-party bidders purchased the real estate.  The USDA thereafter asserted its redemption rights under federal law (28 U.S.C. § 2410(c)).  In exchange for a deed, the USDA paid the purchasers an amount equal to what the purchaser’s paid at the sheriff’s sale, plus interest.  After recording the deed, the USDA sent the borrower a notice to vacate the premises within thirty days.  The borrower refused to comply. 

Procedural maneuvering.  To obtain possession of the real estate, the USDA, in a lawsuit separate from the state court foreclosure, filed a motion for judgment on the pleadings pursuant to F.R.C.P. 12(c).  The Court in Cotton noted that the USDA had to establish “that [bank’s] lien on the [subject real estate] stood in first priority, ahead of the USDA’s; that it timely exercised its redemption right in the [subject real estate]; and that it followed the proper procedures under Indiana law to perfect legal title in the [real estate].”  The Court concluded that the USDA had met its burden.

Right to possession.  The USDA’s right of redemption vested upon the sale of the real estate at the sheriff’s sale.  The USDA timely redeemed the real estate and properly recorded the subject deed.  This served to perfect the USDA’s legal title in the real estate.  In Indiana, property law grants to property owners the absolute and unconditional right “to exclude from their domain those entering without permission.”  The Court stated that:  “as the owner of an undivided fee simple interest in the [real estate], the United States is entitled to permit, or exclude, whomever it desires from the property; including [the borrower].”

Borrower’s contentions.  The borrower did not contest the action upon the legal formalities of the acquisition by the USDA, but rather upon notions of equity.  The borrower asserted that the USDA did not have “clean hands,” an equitable doctrine I discussed in a December, 2012 post.  Generally, “one who seeks relief in a court of equity must be free of wrongdoing in the matter before the court.” 

    First, the borrower argued that the USDA had an obligation to intervene on his behalf and to provide him with legal representation and advice in the state court foreclosure proceedings.  The Court noted that, while the USDA might have an obligation under federal law to assist minority and impoverished individuals in efforts to obtain affordable housing, such obligation does not extend to the requirement to provide free legal services to those persons. 

    Second, the borrower asserted that “because the USDA previously defended against allegations of race discrimination in a class action lawsuit, this alleged misconduct should either be imputed or presumed into the context of the instant case.”  The cases upon which the borrower relied involved alleged racial discrimination in applying for mortgage loans.  In Cotton, the borrower received a mortgage from the USDA without any complications.  The borrower invited the Court “to entertain a presumption that because the USDA discriminated against similarly situated persons in the past, it necessarily follows that he too was a victim of discrimination.  Because the evidence in the pleadings [did] not substantiate this allegation, the Court [was] not inclined to leap to such a conclusion.”

The Court in Cotton held that the actions of the USDA did not make it inequitable for the Court to order the requested relief.  The Court granted the USDA’s motion for judgment on the pleadings and found that the borrower was in wrongful possession of the subject real estate.  The Court ordered him to vacate the premises accordingly.  One point Cotton illustrates is that, in Indiana, a sheriff’s sale terminates the borrower’s (former owner’s) rights to the mortgaged real estate.


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 left 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.


More On Indiana’s Service Of Process Rules and Pitfalls

My December, 2010 post “Service Of Process” Fundamental For The Plaintiff Lender addressed the matter of inadequate service of process, which can result in defective judgments.  The subsequent decision in Norris v. Personal Finance, 957 N.E.2d 1002 (Ind. Ct. App. 2011) allows me to supply a complementary post.  Since “do overs” should be avoided, secured lenders and their foreclosure counsel need to have a good grasp on how to initiate a suit against someone. 

How service occurred.  In Norris, a borrower failed to make payments on the subject loan, and the lender filed a collection action.  The sheriff delivered the complaint to the address of the parents of the borrower and sent another copy to that address by first class mail.  Since the borrower failed to appear at the trial, the court entered a default judgment against him.  In a post-judgment hearing, the borrower argued that service of process at his parents’ address was insufficient and that the default judgment should be set aside.  The trial court denied the requested relief, and the borrower appealed. 

The lender’s argument.  The promissory note identified the borrower’s parents as references and gave their home address.  Two emails involving the lender’s lawyer’s secretary and the borrower indicated that the borrower had knowledge of the suit and the trial date.  Previous phone conversations between the borrower and the lender’s representative occurred in which the borrower stated that he was living with his parents due to the loss of his home.  At one point the lender’s representative called the parents’ home, and the borrower answered the phone.  In short, the evidence was overwhelming that the borrower knew about the suit.

The borrower’s argument.  The borrower claimed that he did not reside at his parents’ address when the complaint was served and, as such, the court did not have personal jurisdiction over him when it entered the default judgment.  The borrower had not appointed his parents as his agents or otherwise authorized them to accept service on his behalf. 

Rule 4.1.  This trial rule governs service on an individual, and section (A)(3) provides service may be made by “leaving a copy of the summons and complaint at his dwelling house or usual place of abode.”  The Court held that the record in Norris was devoid of such evidence.  In footnote 4 of its opinion, the Court provided a nice summary of Indiana law on the “extremely fact-sensitive” question of whether an address is a party’s “dwelling house or usual place of abode.” 

Rule 4.16.  Instead of focusing on Rule 4.1(A), the trial court based its decision upon this trial rule, which essentially states that one who accepts service for another is under a duty to notify that person.  The trial court presupposed that the parents either did or could accept service for their son.  Since it was undisputed the parents received the complaint, the trial court reasoned that the parents had a duty to inform their son of the suit or to inform the court that the borrower did not live with them.  The borrower asserted that this rule only applies to those with authority to accept service for another, and the Court agreed.  Parents of competent adults are not, under Indiana law, persons having authority to accept service.  And there was no evidence in Norris establishing that the parents in fact did not have such authority. 

Rule 4.15(F).  This trial rule basically provides that service shall not be deemed insufficient when it “is reasonably calculated to inform the person to be served that an action has been instituted against him.”  Although this somewhat nebulous rule had the potential to save the lender, the Court rejected its application because the purpose of the rule is only to cure “technical defects in service of process, not a total failure to serve process,” which was the situation in Norris

Actual knowledge not the test.  The evidence established that the borrower in Norris had actual notice of the collection action and the trial.  Nevertheless, Indiana law is well settled that the mere fact that the defendant had knowledge of the action will not grant the court personal jurisdiction.  Plaintiffs must follow the guidelines in the Rule 4 series and constitutional due process. 

In Indiana, the seemingly simple step of serving a defendant borrower with a summons and complaint can sometimes become a frustrating obstacle to overcome.  One of the lessons of Norris, together with the Elliott and Yoder cases I discussed in my December, 2010 post, is to get service right the first time.  An expedient default judgment based on questionable service may, in the end, prove to be a waste of time and money.  Ultimately, the foolproof method of service upon an individual is to deliver a copy of the summons and complaint to him personally.  See, T.R. 4.1(A)(2).  


Successor-In-Interest Banks As Plaintiffs In Foreclosure Actions

With bank mergers and takeovers, we sometimes see cases where the name of the plaintiff lender will not be the same as that reflected in the note and mortgage.  This is because, normally, there are not loan assignment documents like those we see when loans are bought and sold.  When lenders are bought or sold, generally speaking, the corporate existence of each bank, and ownership of assets like loans, automatically continue in the receiving entity.  Without the benefit of traditional assignment documents showing the chain of ownership of a loan, how can the successor bank prove that it holds the predecessor’s note and mortgage?  CFS v. Bank of America, 962 N.E.2d 151 (Ind. Ct. App. 2012), settles this question in Indiana. 

Procedural history.  CFS involved a borrower’s appeal of the trial court’s summary judgment in favor of a lender - Bank of America, successor-in-interest to LaSalle Bank Midwest National Association.  In 2007, the borrower executed a promissory note and mortgage in exchange for a loan from LaSalle.  In 2009, Bank of America filed a complaint to foreclose the mortgage, and then moved for summary judgment.  In an affidavit supporting the summary judgment motion, a Bank of America representative testified that Bank of America was the successor-in-interest to LaSalle.  But, Bank of America did not produce any documentation to support or verify that fact.  The borrower objected to the motion on the basis that Bank of America had failed to demonstrate its ownership of the LaSalle note and mortgage, but the borrower didn’t file any evidence to contradict the bank’s affidavit. 

Shift of burden of proof.  The borrower in CFS argued that Bank of America did not sufficiently prove it was entitled to enforce the loan originally held by LaSalle.  (I.C. § 26-1-3.1-301 defines a “person entitled to enforce.”)  The Court disagreed and reasoned that the borrower failed to identify an issue of fact or otherwise designate evidence to show that Bank of America was not the successor of LaSalle.  The law did not require the trial court to consider a certificate of merger or some other document supporting the LaSalle/Bank of America transaction.  “Whether the merger took place was not a disputed issue of material fact.” 

Legal issue.  As to the law regarding whether a successor bank surviving after merger can enforce a note and mortgage of the predecessor, the Court relied upon 12 U.S.C. § 215(a)(e), which states in part:

The corporate existence of each of the merging banks or banking associations participating in such merger shall be merged into and continued in the receiving association and such receiving association shall be deemed to be the same corporation as each bank or banking association participating in the merger.  All rights, franchises and interests of the individual merging banks or banking associations in and to every type of property (real, personal, and mixed) and choses in action shall be transferred to and vested in the receiving association by virtue of such merger without any deed or other transfer.  The receiving association, upon the merger and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property.

Bank of America, as the successor after merger, acquired the rights to LaSalle’s property (i.e. the subject loan) by operation of law. 

No assignment necessary.  CFS was a different scenario from one in which a loan had been sold, and thus assigned, from one existing lender to another existing lender.  As I noted in November of 2007 and again this past November, an institution filing a foreclosure suit must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint.  When loans are transferred, the plaintiff must produce chain of assignment documents linking the original lender/mortgagee to the holder of the debt at the time.  Without such documentation, the plaintiff lacks standing to file suit.  In CFS, the original lender merged into another lender.  Proof of standing did not involve loan assignment documents but rather testimony that there had been a merger.  CFS therefore supports the idea that a predecessor need not assign its loans to the successor.  Such a transfer occurs by virtue of the merger/acquisition itself pursuant to 12 U.S.C. § 215(a)(e).

Lenders faced with the problem of suing upon loan documents that identify a predecessor-in-interest need not worry in Indiana.  As long as there is testimony to show that the named plaintiff is indeed the successor-in-interest by merger, then the plaintiff should have the right to foreclose.  Absent evidence submitted by the defendant calling into question whether a merger occurred, certificates or other voluminous documents verifying the merger are not necessary.


Are Borrowers Entitled To Jury Trials On Their Counterclaims?

In my post Contractual Waiver Of Right To Jury Trial, I explain why Indiana mortgage foreclosure actions are not tried to a jury but rather to a judge.  But what about a borrower’s counterclaim?  The Indiana Supreme Court in Lucas v. U.S. Bank, 953 N.E.2d 457 (Ind. 2011) examines that issue. 

Legal claims.  Lucas was a residential foreclosure action.  Here is a list of the defenses and claims asserted by the borrowers against the lender and its servicer – some of which we might also see in a commercial foreclosure:

• Ineffective assignment of loan documents
• Violation of Truth in Lending Act
• Violation of Real Estate Settlement and Procedures Act
• Civil conversion
• Civil deception
• Breach of duty of good faith and fair dealing
• Breach of contract
• Promissory estoppel
• Violation of Fair Debt Collection Practices Act

The question in Lucas was whether the borrowers had a right to a jury trial on these claims (assuming they survived a motion for summary judgment).

Subsumed into equity?  The Court in Lucas articulated the legal issue as:  “[o]nce a foreclosure action invokes the equity jurisdiction of a trial court, when are the borrowers’ legal defenses and claims subsumed into equity?”  Trial courts must determine whether a suit is “essentially equitable” and, in so doing, must engage in a multi-pronged inquiry:

If equitable and legal causes of action or defenses are present in the same lawsuit, the court must examine several factors of each joined claim – its substance and character, the rights and interests involved, and the relief requested.  After that examination, the trial court must decide whether core questions presented in any of the joined legal claims significantly overlap with the subject matter that invokes the equitable jurisdiction of the court.  If so, equity subsumes those particular legal claims to obtain more final and effectual relief for the parties despite the presence of peripheral questions of a legal nature.  Conversely, the unrelated legal claims are entitled to a trial by jury.

Distilled to its essence.  The basic theory of the borrowers in Lucas was that “but for the unlawful actions by [lender], the borrowers would not have suffered any money damages, their account would be considered current, and the foreclosure complaint would not have been filed.”  The case fundamentally dealt with (1) the terms of the parties’ agreement, (2) the amount of the borrowers’ payments, (3) the application of those payments, and (4) whether the borrowers failed to pay as agreed.  The Court said that “[w]hen comparing the core issues presented by the [borrowers’] legal defenses and claims to the core issues presented by the foreclosure action, it is evident that they are closely intertwined with one another.”  Because the heart of the claims rested upon whether the borrowers were in default and, if so, what the amount of their debt was, Indiana’s equitable clean-up doctrine was properly invoked, and the legal claims were “subsumed into equity to obtain more final and effectual relief for the parties.” 

Significant overlap.  The Court, in a 3-2 decision, concluded that equity had taken jurisdiction over the essential features of the lawsuit, including the borrowers’ affirmative defenses, counterclaims and third-party claim, so as to negate the borrowers’ right to a jury trial.  The following excerpt from Lucas sums up the Court’s ruling:

In this case, a mortgage holder filed a foreclosure action against the loan borrowers.  In response, the borrowers asserted numerous legal defenses and claims against the mortgage holder and loan servicer.  The borrowers asked for a jury trial on these defenses and claims, but the trial court denied the request.  We affirm and hold that the borrowers’ claims and defenses shall be tried in equity because the core legal questions presented by the borrowers’ defenses and claims are significantly intertwined with the subject matter of the foreclosure action.

No jury.  Lucas leaves a small window open for a trial by jury on totally unrelated legal claims, but it seems that most borrower counterclaims should be tried to a judge.  The Court’s opinion is favorable to lenders, particularly those involved in the residential foreclosure world.  The Lucas holding eliminates potential delays and uncertainties associated with the possibility of a jury trial on the laundry list of counterclaims that we sometimes see borrowers assert.  


How Should A Junior Lender/Mortgagee Respond To An Indiana Foreclosure Suit?

One of our bank clients, which has a home equity line of credit portfolio, recently asked me to give a presentation on how best to deal with foreclosure suits filed by senior lenders (first mortgagees).  Whether junior mortgages are residential or commercial, the basic plan of attack in Indiana is the same:

 1. Email Summons and Complaint filed by senior mortgagee, together with scan of the bank’s loan documents, to foreclosure counsel.  Advise foreclosure counsel of the manner of service of process (certified mail or hand delivery) and date of receipt.

 2. Foreclosure counsel will file an appearance and a motion for extension of time with the court.  Nothing else typically will be due with the court until 50 – 53 days after the date of service of process.

 3. During the 50 – 53 day window, the bank should do the following:

a. Order an appraisal or broker price opinion, and determine the fair market value of the mortgaged property.

b. Create an estimate of the senior mortgagee’s entire indebtedness, including unpaid principal balance, accrued interest, late fees, delinquent real estate taxes, per diem interest and attorney fees/litigation costs.  The complaint will list many of these figures.

c. Create an estimate of carrying costs associated with owning the real estate, including real estate taxes, hazard insurance premiums, maintenance/repair costs, utility expenses and attorney fees/litigation expenses for foreclosure. 

d. Create an estimate of liquidation expenses, including broker fees and closing costs.

e. Determine the bank’s own estimated indebtedness, including unpaid principal balance, accrued interest, per diem interest and late fees.

 4. Before the close of the 50 – 53 day window, the bank should determine whether it would ultimately net any money if it were to acquire the mortgaged property at the sheriff’s sale and then liquidate it.  The question is whether the value of the mortgaged property exceeds the senior mortgagee’s indebtedness, the carrying costs and the liquidation expenses.  Here is a basic formula:  Fair Market Value - (Senior Debt + Carrying Costs + Liquidation Expenses) = Equity.

 5. If the calculation in #4 shows insufficient equity, then the bank should consider instructing foreclosure counsel to file a disclaimer of interest and motion to dismiss.  (The exception to this would be if the bank desires to collect the debt from other assets of the borrower or a guarantor.)  The case might end here.

 6. If the calculation in #4 shows sufficient equity, then the bank should advise foreclosure counsel of its debt figures in #3(e) above and instruct counsel to file an answer to the complaint and a cross claim against the borrower (and guarantor, if applicable).

 7. The bank or foreclosure counsel next should order a title commitment to be effective through the date of the filing of the complaint, and ensure all lien holders are named in the case.

 8. Foreclosure counsel will monitor the lawsuit and obtain judgment/foreclosure decree for the bank.

 9. After the entry of judgment but before the sheriff’s sale, the bank should revisit the equity analysis in #4.  The bank – the junior lender - must decide if it is prepared  to pay off the senior mortgagee’s judgment so that the bank can credit bid its own judgment at the sale. 

 10. The junior lender should communicate its decision regarding #9 to foreclosure counsel, with bidding instructions, if any. 

 11. As applicable, foreclosure counsel will attend the sheriff’s sale, tender a cash deposit sufficient to pay the senior mortgagee’s judgment in full and submit a credit/judgment bid on behalf of the bank, which will acquire title to the property if it’s the winning bidder.  If the bank is outbid, then it will receive cash in the amount of its credit bid (and a refund of the deposit). 

Perhaps the most important thing to bear in mind is that the process requires junior mortgagees to bring enough cash to the sheriff’s sale to pay off the credit (judgment) bid of the senior mortgagee.  A junior lender cannot submit its own credit bid or obtain title to the real estate unless it first outbids the senior lender with cash.  Hence the significance of the analysis in #4. 


Is The Citimortgage Opinion Flawed For Not Requiring Proof Of Assignment Documents?

This is my final post about the Indiana Supreme Court’s opinion in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  Here are my other three:  10-26, 10-19, 10-12.  The Court’s decision to grant Citimortgage’s motion to intervene was understandable in that it preserved the senior lien.  Based upon the Court’s ruling, a logical outcome would have been to set aside the trial court’s judgment and resulting sheriff’s sale.  But that’s not what happened. 

Result.  The Court didn’t simply remand the case to the trial court - to the prejudgment stage - for further proceedings with Citimortgage as a party.  The Court dispensed with a “do over” and instructed the trial court to amend its judgment “to provide that ReCasa took the [real estate] subject to Citimortgage’s lien.”  What I believe this means is that the litigation (for now) is over but that Sanders, the third-party purchaser, owns the real estate subject to the Citimortgage lien (of an undetermined amount).  Junior mortgagee ReCasa didn’t lose – Sanders did

Absence of proof.  A more curious aspect of the Court’s analysis was the fact that there was no hard evidence of Citimortgage’s lien.  From what I can tell in reviewing all of the Citimortgage opinions, there was no proof of the date upon which Citimortgage acquired the lien or, in other words, when Citimortgage became Irwin’s assignee.  The Court appears to have assumed, based perhaps on the 2009 mortgage assignment, that Citimortgage was the mortgagee at the time ReCasa filed the suit in 2008.

Against the grain.  Setting aside the trial court’s judgment is one thing, but it’s an entirely different matter to effectively grant Citimortgage its own judgment.  This outcome seems to cut against law that has developed in this country over the last several years mandating that lenders/mortgagees actually prove that they hold the mortgage at the time of the filing of a foreclosure claim.  As I noted back in November of 2007, a famous opinion from a federal court in Ohio emphatically held that an institution filing a foreclosure suit must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint.  This means that the real party in interest must produce, and typically must include as exhibits in its pleadings, chain of assignment documents linking the original lender/mortgagee to the holder of the debt at that time.  Without such documentation, the party lacks standing to file a lawsuit or, in the case of a junior lien holder, to assert a claim in a lawsuit, which is what Citimortgage did.  In the Ohio case, District Judge Boyko lectured:  “unlike Ohio State law and procedure, as the Plaintiffs perceive it, the federal judicial system need not, and will not, be forgiving in this regard.”  In footnote 3, he flatly rejected plaintiff’s “judge, you just don’t understand how things work” argument. 

Seemingly, the Indiana Supreme Court bought the “judge, you just don’t understand how things work” argument in Citimortgage.  Or, to be fair, perhaps the Court knows how things work.  Either way, a compelling contrast exists between Judge Boyko’s uncompromising order dismissing plaintiffs’ cases and the Indiana Supreme Court’s pragmatic decision recognizing Citimortgage’s purported lien. 

 


In Indiana, Name MERS In Foreclosure Suit If Mortgage Does

This follows-up last week’s post regarding the Citimortgage opinion, which circumvented two foreclosure statutes that supported a conclusion opposite of the one the Court reached.  The result preserved the lien rights of the purported senior mortgagee, Citimortgage, even though Citimortgage did not record its assignment of mortgage until months after the subject real estate had been sold at a sheriff’s sale.  How?  Citimortgage had an “ace in the hole” – Mortgage Electronic Registration Systems, Inc. (“MERS”).

Section 1 problem.  The Court wrestled with the applicability of Ind. Code § 32-29-8-1 (“Section 1”), which governs who should be named when a plaintiff seeks to extinguish a mortgage.  That statute currently identifies two options as to whom to sue:

If a suit is brought to foreclose a mortgage, the [1] mortgagee or an [2] assignee shown on the record to hold an interest in the mortgage shall be named as a defendant.

Citimortgage argued that MERS was statutorily entitled to notice under that provision as a “mortgagee.”  The Court stated “that is a bridge too far.”  The Court found that MERS was neither the mortgagee itself nor the assignee of the mortgage.  Yet Citimortgage prevailed.   

Section 1 solution.  The Court plowed new ground by determining that the mortgage designated MERS as the agent of Citimortgage and that MERS as agent was entitled to notice:

Ultimately, we do not believe that the authors of the original version of [Indiana Code § 32-29-8-1], writing in 1877, would have understood the term “mortgagee” to include an entity like MERS that neither holds title to the note nor enjoys a right of repayment.  Thus, our decision here should not be taken to mean that MERS is a “mortgagee” as the term is used in Indiana Code § 32-29-8-1.  All we hold today is that because Citimortgage never received proper notice of the foreclosure proceeding, it lay beyond the jurisdiction of the trial court, and the default judgment is thus void as to Citimortgage’s interest in the Madison County property. 

One might interpret Citimortgage to say that Section 1 includes a third option as to whom to sue:  a nominee (agent) of the mortgagee.

Section 2 problem.  Citimortgage avoided the impact of I.C. § 32-29-8-2(1) (“Section 2”), which states that “a person who is assigned a mortgage and fails to have the assignment properly placed on the mortgage record . . . is bound by the court’s judgment or decree as if the person were a party to the suit.”  At some point, Citimortgage apparently became the assignee of Irwin but evidently did not record the assignment until after ReCasa obtained a judgment (and flipped the house to Sanders).  Yet Citimortgage prevailed. 

Section 2 solution.  The Citimortgage decision carves out an exception to the recording requirement in Section 2 when the mortgage identifies MERS.  The plaintiff must name MERS “as nominee” of the identified lender.  The Court’s rationale appears to be based upon the premise that MERS - identified in the mortgage - is shown on the record to hold an interest in the mortgage.

Statutory amendments coming?  In its opinion, the Court poked Indiana’s legislature about changing I.C. § 32-29-8:

We note in closing that it is both difficult and undesirable to apply such superannuated statues to the modern mortgage industry.  The drafters of the original 1877 version of Indiana Code § 32-29-8-1 envisioned a drama for two, or at most three, actors:  Borrower, Mortgagee, and possibly Assignee.  They could not have imagined our present-day multi-trillion-dollar international mortgage market.  The statute that they drafted, and under which Indiana mortgage transactions still take place, thus leaves unaddressed many issues important to contemporary practice.  We recognize that the General Assembly may soon find it necessary to modernize the statutory script to accommodate this new and larger cast of characters.

How the Indiana General Assembly will tweak Sections 1 or 2, if at all, is guesswork.  Perhaps MERS itself will be written into the statute, or maybe the statute will define “nominee” and add such a party as an option for whom to sue.  Something should be done, and Section 3 should be included in any amendment. 

Name MERS.  What we do know in the wake of Citimortgage is that, under Indiana law, MERS “as nominee” is the actual mortgagee’s agent for service of process.  When a mortgage identifies MERS “as nominee,” the plaintiff creditor must name MERS as a defendant in any foreclosure action and serve MERS with a summons and complaint.  To be safe, both the identified lender and MERS should be named in the suit. 

Next week I’ll address what some may feel to be a flaw with the Court’s ultimate finding.


Indiana Supreme Court Concludes That MERS Is Merely The Agent Of The Actual Mortgagee

What is Mortgage Electronic Registration Systems, Inc. (“MERS”)?  More specifically, what does mortgage language identifying MERS “as nominee” mean?  The Indiana Supreme Court in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012) dealt with those and other questions surrounding the role of MERS in the foreclosure world. 

Setting the table.  As noted in my prior posts about Citimortgage, junior mortgagee ReCasa initiated a foreclosure action and named only Irwin, the purported senior mortgagee, as a defendant.  The language in the subject mortgage stated that Barabas, the mortgagor, granted the mortgage to MERS “as nominee” of Irwin, identified as the lender.  Upon being sued to answer as to its interests in the subject real estate, Irwin quickly filed a disclaimer of interest, and the court dismissed Irwin from the case.  The trial court later entered judgment for ReCasa, which acquired the real estate at the sheriff’s sale.  ReCasa then sold the real estate to a third party, Sanders.  A month later, Citimortgage filed a motion to intervene in the action and asked the trial court to set aside the judgment and sheriff’s sale. 

Defining MERS.  In its rationale, the Court came to terms with the reality that “about 60% of the country’s residential mortgages are recorded in the name of MERS rather than in the name of the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.”  The Court pronounced that “a MERS member bank appoints MERS as its agent for service of process in any foreclosure proceeding on a property for which MERS holds the mortgage.”  The Court found that:

the relationship between Citimortgage and MERS was one of principal and agent.  Clearly, one of the primary purposes of that agency relationship was to facilitate efficient service of process.  . . .  By designating MERS as an agent for service of process, as Irwin did in the Barabas mortgage, lenders can have their cake and eat it too; they free themselves from burdensome, expensive recording requirements but still receive notice when another lienholder seeks to foreclose on a property in which they have a security interest.

Senior mortgage survives.  The core question in Citimortgage was whether ReCasa’s failure to name MERS as a defendant impacted the rights, if any, of Citimortgage, which at some point appears to have acquired the senior mortgage.  Although the Court of Appeals affirmed the trial court’s decision in favor of ReCasa, the Supreme Court ruled for Citimortgage.  ReCasa’s failure to name MERS as a defendant or, more specifically, failure to serve MERS with a summons and complaint, prevented ReCasa from terminating the senior mortgage and leapfrogging into the first lien position.  In short, the judgment was void as to Citimortgage. 

Next week, I’ll explain how the Court in Citimortgage circumvented two foreclosure statutes that clearly supported ReCasa’s position. 


Post-Sale Redemption Mystery Unsolved

Last week, the Indiana Supreme Court said much about Mortgage Electronic Registrations Systems, Inc. (“MERS”) in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  The Court also said a lot about who should receive notice of a foreclosure proceeding.  I hope to discuss those matters next week. 

No comment.  Just as important was what Citimortgage didn’t say.  I’m referring to the issue of the enigmatic post-sheriff’s sale statutory right of redemption found at Ind. Code § 32-29-8-3 entitled “Good faith purchaser at judicial sale; right to redeem of assignee or transferee not made a party.”  For background, please click on my August 2 and November 1, 2011 posts regarding Citimortgage.  Subsequently, the Indiana General Assembly amended portions of Section 3, but as I wrote in March of this year the obscure one-year redemption language remained untouched by the legislature.  Here is the statute, and the key language is underlined: 

     Sec. 3. A person who:
        (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
        (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
            (A) an assignment that is not of record; or
            (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

When the Supreme Court accepted transfer in Citimortgage, many thought the Court would interpret the redemption language in Section 3.  No such luck.  The Court  expressed “no opinion as to whether Citimortgage had the right to redeem the property under [Section 3].”   This is because the Court decided the case on other grounds.  The opinion provided no help with the confusion and uncertainty created by the analysis of the Court of Appeals in Citimortgage, which precedent has now been vacated.

Status.  It’s my understanding Indiana’s legislature may consider clearing up I.C. § 32-29-8-3 in the 2013 session.  For now, while Indiana law is well settled that a sheriff’s sale terminates the right of redemption for borrowers/mortgagors, the law remains unclear as to whether there exists some kind of post-sheriff’s sale right of redemption for mortgage assignees whose assignments were not recorded before the filing of the foreclosure complaint.  As I often say, foreclosing lenders should invest in a foreclosure (title) commitment, and purchasers at sheriff’s sales should buy title insurance. 

NOTE:  In the 2013 session, Indiana's General Assembly deleted much of Section 3(2)(B) so as to resolve the matter once and for all.  My post


Indiana Supreme Court Reverses Trial Court In Landmark Case Involving MERS

Yesterday, the Indiana Supreme Court issued its opinion in Citimortgage v. BarabasClick here to read the case.  I plan on writing about the decision next week and following-up on my 2011 posts regarding the Indiana Court of Appeals' rulings in the dispute:  August 2/time bar, August 10/straw man and November 1/redemption

By rule, the two Court of Appeals' Citimortgage opinions have been vacated in their entirety.  In other words, they are no longer binding precedent in Indiana.  Thus yesterday's decision to a large extent mooted my 2011 posts, particularly because the Supreme Court did not adopt the Court of Appeals conclusions or rationale. 

By way of a preview, MERS appears to be alive and well in Indiana.  The Section 3 post-judgment redemption right, however, may not be.  The Court expressed "no opinion as to whether Citimortage had the right to redeem the property under that statute."  More to come....  


Forgery Defense Must Be Raised Immediately

Weinreb v. TR Developers, 943 N.E.2d 856 (Ind. Ct. Ap. 2011) dealt with a guarantor’s claim that he did not sign the guaranty upon which the judgment entered against him was based.  The Court’s opinion involves technicalities surrounding a couple rules of procedure, but there is a broader message for defendants in Indiana foreclosure cases:  denials of document execution should be raised right away.

Case history.  In September, 2008, the lender filed its complaint, including copies of the subject guaranty.  The guarantor filed an answer to the complaint and asserted a general denial to all of the allegations.  The lender subsequently filed a motion for summary judgment that resulted in the entry of judgment in May of 2009.  In June, 2009, after the period for filing an appeal had run, the guarantor filed a Rule 60(B) motion and submitted for the first time evidence suggesting that the guaranty had been forged.  The trial court denied the motion, and the guarantor filed a second Rule 60(B) motion on the same grounds, plus an allegation of negligence on the part of the guarantor’s original attorney.  The trial court denied the second motion as well, and the guarantor appealed.

Operative rule of procedure.  Indiana Trial Rule 9.2(B) provides that, when a complaint is founded on a written instrument (such as a guaranty) and such instrument is filed with the complaint, “execution . . . shall be deemed to be established and the instrument, if otherwise admissible, shall be deemed admitted into evidence in the action without proving its execution unless execution be denied under oath in the [answer] or by an affidavit filed therewith.”  In Weinreb, the Court noted that an attorney’s signature on a general denial does not constitute an oath by which the defendant denies execution of an instrument.  Because the guarantor failed to deny, under oath, that he executed the guaranty, “execution . . . was deemed established by operation of Trial Rule 9.2(B).” 

Summary judgment.  The Court hinted that the defect in the pleadings could have been cured during the summary judgment stage.  Nevertheless, in Weinreb, “the trial court properly presumed execution of [the guaranty] at summary judgment because [the guarantor] failed to introduce in a timely manner any evidence that would support a contrary finding.”  Ultimately:

[the guarantor] failed to respond to [the lender’s] motion for summary judgment within the time limits prescribed by Trial Rule 56(C).  Despite notice and two distinct opportunities to challenge [the lender’s] documentation, [the guarantor] failed to raise his forgery defense at any stage of the proceedings before final judgment was entered against him.

Explanation.  The Weinreb opinion discussed at length the principles and standards applicable to Trial Rule 60(B) motions.  In the final analysis, the Court concluded that “newly discovered” evidence did not exist.  Rather, the guarantor’s failure to use due diligence was the compelling factor.  The Court held:

With this equivocal evidence before it, distilling essentially to a swearing contest that should have been raised long before, the trial court was well within its discretion to reject [the guarantor’s] equitable demands that the trial court set aside the judgment entered against him under Trial Rule 60(B)(8).  [The guarantor’s] second Trial Rule 60(B) motion did not present any grounds that would entitle him to relief from judgment that were unknown or unknowable at the time he filed his first such motion.

Take away.  Borrowers and guarantors, and their counsel, should raise in their initial response to the lender’s complaint the defense of forgery, assuming there is evidence supporting such a defense.  Even if the guaranty was forged in Weinreb, the guarantor (or his lawyer) was too late in asserting the defense.  On the other hand, for lenders and their counsel, the Weinreb is a reminder to attach to the complaint any and all loan documents that form the basis of the action. 


Criminal Bank Fraud As A Collection Tool?

Secured lenders caught up in loan defaults typically pursue the contract-based remedies of damages and foreclosure designed to make lenders whole for their actual losses (unpaid principle balance, interest and attorney fees).  In Klinker v. First Merchants Bank, 964 N.E.2d 190 (Ind. 2012), a lender sought statutory-based treble damages for alleged criminal acts of fraud by a guarantor.  It was an aggressive strategy, but was it worth it?

Default.  Klinker involved a used car dealership that borrowed money from a lender to purchase cars under a floor-plan agreement.  The terms of the loan, which the dealership’s principle guaranteed, required the borrower to pay money to the lender whenever it sold a car.  Also, the borrower could not transfer title without the lender’s consent.  When the lender audited the dealership, it learned that thirty-one cars for which the lender had loaned money were gone.  The borrower had failed to turn over any sale proceeds for the thirty-one cars.   

CVCA.  What was unique about Klinker was the lender’s claims under Ind. Code § 34-24-3-1, known as the Indiana Crime Victims’ Compensation Act (“CVCA”).  The CVCA permits one who suffers a pecuniary (monetary) loss as a result of certain property crimes to bring a civil action against the person who caused such loss.  The victim can recover up to three times its actual damages.  Although a criminal conviction is not required, the plaintiff must prove each element of the underlying crime, including criminal intent. 

Claim 1.  The lender’s CVCA action asserted two fraud claims based on I.C. §§ 35-43-5-4 and 8, which are criminal statutes.  Under the first, the lender could obtain summary judgment only if undisputed facts showed (1) the guarantor (2) concealed, encumbered or transferred property (3) with the specific intent to defraud the lender.  The guarantor transferred financed vehicles without the lender’s knowledge and thus concealed them from his creditor.  This constituted a breach of contract, but did “not lead inescapably to a finding of criminal fraud.”  This is because the lender also must demonstrate undisputed facts showing that the guarantor acted with the requisite “mens rea – the specific intent to defraud.”  There must have been undisputed facts to establish that, when the guarantor made the challenged transfers, “his conscience objective was to cause injury or loss” to the lender by deceit.

Mens rea.  When judgment creditors bring proceedings supplemental to set aside fraudulent conveyances, fraudulent intent may be inferred from the “8 badges of fraud,” about which I have written previously.  In Klinker, the lender designated evidence that established three badges of fraud, but summary judgment was inappropriate due to the absence of the mens rea element:

summary judgment is almost never appropriate where the claim requires a showing that the defendant acted with criminal intent or fraudulent intent.  . . .  This is particularly so for CVCA claims.  The CVCA provides a punitive remedy if the claimant can prove that the defendant violated a penal statute, and, as a punitive measure, it should be strictly construed and applied only where the challenged conduct is clearly proscribed.  Moreover, because CVCA claims combine criminal and civil law, they implicate the state constitutional policy favoring jury intervention in both criminal trials and civil trials.

The Court concluded that “drawing all reasonable inferences in favor of the non-moving party, it is possible that the trier of fact could find a simple breach of contract here instead of criminal fraud, regardless of how strong the badges of fraud may be.”

Claim 2.  As to the second claim, to be entitled to summary judgment the lender must show undisputed facts establishing that (1) the guarantor (2) knowingly (3) executed or attempted to execute (4) a scheme or artifice (5) to obtain the lender’s money or other property (6) by means of false or fraudulent pretenses, representations, or promises, and (7) that the lender is a state or federally chartered or federally insured financial institution.  In Indiana, “a person engages in conduct ‘knowingly’ if, when he engages in the conduct, he is aware of a high probability that he is doing so.”  I.C. § 35-41-2-2(b).  “The fraudulent-conveyance badges of fraud (circumstantial evidence) are not relevant in this context – other circumstantial evidence must be presented.”  In addition to the “knowingly” problem, the lender in Klinkler had a fatal timing issue with this particular claim.  The alleged misrepresentations occurred after the guarantor had obtained the loans.  The fraudulent activity must have been done at the time of execution.

No summary judgment.  The Indiana Supreme Court reversed the trial court’s summary judgment for the lender.  The result reveals at least one drawback of the lender’s aggressive loan enforcement approach - CVCA cases virtually guarantee a trial.  This means that the case will be lengthier and more expensive.  As illustrated by Klinker, although CVCA claims are available to lenders in Indiana, the pursuit of such claims almost certainly will slow down the collection process.


"Temporary Admissions May Create Problems"

The latest issue of The Indiana Lawyer touches upon a topic about which I've written in past:  Pro Hac Vice Admission in Indiana and the Role of Local Counsel.  The paper's piece is well done and contains quotes from G. Michael Witte, executive secretary for the Indiana Supreme Court Disciplinary Commission.  The story also deals with pro hac vice admission in our federal courts - an area I didn't discuss in my prior posts.  Here is a link to The Indiana Lawyer's article:   Temporary Admissions May Create Problems.      


Will Mysterious Post-Sale Redemption Statute Be Clarified ... And What About The Treatment Of MERS?

I've learned that, on April 10th, the Indiana Supreme Court granted transfer in the CitiMortgage v. Barabas case about which I've written on four prior occasions, most recently on March 29th:  Indiana Legislation, 2012:  Part 2 of 3 - Obscure Redemption Language Remains.  In Indiana, a decision to grant transfer automatically vacates opinions of the Court of Appeals or, in other words, negates the prior case law.  So, perhaps later this year we'll hear from Indiana's highest court on some important foreclosure-related topics, including post-sale redemption rights and the treatment of MERS.  Interestingly, the opinion will be rendered after the 2012 legislation that amended the operative statute, Ind. Code Section 32-29-8.  It's unclear to me whether or to what extent the Court will take into account or otherwise touch upon the amended statute.  I'll be on the lookout for the Court's decision and will post about it accordingly.    

NOTE:  On 10-4-12, the Supreme Court reversed the trial court.


Indiana Legislation, 2012: Part 1 Of 3 – Abandonment Of Mortgaged Property

The Indiana General Assembly’s 2012 session addressed three noteworthy issues related to Indiana Commercial Foreclosure Law. Today’s post is about House Bill 1238 and its amendment to Indiana Code § 32-29-7-3.

Three-month waiting period. Indiana has a post-complaint, three-month waiting period before sheriff’s sales can be requested. My July 30, 2010 post noted the exception to the three-month rule, which exception did not at the time apply to commercial properties – only residential.

The new I.C. § 32-29-7-3(a)(2). The amended statute, which becomes effective July 1, 2012, revises the exception to the three-month rule to read: “If the Court finds under I.C. 32-30-10.6 that the mortgaged real estate has been abandoned, a judgment or decree of sale may be executed on the date the judgment of foreclosure or decree of sale is entered, regardless of the date the mortgage is executed.” The new statute deletes the “residential” qualification and thus applies to commercial foreclosures now too. Moreover, the statute incorporates a brand new statute – I.C. § 32-30-10.6 – that creates a test and a procedure to determine whether the real estate has been abandoned.

I.C. § 32-30-10.6. This brand new statute is entitled “Determination of Abandonment for Property Subject to a Mortgage Foreclosure Action” and is quite lengthy. If foreclosing lenders or their counsel believe the subject real estate may be abandoned, then this new statute should be studied and followed, assuming there is interest in rushing to a sheriff’s sale. My partner Tom Dinwiddie, who helped draft the legislation, pointed out to me that, in practice, a Section 10.6 motion should be filed with the Complaint or, at the latest, with the Motion for Default Judgment in order to take advantage of the exception to the three-month rule.

Commercial application. As noted by one of my 2006 posts, Indiana’s judicial foreclosure process takes time. In my experience, the three-month waiting period rarely comes into play in commercial actions. Nevertheless, in instances where the commercial property is abandoned, this new legislation establishes a process that, in theory, permits lenders to get the property to a sheriff’s sale faster.


 


In Indiana, Failure To Comply With HUD Servicing Regulations Can Be A Defense To A Foreclosure Action

While not directly applicable to commercial cases, Lacy-McKinney v. Taylor, Bean & Whitaker Mortgage, 937 N.E.2d 853 (Ind. Ct. App. 2010) is worth mentioning here. If you are involved in residential mortgage foreclosures in Indiana, you should be aware of the Lacy-McKinney decision. The case addressed the question of whether a lender/mortgagee’s lack of compliance with federal mortgage servicing responsibilities may be raised as an affirmative defense to the foreclosure of an FHA-insured mortgage.

HUD language. The Lacy-McKinney note and mortgage, which were in default for non-payment, referenced the applicability of HUD regulations to the loan. The terms of the loan documents clearly spelled out that regulations limited the lender’s right to accelerate and foreclose. For example, the borrower claimed that the lender did not satisfy a HUD regulation requiring a face-to-face meeting before the filing of a complaint for foreclosure.

The issue. The main issue in Lacy-McKinney was: are the HUD regulations binding conditions precedent that must be complied with before a lender has the right to foreclose on a HUD-insured mortgage? (Please note that the quarrel over the condition precedent did not affect the validity of the mortgage, but only whether the lender had a right at the time to foreclose on the mortgage.)

First impression. The issue was one of “first impression” in Indiana – meaning that the legal question was entirely novel and could not be governed by any existing Indiana precedent. The opinion thoroughly outlined the background of HUD-insured mortgages and some of the applicable regulations. (Read the opinion for more detail.) The case also discussed other states’ positions on the issue.

Defense recognized. The Court concluded that an affirmative defense should be recognized for non-compliance with HUD regulations under the circumstances:

The above precedents, the language of the HUD regulations, and the public policy of HUD persuade us that the HUD servicing responsibilities at issue in this case are binding conditions precedent that must be complied with before a [lender] has the right to foreclose on a HUD property. As such [borrower] can properly raise as an affirmative defense that [lender] failed to comply with the HUD servicing regulations prior to commencing this foreclosure action.

Summary judgment reversed. The Court went on to hold that the trial court’s summary judgment in favor of the lender should be reversed. “The trial court erred in granting summary judgment in favor of [lender] on its action to foreclose on [borrower’s] HUD-insured mortgage without first determining that [lender] had complied with Subpart C – the conditions precedent to foreclosure.” The Court therefore remanded the case to the trial court for further proceedings – likely a dismissal of the case. Ultimately, the lender in Lacy-McKinney may win the foreclosure war, but the borrower won this battle.

Those who deal in this area, whether they be lenders, borrower or counsel, should be familiar with this case. The loan document provisions and regulations appear to be consistent with 2009 Indiana state and local law developments requiring pre-suit settlement conferences, etc. about which I discussed on March 15, 2009 and June 19, 2009. Depending upon the contents of the loan documents, HUD-related “i’s” need to be dotted and “t’s” need to be crossed before suit can even be filed.


How Long Is Too Long To Wait Before Enforcing A Money Judgment In Indiana?

The question posed in the title of this post is exactly the question stated by the Indiana Court of Appeals in Wilson v. Steward, 937 N.E.2d 826 (Ind. Ct. App. 2010).

Oldie, but a goodie. On July 25, 1989, the Henry Circuit Court held that Father was in contempt for non-payment of child support and ordered that Father pay a lump sum for the arrearage, plus Mother’s attorney fees. Father died in 2009, and an estate was opened in Rush Superior Court. On September 10, 2009, Mother filed a claim against the estate based on the unpaid order from 1989. The estate filed a motion to dismiss and asserted that the claim was barred by statutes of limitations. The trial court denied the motion and awarded Mother the money to which she was entitled over twenty years earlier.

Not child support. The Court of Appeals rejected the idea that the 1989 order was an enforcement of child support obligations, which triggers its own statute of limitations (Ind. Code § 34-11-2-10). If you are a domestic relations lawyer who has stumbled on to my blog, please read the opinion for more on that subject.

Money judgment. The Court held that the Indiana code sections dealing with the enforcement of money judgments applied. “Mother’s claim against the estate is an attempt to enforce the 1989 judgment . . ..” The issue was whether I.C. § 34-11-2-12 barred Mother’s claim. I touched upon this matter in my 2008 post “Time Limitations Upon The Enforcement Of Non-Indiana Judgments In Indiana.” The statute reads: “Every judgment and decree of any court of record of the United States, of Indiana, or of any other state shall be considered satisfied after the expiration of twenty (20) years.”

Unique statute. The Wilson opinion noted that I.C. § 34-11-2-12 contains “unique phraseology” that “sets it apart from all other statutes of limitation listed in Indiana Code Chapter 34-11-2.” In reality, the twenty-year statute is not a statute of limitations but “a rule of evidence that creates a rebuttable presumption.” This means:

A judgment that is less than twenty years old constitutes prima facie proof of a valid and subsisting claim, whereas a judgment that is over twenty years old stands discredited, with the lapse of time constituting prima facie proof of payment. Thus, the party seeking to avail itself of the presumption of satisfaction of a judgment after twenty years have passed must plead payment.

(Prima facie is defined as “a fact presumed to be true unless disproved by some evidence to the contrary.”)

Applying the statute. In Wilson, Mother filed her claim to enforce the 1989 money judgment six weeks after the twenty-year period expired. At the trial court’s hearing in 2010, Mother provided testimony that the 1989 judgment had not been paid. Moreover, the record was devoid of any evidence from the estate asserting payment. The Court of Appeals concluded that “the evidence was sufficient to overcome the presumption of satisfaction of the judgment.” Accordingly, I.C. § 34-11-2-12 did not bar Mother’s claim against the estate.

No absolute bar. Wilson illustrates that Section 12 does not set an outer limit of twenty years on the validity and enforceability of a money judgment. In other words, Section 12 does not constitute an absolute bar to recovery. Rather, it is a rule of evidence creating a rebuttable presumption of satisfaction (payment) by the lapse of time (twenty years). If there is proof of non-payment, particularly in the absence of any proof of payment, then judgments can be enforced outside of the twenty-year period. How long is too long to wait before enforcing a money judgment in Indiana? According to Wilson, it may never be too late, even if the judgment debtor is dead!


Can Witnesses Testify By Telephone At An Indiana Court Proceeding?

In connection with one of my recent hearings on a petition for the appointment of a receiver, the lender sought permission from the trial court to have its representative testify by telephone.  The borrower and the guarantor – my clients – contested the receivership.  One of our first filings was an objection to the lender’s request to allow telephonic testimony.  The issue was a novel one for me.

The lender’s position.  The reasoning behind the lender’s motion was understandable.  The lender’s representative lived in Dallas, the lender anticipated the hearing would be less than an hour, and the defendants conceivably would not even appear.  The obvious motive was to avoid time and expense, and there’s nothing wrong with that.  (As an aside, a lender’s proof generally can be made through an affidavit.  Depending upon the facts and circumstances, however, a lender may want one of its representatives in court to address any surprises or to provide a more compelling presentation of the lender’s position.) 

The defendants’ position.  For a variety of reasons, my clients instructed me to object.  The theory we advanced was that, pursuant to Indiana Rule of Trial Procedure 43(A), “[i]n all trials the testimony of witnesses shall be taken orally in open court . . ..”  And “a hearing [such as a receivership hearing] in which issues of fact will be determined constitutes a trial within the meaning of T.R. 43(A).”  3 William Harvey, Indiana Practice §43.7 (3rd ed. 2002).  In addition, we argued that lender’s representative, testifying by phone, would hinder our and the court’s ability to “observe [the witness’s] demeanor and determine credibility.”  Holman v. Holman, 472 N.E.2d 1279, 1289 (Ind. Ct. App. 1985). 

The rule.  The judge, at the pre-hearing attorney conference, pointed to law to which neither firm had cited:  the Indiana Administrative Rules, which aren’t rules of procedure or evidentiary rules, but which deal with certain administration functions of the courts.  The operative rule was 14 “Use of Telephone and Audiovisual Telecommunication,” which sanctions telephonic testimony under limited circumstances.  Here are the rule's applicable subsections:

(B) Other Proceedings.  In addition, in any conference, hearing or proceeding not specifically enumerated in Section (A) of this rule . . . a trial court may use telephone or audiovisual communications subject to:
(1) the written consent of all the parties, entered on the Chronological Case Summary; or
(2) upon a trial court's finding of good cause, upon its own motion or upon the motion of a party. The following factors shall be considered in determining "good cause":
(a) Whether, after due diligence, the party has been unable to procure the physical presence of the witness;
(b) Whether effective cross-examination of the witness is possible, considering the availability of documents and exhibits to counsel and the witness;
(c) The complexity of the proceedings and the importance of the offered testimony in relation to the convenience to the party and the proposed witness;
(d) The importance of presenting the testimony of the witness in open court, where the fact finder may observe the demeanor of the witness and impress upon the witness the duty to testify truthfully;
(e) Whether undue surprise or unfair prejudice would result; and
(f) Any other factors a trial court may determine to be relevant in an individual case.

Rule 14(B)(3) discusses a motion/hearing process for determining the issue.  The court in our case, after weighing the “good cause” factors in Rule 14(B)(2), held that the lender’s representative had to appear live.

The device.  Parties to litigation, whether plaintiffs or defendants, almost always look for ways to save time and money.  Although Indiana courts are fundamentally opposed to testimony over the phone, Administrative Rule 14 provides narrow exceptions to the rule.  If the two sides can agree on the issue, Rule 14(B)(1) specifically authorizes telephonic testimony.  Even if there is no mutual consent, Rule 14(B)(2) outlines the standards for “good cause” to permit it.  Lenders and borrowers that navigate through Indiana’s judicial foreclosure process, including any receivership proceedings, should be cognizant of the potential benefits of Administrative Rule 14.


What Are A Lender’s Rights As A “Loss Payee” Under An Insurance Policy In Indiana?

If you work for a lending institution that makes secured loans, then you may have heard of the term “loss payee.”  If you are not sure what that means, then the Court’s decision in Monroe Bank v. State Farm, 2010 U.S. Dist. LEXIS 119736 (S.D. Ind. 2010) (.pdf) will help. 

The loan and the loss.  In Monroe, the lender funded a loan to the borrower that was secured by a lien on the borrower’s boat.  The loan agreement between the lender and the borrower called for the borrower to obtain insurance for the boat and to name the lender as a “loss payee.”  The borrower did just that.  Thereafter, the boat fell on hard times, so to speak, by being stolen twice and ultimately suffering severe damage.  As a result, both the borrower and the lender filed an insurance claim but, for reasons not explained in the Court’s opinion, the insurer denied the claim. 

Loss payee definition.  Black’s Law Dictionary defines “loss payee” as a “person named in insurance policy to be paid in event of loss or damage to property insured.”  For more background, here is a link to Wikipedia’s definition of a “loss payee clause.” 

Direct suit by lender.  Due to the damage to its loan collateral, and in light of the insurer’s denial of the claim, the lender filed suit against the insurer.  Specifically, the lender filed a breach of contract claim and sought damages for its losses associated with the damage to the boat.  The insurer filed a motion to dismiss under Rule 12(b)(6) and advanced two arguments in support. 

    Direct action rule.  The insurer’s first argument rested upon Indiana’s “direct action rule” that “prohibits a third party or judgment creditor from directly suing a judgment debtor’s insurance carrier to recover an excess judgment.”  The Court, concluding that the direct action rule did not apply, rejected the argument.  The lender in Monroe was not a “third party,” but rather a loss payee under the policy.  As such, the lender “was a third party beneficiary of the contract between [the insurer] and [the borrower].” 

    Suit limitations clause.  In the alternative, the insurer contended that the policy’s suit limitations clause barred the lender’s claim.  The clause stated that “no action shall be brought unless there has been compliance with the policy provisions.  The action must be started within one year after the date of loss or damage.”  The premise of the insurer’s argument was that the lender had to include the borrower in the suit.  In Monroe, the borrower was not included in the suit, and it was undisputed that more than one year had elapsed since the date of loss.  Again, the insurer’s argument failed, and the reason was that the insurer “ignored the fact that as a loss payee, [lender] is a third party beneficiary to the insurance contract.”  In Indiana, as a third party beneficiary, the lender can sue the insurer directly to enforce the insurance contract. 

Rights, generally.  I am no insurance law expert.  Such matters for our firm generally are handled by my partner, Dale Eikenberry.  Nevertheless, it is important for attorneys like me, who handle litigation involving secured loans, to be conversant with insurance fundamentals.  Similarly, representatives of secured lending institutions need to know the basics.  Hence this post about Monroe, which teaches us that, generally, in Indiana a secured lender, named as a loss payee under its borrower’s insurance policy, can as the situation warrants file suit directly against the insurer if a claim is wrongfully denied. 


Certain Summonses In Indiana Residential Mortgage Foreclosure Cases Deemed Confidential

Indiana’s General Assembly passed legislation in 2009, in the midst of the residential mortgage foreclosure crisis, that included the “Foreclosure Prevention Agreements for Residential Mortgages” found at Indiana Code § 32-30-10.5. (See my 2009 blog post about this.) The 2009 laws affected only residential (consumer) mortgage foreclosure litigation and did not apply to commercial matters. See, I.C. § 32-30-10.5-5.

Amendment. In 2011, the General Assembly tweaked certain portions of I.C. § 32-30-10.5 to include, among other things, a limited requirement of confidentiality regarding a borrower/defendant’s address on a summons. See, I.C. § 32-30-10.5-8(d). If a lender files suit to foreclose a residential mortgage, the borrower’s mailing address must be omitted from the summons if “the last known mailing address of the [borrower] in the [lender’s] records indicates that the mailing address . . . is other than the address of the mortgaged property.” I.C. § 32-30-10.5-8(b)(2). I.C. § 5-14-3-4(a)(13) declares such last known mailing address to be confidential:

Since such an address may need to be used on a summons, Indiana’s “Green Paper Rule,” which governs confidential information, mandates that the address be omitted from the summons and set forth on a separate accompanying document in light green paper pursuant to Trial Rule 5(G)(2).

In practice. Documentation on light green paper can be provided to the sheriff, in cases where the sheriff will be effectuating service of process, and then returned to the clerk’s confidential file following service. Evidently county clerks have been directed to advise lenders filing residential mortgage foreclosure cases to follow the green paper rule by submitting the summons on green paper when the last known mailing address of the borrower on the lender’s records is not the address of the mortgaged property. For more on service of process and summons issues, click here. I would like to thank Lori Schein, Boone County Bar Association officer and Deputy Prosecutor, for distributing this information to the Association’s membership.

Residential foreclosures involve all sorts of administrative headaches (or consumer protections, depending upon your point of view) of which lenders must be aware. But, again, for purposes of this blog, neither this new change, nor Indiana Code § 32-30-10.5 in general, applies to Indiana commercial foreclosure cases or, in other words, to foreclosures involving business-related real estate.

Happy Thanksgiving.