Indiana Court Holds That Contract For Purchase Of Loan Was Not Breached

Lesson. When dealing with the purchase or sale of a loan, be mindful that the borrower could pay off the loan before closing, so consider including language in the agreement to account for that contingency.

Case cite. Singleton St. Pierre Realty Invs. LLC v. Estate of Singleton 2022 Ind. App. Unpub. LEXIS 1390 (Ind. Ct. App. Dec. 6 2022)

Legal issue. Whether a seller breached a loan sale agreement.

Vital facts. Buyer and Seller (and estate) entered into an agreement for the purchase and sale of a $1MM loan that was in default. The parties contemporaneously contracted for the purchase of a funeral home, which the underlying borrower operated. The borrower (as tenant) was $366k behind in its lease payments. If the deals closed, Buyer would become both a lender and a landlord with rights to recover the $1.0MM loan and the $366k lease arrearage. The probate court approved the agreements. About a week before closing, the borrower paid off the loan, so the closing on that agreement never occurred. The closing on the purchase of the property did occur, however. Buyer later collected the $366k.

Procedural history. Seller claimed Buyer was obligated to remit the lease arrearage to Seller. The trial court agreed and granted a summary judgment awarding damages to Seller for the arrearage. Buyer appealed.

Key rules. The Singleton opinion, which turned on the Court’s reading of the two agreements, spelled out Indiana’s general rules of contract interpretation (citations omitted):

The unambiguous language of a contract is conclusive upon the parties to the contract and upon the courts. Courts may not construe clear and unambiguous provisions, nor may courts add provisions not agreed upon by the parties. Unambiguous contracts must be specifically enforced as written without any additions or deletions by the court. In interpreting a written contract, the court should attempt to determine the intent of the parties at the time the contract was made as discovered by the language used to express their rights and duties. If the language of the instrument is unambiguous, the intent of the parties is determined from the four corners of that instrument. If, however, a contract is ambiguous or uncertain, its meaning is to be determined by extrinsic evidence and its construction is a matter for the fact finder. The contract is to be read as a whole when trying to ascertain the intent of the parties. The court will make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless.

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

Policy/rationale. One of Buyer’s theories to retain the $366k was based on its interpretation of the loan purchase agreement. Buyer contended that Seller breached the contract despite the fact that “no amounts were owed” under the loan at the time of the scheduled closing. Nonetheless, Buyer claimed that, because the loan had a balance of over $1,000,000 when the related (but separate) property sale agreement was executed, "[$1MM was] the amount … that the parties understood and intended that [Buyer] had to recover before it would be obligated to remit the Arrearage to the [Seller]."

Seller countered that Buyer did not identify which contract term in the loan purchase agreement was allegedly breached. No language in the agreement “prevented [Seller] from accepting the amount due under the [loan] before the closing date and [nothing gave Buyer] any right to the [loan] proceeds before the closing date.” Had Buyer "wanted to prevent an early payoff … or require [the loan have] some minimum balance at the time of closing, [Buyer] could have demanded that the [agreement] include language to that effect." Or, the agreement "could have included language reducing the purchase price … to account for any payments made … prior to the closing date[,] but it did not.” Moreover, Buyer did not tender the purchase price to Seller and did not proceed with the closing as the agreement stipulated, “thus relieving [Seller] of performing its obligations under the [loan purchase] agreement.”
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Part of my practice includes the purchase and sale of secured loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected] Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

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

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

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

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

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

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

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

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

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

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

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

Related posts.

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

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

Indiana Supreme Court’s COVID Order Interpreted: Post-Judgment Interest

Lesson. Post-judgment interest was not tolled by the Indiana Supreme Court’s 2020 COVID-related emergency orders.

Case cite. Denman v. St. Vincent Med. Grp., Inc., 2021 Ind. App. LEXIS 254 (Ind. Ct. App. 2021)

Legal issue. Whether the Indiana Supreme Court’s order that “no interest shall be due or charged during the tolled period” was unconstitutional with respect to statutory post-judgment interest.

Vital facts. Plaintiff obtained a $4.75 million judgment against Defendant in January 2020. Beginning on March 13, 2020, the Indiana Supreme Court entered a series of orders that dealt with the COVID public health emergency. The order pertinent to the Denman case included the following language:

The Court authorizes the tolling … of all laws, rules, and procedures setting time limits for speedy trials in criminal and juvenile proceedings; public health and mental health matters; all judgments, support, and other orders; and in all other civil and criminal matters before Indiana trial courts. Further, no interest shall be due or charged during this tolled period.

Procedural history. On March 30, 2020, the trial court in Denman ordered that post-judgment interest on Plaintiff’s judgment shall be tolled per the Supreme Court’s order. Plaintiff appealed that ruling and others.

Key rules.

Ind. Code § 24-4.6-1-101 states that: “[e]xcept as otherwise provided by statute, interest on judgments for money whenever rendered shall be from the date of the return of the verdict or finding of the court until satisfaction at: . . . (2) an annual rate of eight percent (8%) if there was no contract by the parties.”

As opposed to prejudgment interest, trial courts have no discretion over whether post-judgment interest will be awarded. Prevailing plaintiffs are awarded it automatically.

Holding. The Indiana Court of Appeals reversed the trial court’s order tolling the accrual of post-judgment interest.

Policy/rationale. The Court found that the trial court erred in applying the Supreme Court’s interest-tolling order to post-judgment interest “because so doing would give the [order] effect beyond the power constitutionally and statutorily allocated to the courts.” Post-judgment interest is a “creature of statute, borne of legislative authority.”

The Court upheld the trial court’s tolling of prejudgment interest, however, which is discretionary. One of its reasons in doing so was the Supreme Court’s “inherent authority,” in an emergency, to supervise all courts of the state. This authority “allows it to suspend trial courts' discretionary decision-making, like the grant of prejudgment interest.” The Court explained:

Permitting grants of prejudgment interest would have cost litigants for a delay they did not cause. As we explained above, Indiana's Tort Prejudgment Interest Statute is meant to influence litigants' behavior. To award prejudgment interest for delays not attributable to any party would not advance that goal. Post-judgment interest, on the other hand, arises just as automatically during a pandemic as it does any other time—and it will continue to do so until the legislature decides otherwise.

The “elephant in the room” is whether the Supreme Court’s order impacted interest accruing on a loan, such as contractual interest under a promissory note. The Indiana Court of Appeals’ treatment of pre- and post-judgment interest in Denman is telling on this point. Interest on a loan is not discretionary (in my view, at least). It is based on a contract entered into between private parties that, arguably, is constitutionally protected from an emergency order from the judicial branch. Contractual interest, not unlike post-judgment interest, arises automatically during the pandemic - as it does any other time. Accordingly, I do not believe that the Supreme Court’s COVID-related orders in 2020 tolled the accrual of interest on loans, and the outcome in Denman supports that conclusion.

Related posts.

• What Is Indiana's Post-Judgment Interest Rate?
• Force Mejeure And The COVID-19 Pandemic: Impact On Indiana Notes and Mortgages

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

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

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

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

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

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

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

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

Key rules.

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

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

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

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

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

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

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

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

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

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

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

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

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

Have a great Thanksgiving.  

Related posts.  

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

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

Email Evidence Of Alleged Loan Modification And Promissory Estoppel Defeats Auto Dealer Lender’s Summary Judgment Motion

Lesson. Lenders, particularly those that are not conventional banks, should proceed carefully when entering into and executing upon loan modification or workout discussions. An innocent or well-intended email or phone call could come back to haunt you.

Case cite. SWL v. Nextgear, 131 N.E.3d 746 (Ind. Ct. App. 2019)

Legal issues. Whether a “floor plan” finance company was entitled to summary judgment on the borrower’s defenses, which were (1) that the lender modified its loan or (2) was otherwise barred from enforcing the default based upon promissory estoppel.

Vital facts. Plaintiff lender and defendant borrower, a car dealer, entered into a promissory note and security agreement in which the lender agreed to extend a revolving line of credit to the borrower. The borrower used the money to buy vehicles at auctions. As part of the financing arrangement, the parties agreed to a payment schedule detailing, among other things, the money the borrower was required to repay for each vehicle it purchased with the lender’s funds.

At some point, the borrower became delinquent on its payments, and the parties began discussing how to proceed. On the one hand, there was evidence that the borrower’s plan was to liquidate its inventory and pay off the loan. On the other hand, there was evidence, primarily in the form of an email exchange, in which a representative of the lender pushed for and stipulated to a plan to salvage the relationship. The borrower claimed that, in reliance on the email exchange, it made a couple more payments in an apparent effort to pay down the loan and continue the lending relationship. Something broke down, however, causing the lender to repossess the borrower’s remaining vehicles and file suit to collect the balance owed on the loan.

Procedural history. The lender filed a breach of contract action. The borrower asserted the defenses of modification and promissory estoppel. The trial court granted the lender’s motion for summary judgment, and the borrower appealed.

Key rules.

    Oral modification. Despite language in a contract expressing that it can only be modified by written consent, a contract “may nevertheless be modified orally.” Moreover, modification “can be implied from the conduct of the parties.” Intent is what matters – the parties’ “outward manifestations of it” or, in other words, “the final expression of that intent found in conduct” as opposed to one’s subjective intent.

    Promissory estoppel. The doctrine provides that, where parties believed they had a contract but in fact did not, equity applies to hold the parties to their representations to each other. To demonstrate that the doctrine of promissory estoppel applied in SWL, the borrower was required to show:

(1) a promise by the promissor; (2) made with the expectation that the promisee will rely thereon; (3) which induces reasonable reliance by the promisee; (4) of a definite and substantial nature; and (5) injustice can be avoided only by enforcement of the promise.

In SWL, the “promissor” was the lender, and the “promisee” was the borrower.

As an aside, please note that Indiana's Lender Liability Act did not apply to this case because the plaintiff lender in SWL was not a conventional bank.  For more, click on the Related Posts below.

Holding. The Indiana Court of Appeals reversed the summary judgment in favor of the lender and remanded the case for trial.

Policy/rationale. First, it’s important to remember that SWL was a summary judgment case, not a trial. Issues of fact, mainly surrounding the modification discussions and the parties’ intent, prevented a pretrial judgment for the lender. If the case were tried, the lender still could prevail.

With regard to the modification issue, the borrower designated evidence to raise a genuine issue of material fact concerning whether the lender intended to modify the terms of the promissory note when the lender’s rep spoke with the borrower’s rep and sent the email. “Because the parties' conduct is subject to more than one reasonable inference, we cannot say as a matter of law that the parties did not modify the Contract.”

As to the promissory estoppel matter, the lender keyed in on the legal requirement that the alleged promise must be of a “definite and substantial nature.” The borrower had in fact been in default on vehicles other than those addressed in the fateful email at the heart of the case. However, the borrower’s affidavit in opposition to the summary judgment motion raised questions surrounding the matter of default. The Court reasoned:

[The borrower’s] affidavit is sufficient evidence to create a genuine issue of material fact concerning whether [the borrower] was in default when [the lender sent] the February email. And even if [the borrower] were in default as of February 24, 2016, the designated evidence suggests that, because [the borrower] had a “lengthy impeccable history,” [the lender] proposed a course of action to cure any default and for [the borrower] to maintain its good standing. We therefore cannot say as a matter of law that [the lender] did not make a definite and substantial promise to [the borrower].

Related posts.

• Indiana’s Lender Liability Act Once Again Protects Bank From Borrower’s Claims
• ILLA Saves Bank From Alleged Misrepresentation That Loan Was “A Go”
• Alleged Oral Release Of Mortgage Rejected

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

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

1. What does force majeure mean?

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

2. What is the typical applicability of force majeure?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No.  See 7 and 8 above.

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

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

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

Please remember that we represent parties in disputes arising out of loans.  Please call me at 317-639-6151 or email me at [email protected] to discuss an engagement.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Supreme Court Negates Reasonableness Test For Statute Of Limitations

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

• Dean Blair and Paula Blair v. EMC Mortgage, LLC
• Collins Asset Group, LLC v. Alkhemer Alialy

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

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

• March 2009: Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years
• August 2019: Indiana Court of Appeals Adopts Reasonableness Test For Promissory Note Statute of Limitations
• August 2019: Indiana Has Two Statutes Of Limitations For Promissory Notes
• February 2020: Indiana Supreme Court Currently Reviewing Statute Of Limitations Rules Applicable to Promissory Notes

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

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

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

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

The “reasonableness test” is now gone. 

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

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

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

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

Indiana Supreme Court Rules On Statute Of Limitations Cases

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

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

    *Collins Asset Group, LLC v. Alkhemer Alialy

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

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

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

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

• Indiana Court of Appeals Adopts Reasonableness Test For Promissory Note Statute of Limitations; and
• Indiana Has Two Statutes Of Limitations For Promissory Notes.

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

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

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

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

Indiana Has Two Statutes Of Limitations For Promissory Notes

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

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

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

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

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

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

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

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

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

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

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

  
 

 

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

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

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

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

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

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

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

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

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

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

Holding. The Court affirmed the order dismissing the case.

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

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

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

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

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

Related posts.

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

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

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

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

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

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

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

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

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

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

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

"Person entitled to enforce" an instrument means:

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

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

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

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

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

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

Related posts.

• Proving You’re The Holder Of The Note
• Promissory Notes “Endorsed In Blank” Are Perfectly Fine

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

New York Confession Of Judgment From Cognovit Note Enforceable In Indiana

Lesson. Although Indiana does not permit cognovit notes (confessions of judgment), our state will enforce properly-entered foreign judgments based upon the otherwise prohibited language. The key is to determine whether cognovit notes are legal in the state that entered underlying the judgment.

Case cite. EBF v. Novebella, 96 N.E.3d 87 (Ind. Ct. App. 2018)

Legal issue. Whether Indiana courts must give “full faith and credit” to a “confessed judgment” entered in New York pursuant to a cognovit note.

Vital facts. Plaintiff obtained a judgment in a New York state court based upon the Defendant’s alleged breach of a contract. The contract, a purchase agreement, contained a clause with the following language: upon a default “… [Defendant] hereby authorizes [Plaintiff] to execute in the name of the [Defendant] a Confession of Judgment in favor of [Plaintiff] in the full uncollected Purchase Amount and enter that Confession of Judgment with the Clerk of any Court and execute thereon.” (This type of clause transforms the agreement into something called a “cognovit note.”) The contract in EBF expressed that it was to be governed by and construed under New York law.

Procedural history. The New York court entered a judgment pursuant to the confession of judgment clause. Because Defendant was an Indiana company, Plaintiff came to Indiana and filed a Petition to Domesticate Foreign Judgment that asked the Indiana trial court to recognize and enforce the New York judgment. (Plaintiff did not proceed under the statutory method to enforce the foreign judgment.) Defendant contested the Indiana action on the basis that the judgment was void under Indiana law. The trial court granted Defendant’s motion to dismiss, and the Plaintiff appealed.

Key rules. Generally, a cognovit note is a legal device whereby the debtor consents in advance to the creditor’s judgment without notice or hearing. Evidently, such confessions of judgment are allowed in the State of New York.

Indiana Code 34-54-3-1 essentially is Indiana’s definition of a cognovit note.

Importantly, cognovit notes are prohibited in Indiana. See, I.C. 34-54-3-2. In fact, Indiana makes it a crime to procure such a note or enforce it. I.C. 34-54-4-1. A key concept here is that the promise to pay cannot be entered into before a cause of action on the underlying agreement has accrued. I.C. 34-54-3-3.

Nevertheless, the Court in EBF noted that, under Indiana common law, “a valid foreign judgment based on a cognovit note will be given full faith and credit in Indiana … based upon the Federal Constitution’s ‘full faith and credit’ clause.” Article IV, Section 1. Indiana cases articulate “full faith and credit” as meaning: “the judgment of a state court should have the same credit, validity, and effect, in every other court of the United States, which it had in the state where it was pronounced.” The Indiana Code adopts full faith and credit at I.C. 34-39-4-3.

The full faith and credit rule has two exceptions/limitations: if, in the foreign court, there was an absence of (1) subject matter jurisdiction and/or (2) personal jurisdiction. The debtor/defendant has the burden of proof on these jurisdictional matters, meaning that it must rebut the presumption of the judgment’s validity.

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

Policy/rationale. The Court concluded that constitutional federal full faith and credit rules and policies trumped Indiana’s statutory prohibition on cognovit notes/confessions of judgment. The underlying judgment appeared “on its face to be rendered by a court of competent jurisdiction and [Defendant] did not challenge the jurisdiction of the New York court to enter the judgment.” For more on the policies behind full faith and credit, read the EBF opinion, which impressively lays out all the applicable and competing ideas.

Related posts.

• Indiana No-Nos: Confessions Of Judgment And Cognovit Notes
• Indiana Court of Appeals Vacates Trial Court Order Domesticating Illinois Judgment
• Full Faith And Credit: Indiana Foreclosure’s Die Was Cast By Kentucky Judgment

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

Commercial Foreclosure Refresher: Some Basics

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

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

2.    What did #1 require?

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

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

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

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

3.    Indiana Foreclosure Process And Timing - The Basics

 

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

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

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

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

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

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

Key rules.

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

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

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

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

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

Related posts.

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

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

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

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

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

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

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

Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?

A deed-in-lieu of foreclosure (DIL) is one of many alternatives to foreclosure.  For background, review my post Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why And How.  Today I discuss the Indiana Court of Appeals’ opinion in GMAC Mortgage v. Dyer, 965 N.E.2d 762 (Ind. Ct. App. 2012), which explored whether a DIL in a residential mortgage foreclosure case released the defendant borrower from personal liability. 

Deficiency.  In GMAC Mortgage, the borrower sought to be released from any deficiency.  The term “deficiency” typically refers to the difference between the fair market value of the mortgaged real estate and the debt, assuming a negative equity situation.  Exposure to personal liability arises out of the potential for a “deficiency judgment,” which refers to the money still owed by the borrower following a sheriff’s sale.  The amount is the result of subtracting the price paid at the sheriff’s sale from the judgment amount.  (For more on this topic, please review my August 1, 2008, June 29, 2009 and March 9, 2012 posts.) 

DIL, explained.  GMAC Mortgage includes really good background information on the nature of a DIL, particularly in the context of residential/consumer mortgages.  According to the U.S. Department of Housing and Urban Development (HUD), a DIL “allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation option, to sign the house back over to the mortgage company.”  A letter issued by HUD in 2000 further provides:

[d]eed-in-lieu of foreclosure (DIL) is a disposition option in which a borrower voluntarily deeds collateral property to HUD in exchange for a release from all obligations under the mortgage.  Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure . . ..  Also, a DIL is generally less damaging than foreclosure to a borrower’s ability to obtain credit in the future.  DIL is preferred by HUD because it avoids the time and expense of a legal foreclosure action, and due to the cooperative nature of the transaction, the property is generally in better physical condition at acquisition.

Release of liability in FHA/HUD residential cases.  The borrower in GMAC Mortgage had defaulted on an FHA-insured loan.  The parties tentatively settled the case and entered into a DIL agreement providing language required by HUD that neither the lender nor HUD would pursue a deficiency judgment.  The borrower wanted a stronger resolution stating that he was released from all personal liability.  The issue in GMAC Mortgage was whether the executed DIL agreement precluded personal liability of the borrower under federal law and HUD regulations.  The Court discussed various federal protections afforded to defaulting borrowers with FHA-insured loans, including DILs.  In the final analysis, the Court held that HUD’s regulations are clear:  “A [DIL] releases the borrower from all obligations under the mortgage, and the [DIL agreement] must contain an acknowledgement that the borrower shall not be pursued for deficiency judgments.”  In short, the Court concluded that a DIL releases a borrower from personal liability as a matter of law. 

Commercial cases.  In commercial mortgage foreclosure cases, however, a lender/mortgagee may preserve the right to pursue a deficiency, because the federal rules and regulations outlined in GMAC Mortgage do not apply to business loans or commercial property.  The parties to the DIL agreement can agree to virtually any terms, including whether, or to what extent, personal liability for any deficiency is being released.  The point is that the issue of a full release (versus the right to pursue a deficiency) should be negotiated in advance and then clearly articulated in any settlement documents.  A release is not automatic. 

GMAC Mortgage is a residential, not a commercial, case.  The opinion does not provide that all DILs release a borrower from personal liability, and the precedent does not directly apply to an Indiana commercial mortgage foreclosure case. 

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

"Wet Signature" Defense To Indiana Promissory Note Enforcement Action

A pro se (unrepresented) borrower, in a recent contested mortgage foreclosure case our firm is handling, claimed that the action should be dismissed because the lender failed to file or otherwise produce the promissory note with a "wet signature" with the complaint.  We're fairly certain the borrower pulled her filing, or at least the argument, off the internet.  

The only legitimate argument coming even close to a "wet signature" defense is outlined in my 10/14/14 post:   Promissory Notes “Endorsed In Blank” Are Perfectly Fine.  Essentially, if an assignee of a note (not the original lender) holds a note that has been endorsed in blank, then the assignee needs to establish that it possesses the original note.  Even then, filing the original note with the complaint, or even with a motion for summary judgment, is not strictly required.  

To expand on why there is no "wet signature" defense in Indiana, I'm reposting below my 3/26/10 article Judgment Granted To Lender Despite Absence Of Signature On Promissory Note.

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Has your lending institution failed to maintain an original or copy of an executed promissory note?  Similar to the case discussed in my February 7, 2009 post No Signatures, No Promissory Notes, No Problem, the Indiana Court of Appeals in Baldwin v. Tippecanoe Land & Cattle, 2009 Ind. App. LEXIS 1491 (Ind. Ct. App. 2009) upheld a summary judgment for the plaintiff lender even though the lender could not produce the signed promissory note. 

Procedural history.  Lender filed a claim to foreclose its second mortgage and attached to the complaint a promissory note that was not signed.  (The mortgage did, however, appear to contain the borrower’s signature, and the unsigned note referred specifically to the accompanying mortgage.)  In his response to the lender’s claim, the borrower entered a “general denial” pursuant to Indiana Trial Rule 8(B).  The lender later filed a motion for summary judgment that the trial court granted.

The borrower’s contentions.  The borrower argued that the mortgage was unenforceable because the note was not signed by him. 

The lender’s contentions.  The lender’s theory to get around the absence of the signature rested upon Ind. T. R. 9.2(B), which states:

When a pleading is founded on a written instrument and the instrument or a copy thereof is included in or filed with the pleading, execution of such instrument . . . shall be deemed to be established . .  . unless execution be denied under oath in the responsive pleading or by an affidavit filed therewith.

The lender’s point was that the execution of the note was deemed to be established pursuant to this trial rule. 

Rule 8(B) versus 9.2(B).  The Court of Appeals analyzed the technical requirements of Trial Rules 8(B) and 9.2(B), as well as Rule 11(A) dealing with signatures on court filings.  Those rules, collectively, “mean that the attorney’s signature on a general denial [per Rule 8(B)] rejects the assertions in the claim, but does not constitute an oath by which the pleader denies the execution of an instrument attached to a claim [per 9.2(B)].” 

Must deny under oath.  Because the borrower failed to deny, under oath, the execution of the subject note, the Court affirmed the summary judgment granted in favor of the lender:

As [lender] attached the Note and Second Mortgage to its cross-claim, execution of both would be deemed to be established, by operation of Trial Rule 9.2(B), unless [borrower] denied under oath that they were executed.  [Borrower], himself an attorney, filed a general denial.  He signed it as “respectfully submitted.”  He omitted to include a statement that his general denial was truthful and made under penalty for perjury.  Thus, [borrower] failed to deny under oath the execution of the Note.  We therefore conclude that execution of the Note was deemed to be established . . ..

As was the case with the Bonilla opinion, which was the subject of my February 7, 2009 post, Indiana law seemingly allowed the lender in Baldwin to dodge a bullet in order to obtain a pre-trial judgment in its favor.

Loan Servicers As Plaintiffs In Foreclosure Cases

Lesson.  Mortgage loan servicers can, in certain circumstances, prosecute foreclosure actions on behalf of lenders/mortgagees. 

Case cite.  Turner v. Nationstar, 45 N.E.3d 1257 (Ind. Ct. App. 2015).

Legal issue.  How can a servicer of a mortgage loan, instead of the lender itself, be the plaintiff in a foreclosure case?

Vital facts.  Nationstar sued Borrowers to foreclose a mortgage.  The parties entered into a settlement agreement that the Borrowers later breached.  Nationstar filed a motion to enforce the settlement agreement and sought to proceed with the foreclosure.  During the proceedings, facts surfaced that JPMorgan Chase Bank as Trustee for CHEC 2004-C (Chase) was the actual owner of the loan and that Chase had hired Nationstar to service the loan.  The Turner opinion is not altogether clear as to whether Nationstar or Chase actually possessed the original promissory note (endorsed in blank), other than to make an inference that, for purposes of its servicing, Nationstar probably held it.  There was proof that Nationstar’s servicing obligations obligated it to, among other things, handle foreclosure proceedings. 

Procedural history.  Borrowers filed a motion to dismiss Nationstar’s complaint because it was not prosecuted in the name of the owner of the loan (Chase).  In other words, Borrowers contended that Chase should have been the plaintiff.  The trial court denied the motion and granted foreclosure.  Borrowers appealed.

Key rules.  Indiana Trial Rule 17(A) deals with who is the “real party in interest,” and every action must be prosecuted by such party.  T.R.17(A)(1) suggests that in certain instances a party can sue for the benefit of another after “stating his relationship and the capacity in which he sues.”   

Indiana’s UCC at Ind. Code 26-1-3.1-301 outlines persons “entitled to enforce” a promissory note that include the “holder” of the note.  I.C. 26-1-1-201(2)(a) defines “holder” of a note, which can be a person in possession of the note if the note is endorsed in blank. 

Holding.  The Indiana Court of Appeals affirmed the trial court’s denial of Borrowers’ motion to dismiss and affirmed the decision to foreclose. 

Policy/rationale.  Borrowers argued that, under Rule 17(A)(1), Nationstar was required to disclose (plead) its relationship to Chase and the capacity in which it was suing.  The Court disagreed.  Although Chase owned the note, Nationstar was its holder and, by statute, had the right to enforce it.  It followed that Nationstar was a real party in interest.  Furthermore, as to the settlement agreement, the Court pointed out that, as servicer, Nationstar’s role was to negotiate such agreements and that Chase was not a necessary party to any such negotiations.  In the end, although the evidence seemed shaky as to whether Nationstar actually possessed the original promissory note, as a practical matter the Court had enough facts upon which to base its decision that Nationstar was a proper party to enforce the settlement agreement and take the matter through foreclosure. 

(The opinion did not address in any way whether Nationstar or Chase held the underlying mortgage.  In other words, Turner was silent on what assignment(s) of mortgage had been recorded.  As such, I think this case may be unique with regard to traditional standing issues given that the context was the enforcement of a settlement agreement as opposed to a straight foreclosure action.)      

Related posts. 

• Employees Of Mortgage Loan Servicers Are Competent To Testify About Default And Damages In Foreclosure Cases
• Trustees Have Authority To Foreclose For Trusts
• Promissory Notes “Endorsed In Blank” Are Perfectly Fine
• Proving You’re The Holder Of The Note
• Is The Citimortgage Opinion Flawed For Not Requiring Proof Of Assignment Documents?

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

Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures

Lesson.  If you are a borrower or a guarantor in Indiana, or are defending such parties in a contested mortgage foreclosure, defeating a motion for summary judgment on the basis of an alleged breach of a pooling and servicing agreement isn’t going to happen. 

Case cite.  Wilmington v. Bowling, 39 N.E.3d 395 (Ind. Ct. App. 2015).

Legal issue.  Whether the plaintiff/lender was the holder of the promissory note and entitled to enforce it.  In other words, did the lender have standing to sue the borrower?

Vital facts.  The lender, an assignee of a securitized mortgage loan, possessed the original note, which had been endorsed in blank.  The lender also had a complete chain of recorded assignments establishing who held the note at various times.  Nevertheless, the borrower found on the internet what he believed to be the applicable pooling and servicing agreement (PSA), which “reflects that the assignees of the mortgage and note were required to transfer possession by a special endorsement that must be reflected on an allonge.”  There was an absence of evidence of such an allonge and, as such, arguably there had been a breach of the PSA.   

Procedural history.  The trial court granted summary judgment for the lender on the standing issue, and the borrower appealed.

Key rules.  Generally, “only the parties to a contract … have rights under the contract.”  The exception is “where it can be demonstrated that the parties clearly intended to protect a third party by imposing an obligation on one of the contracting parties….”  The law has developed in the country, which law the Indiana Court of Appeals adopted in Wilmington, is that borrowers lack standing to (a) challenge the validity of mortgage securitization or (b) request a judicial determination that a loan assignment is invalid due to noncompliance with a PSA.     

Holding.  The evidence did not establish that the borrower was a party to the PSA.  The evidence also failed to show that there was an intent to protect the borrower as a third party such that he could enforce any obligation under the PSA.  The trial court properly found that the lender was entitled to enforce the note under Ind. Code 26-1-3.1-301.

Policy/rationale.  Parties to PSA’s typically are the certificate holders, a trustee, and a servicer.  Borrowers have no contractual privity with these parties.  Any breach of a PSA, and any damages arising out of such breach, are relevant only as between the parties that signed the PSA.  Alleged breaches do not inure to the benefit of borrowers (or guarantors), who only are in privity of contract with the lenders/mortgagees under the notes and mortgages (or guaranties) – not the securitization documents. 

Related posts. 

• Proving You’re The Holder Of The Note
• Promissory Note = Negotiable Instrument
• Successor Bank Has Standing to Enforce

Single Note/Multiple Mortgages In Different States: Can The Indiana Mortgage Be Foreclosed And, If So, When?

Facts:  A prospective lender client was considering a high-dollar commercial loan to be documented by a single promissory note secured by several mortgages in several states, including Indiana.  In the event of a default under the note, the lawsuit to enforce the note – the action to obtain the judgment under the note – would not be in Indiana. 

Issues:  The lender generally wanted to know whether the Indiana mortgage would be enforceable.  Since Indiana law requires mortgages to be foreclosed in the county where the mortgaged real estate is located (Ind. Code 32-30-10-3), one of my first questions was how, if at all, could the Indiana mortgage be foreclosed, given that the action on the note would be pursued in a different state?  My next thought concerned how any Indiana foreclosure action would be impacted by the promissory note case in the other state? 

Statutes: I reviewed several Indiana statutes for answers, including I.C. 32-30-10 (Mortgage Foreclosure Actions) and I.C. 32-29 (Mortgages).  According to my research, there are no statutes directly on point.  None of the statutes contemplate what to do when there are multiple mortgages in different states securing a single note, although from experience I understand that a debt can be secured by multiple mortgages.  Generally, the structure appeared to be sound.  The enforcement of a default was the trickier matter.  Other than I.C. 32-30-10-3 mentioned above, the only other instructive Indiana statute was I.C. 32-30-10-10, which says in pertinent part:

A plaintiff may not:
(1) proceed to foreclose the mortgagee’s mortgage:
    (A) While the plaintiff is prosecuting any other action for the same debt or matter that is secured by the mortgage; [or]
    (B) While the plaintiff is seeking to obtain execution of any judgment in any other action
(2) Prosecute any other action for the same matter while the plaintiff is foreclosing the mortgagee’s mortgage or prosecuting a judgment of foreclosure.

What I think this statute says is that a lender cannot, in one suit, pursue a judgment under the promissory note while at the same time, in a separate suit, foreclose the mortgage securing the note.  The two actions must occur simultaneously within the same case, or they must be done sequentially – with the note action first to establish the debt to be foreclosed.  Having said this, as noted below, Indiana case law either interpreting or applying Section 10 is extremely limited.  Further, it’s frankly unclear to me what the words “matter” or “same matter” mean in Section 10. 

Case law:  The good news is that there are five Indiana Supreme Court cases that deal with the concepts in Section 10, and one of those cases actually cites to an older version of the statute.  The bad news is that all of the five cases are from the 1800’s.  Assuming the 21st Century courts follow the 19th Century decisions, a lender should be able to obtain a judgment on a note without abandoning its mortgage lien on the mortgaged premises.  In other words, recovery of a judgment on a debt is not a bar to a subsequent action to foreclose the mortgage.  Moreover, a lender, holding a judgment on a debt, may proceed to foreclose the mortgage without going through the judgment execution process. 

Conclusions:  Indiana law appears to be settled that there can be two suits – one on the note and one on the mortgage – as long as the two suits are not pending at the same time.  This principle seems to be supported by the Setree opinion, which I discussed last year - Full Faith And Credit: Indiana Foreclosure’s Die Was Cast By Kentucky Judgment.  Referring back to the original issues above, my opinion is that the Indiana mortgage generally should be enforceable but that the Indiana foreclosure action cannot be commenced until after the entry of the out-of-state judgment on the promissory note.  The unresolved question in my mind is whether the post-judgment Indiana foreclosure action could be prosecuted simultaneously with foreclosure actions in other states. 

If you are aware of any case law to the contrary or have litigated these matters previously, please post a comment or email me at [email protected]  I’d be curious as to any thoughts or input. 

Now, back to March Madness….

Proving A Lender Is Entitled To Enforce An Electronic Promissory Note

Lesson.  Electronic promissory notes are valid and enforceable.  But, proof of standing to enforce such a note, including standing as an assignee, can be tricky. 

Case cite.  Good v. Wells Fargo, 18 N.E.3d 618 (Ind. Ct. Appl. 2014).

Legal issue.  Whether the plaintiff lender, an assignee, was entitled to enforce an electronic promissory note executed by the defendant borrower or, in other words, whether the lender/assignee had standing to obtain a judgment against the borrower.

Vital facts.  Borrower executed an electronic note in favor of Synergy, which note secured a mortgage.  The terms of the note provided that, upon transfer, it would be recorded with a registry maintained by MERS, a party that was the subject of several posts in 2012 related to mortgages (see below).  As with certain mortgages, the note in Good identified MERS as the lender’s (here, Synergy’s) nominee.  After the borrower defaulted, MERS assigned the note to Wells Fargo - the plaintiff in Good. 

Procedural history.  Wells Fargo filed a mortgage foreclosure action and moved for a summary judgment.  Its supporting affidavit, which is detailed in the opinion, attempted to establish that Wells Fargo owned the noted and was entitled to enforce it.  The trial court granted summary judgment, but the borrower, who contended that the Wells Fargo lacked standing, appealed the trial court’s ruling. 

Key rules.  The Indiana Court of Appeals in Good stated that the note was an electronic record authorized by the federal ESIGN Act, 15 U.S.C. 7001 et seq.  That Act should be read in conjunction with Indiana’s UCC, Article 3, including Ind. Code 26-1-3.1-301(1), as previously discussed here (see below).  Section 7021 of the ESIGN Act discusses transferable records, and subsection (b) specifically deals with “control” of the record.  See also, 15 U.S.C. 7021(c) regarding “authoritative” copies and transfers.  Like many federal statutes, the particulars are dense, so lenders and their counsel should review the provisions in detail before filing suit and moving for summary judgment.  Fortunately, the Court summarizes many of the key provisions in its opinion.  Generally, a person having “control” of a transferable record (a note) is the “holder” under the UCC.  Unlike with paper notes, “possession” is irrelevant to electronic notes. 

Holding.  The Court reversed the trial court’s summary judgment for Wells Fargo.  The Court concluded that Wells Fargo had not shown in its supporting affidavit that it controlled the note for purposes of Section 7021(b) and, as such, did not establish “its status as holder for purposes of the UCC.”

Policy/rationale.  Ultimately, the Good case was about a proof problem.  Wells Fargo failed to provide “reasonable proof” that it was in control of the note.  The Court did not reject the idea of electronic notes or the concept of lending on transferable records.  Indeed the opinion operates as a set of instructions for lenders and their counsel to construct summary judgment affidavits, including “proof [that] may include access to the authoritative copy of the transferable records and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.”  Again, control, not possession, is the operative fact.   

Related posts.

• Indiana Supreme Court Concludes That MERS Is Merely The Agent Of The Actual Mortgagee
• Promissory Notes “Endorsed In Blank” Are Perfectly Fine
• Proving You’re The Holder Of The Note
• Conclusory Statements About Payment Default Doom Lender’s Motion For Summary Judgment

Indiana Adopts “Partial Subordination” Approach To Priority Disputes Arising Out Of Subordination Agreements

 

The Indiana Court of Appeals in Co-Alliance v. Monticello Farm Service, 7 N.E.3d 355 (Ind. Ct. App. 2014) discusses subordination agreements, generally, and lien priority disputes arising out of them, specifically.

Three lenders.  Co-Alliance dealt with three lenders, each of which financed the borrower’s farming operations.  Lender 1 had the senior lien on the borrower’s assets, and Lender 2 and Lender 3 held the second and third position liens, respectively.  In 2010, Lender 1 agreed to subordinate part of its senior lien in favor of Lender 3, thereby reducing the extent of Lender 1’s first position.  The subordination agreement was borne out of Lender 3’s stipulation to finance the borrower’s crops for that year.  In turn, Lender 1 agreed to subordinate its interests in the 2010 crops to Lender 3’s interests in them.  Lender 2 was not a party to the subordination agreement.

Subordination agreements, generally.  I touched upon subordination agreements in my September 18, 2013 post.  The Court in Co-Alliance noted that subordination agreements “are nothing more than contractual modifications of lien priorities.”  These types of agreements can “accelerate the flow of cash to troubled projects, providing financial relief that promotes the development of assets that are then used to secure payments to all lienholders.”

Contentions.  The Co-Alliance case was a dispute between Lender 2 and Lender 3.  Lender 2 basically asserted that it jumped into first position and theorized that “subordinate” necessarily means “to move a right or claim to a lower rank.”  Lender 2 took the position that the subordination agreement completely reduced Lender 1’s security interest in the 2010 crops such that that Lender 1’s position dropped to the last (or third) position.  The law commonly refers to this as “complete subordination,” and some states follow this rule.  Lender 3 argued that the subordination agreement “merely allowed [Lender 3] to momentarily step into the [Lender 1’s] first priority status.”  This is commonly referred to as “partial subordination.”  The Indiana Court of Appeals preferred this result.

Intent.  In Co-Alliance, the language of the subordination agreement showed that the parties’ intent was for Lender 1 to assign to Lender 3 a portion of any crop proceeds received by Lender 1 based upon its status as the senior lienholder.  In essence, Lender 1 induced Lender 3 to make a loan by guaranteeing it the right of first payment.  Again, Lender 2 claimed that the subordination agreement moved Lender 1 (and, by extension, Lender 3) to the back of the line, to the full extent of the security.  Yet, Lender 2 was not a party to the agreement and, according to the Court, “should not be entitled to a windfall.”  The Court illustrated the intent of the subordination agreement and how it would work:

Thus, [3,] by virtue of the subordination agreement, is paid first, but only to the amount of [1’s] claim, to which [2] was in any event junior.  [2] receives what it had expected to receive, the fund less [1’s] prior claim.  If [1’s] claim is smaller than [3’s], [3] will collect the balance of its claim, in its own right, only after [2] has been paid in full.  [1,] the subordinator, receives nothing until [2] and [3] have been paid except to the extent that its claim, entitled to first priority, exceeds the amount of [2’s] claim, which, under its agreement, is to be first paid. 

Lender 2 loses.  In Co-Alliance, the evidence showed that the amount of the crop proceeds in question did not exceed either the amount of Lender 1’s lien or the amount that Lender 1 was subordinated to Lender 3.  There was no evidence that Lender 2 was burdened by or benefited from the subordination agreement.  “Rather, [Lender 2] was unaffected.”  Accordingly, the Court held that the trial court properly found the subordination agreement gave Lender 3 a first-priority in the subject proceeds.

Promissory Note Defaults Lead To Criminal Prosecution

The Indianapolis Star is reporting that local developer Lee Alig is "facing 20 felonies after prosecutors say he received thousands of dollars of funds from victims through promissory notes he was unable to pay."  The article goes on to state that the Marion County Prosecutor is alleging Alig "took personal profits from eight promissory notes, totaling $340,000 ... [and] had neither the ability to repay those funds nor ownership of the collateral offered as security for those notes."  Although there are few details in the story, the situation is remarkable and potentially frightening for borrowers/guarantors because it seemingly stands in contrast to Indiana civil/constitutional law holding that Jail Time Is Not An Available Remedy In Collection Actions In Indiana.

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. 

 

Note Assignment (Allonge) And Mortgage Deemed Valid In Recent Opinion

Buchanan v. HSBC, 993 N.E.2d 275 (Ind. Ct. App. 2013) is another decision shooting down a borrower’s defenses to an Indiana mortgage foreclosure action.  In Buchanan, the borrower contested the validity of both the promissory note and the mortgage. 

Assignment defects.  The borrower attacked the legitimacy of the assignment of the promissory note from the original lender to the plaintiff/current lender.  The borrower asserted that (1) the note did not include an endorsement and (2) the allonge was not dated. 

    Allonge application.  The Indiana Court of Appeals first cited to the definition of an “allonge” by referring to Black’s Law Dictionary.  An allonge is a paper “attached to a negotiable instrument [a promissory note] for the purpose of receiving further endorsements when the original is filled.”  The Buchanan Court noted that it was unnecessary to use an allonge because the note did not contain any endorsements (and thus was not “filled”).  Nevertheless, the Court concluded that “we are not aware of any reason to prohibit the use of an allonge in this case.”  In my experience, the use of an allonge, regardless of whether there have been any endorsements, is a common and accepted practice. 

    Allonge okay.  The lender pointed out that the allonge to the subject promissory note was endorsed in blank – a concept about which I discussed on 10/17/14.  Endorsing in blank is a non-issue.  The Court also concluded that the lender’s failure to produce a dated allonge was immaterial.  There is no authority that the lack of a date on an allonge renders it invalid.  (The lender submitted an affidavit showing the year of the transfer of the note.  So, even though there was no date certain in the allonge, there was evidence as to when the transfer occurred.) 

Mortgage acknowledgement.  The borrower contended that the subject mortgage “lacked the requisite acknowledgement” and thus was unenforceable.  Ind. Code § 32-29-1-5(d) requires Indiana mortgages to be “dated and signed, sealed, and acknowledged by the grantor . . . ,” among other things.  The borrower’s argument was that the notary public did not have any authority in Indiana but was limited in its commission to Kentucky.  Indeed there is Indiana case law providing that a notary public’s official activities are limited to the political subdivision for which it is appointed and commissioned and, furthermore, that acts outside of the territorial limits are void.  The Court in Buchanan bypassed the borrower’s argument, stating “we need not decide whether the mortgage was properly acknowledged.”  The Court’s reasoning was that the borrower did not deny that he executed the mortgage and note when he purchased the subject real estate.  Moreover, Indiana case law provides that an “unacknowledged instrument is binding between parties and their privies,” meaning that, as between the borrower and the lender, the notarial acknowledgement was insignificant, according to the Court.

Upheld.  The Indiana Court of Appeals affirmed the trial court’s findings that the lender was the holder of the subject note and that the mortgage was valid despite an allegedly defective acknowledgement.

Indiana Rejects Foreclosure Defenses Based On The Redemptionist Movement And The Vapor Money Theory

Over the years, we have seen borrowers and guarantors defend mortgage foreclosure cases on theories that are pretty out there.  The defenses asserted in Blocker v. U.S. Bank, 2013 Ind. App. LEXIS 396 (Ind. App. 2013) might take the cake.

Payment?  In Blocker, following the initiation of foreclosure proceedings, a Marcus Lenton character sent a personal, non-certified check for the full amount of the debt to the lender, on behalf of the borrowers, to pay off the loan.  In the endorsement box on the back of the check, Lenton wrote, “NOT FOR DEPOSIT EFT ONLY.”  The lender informed the borrowers that a payoff only could occur via certified funds (money order, cashier’s check or wire transfer).  Not to be denied, the borrowers next presented to the lender a “lawful order for money,” directed to the U.S. Treasury, that supposedly drew, on Lenton’s account, a sum in an amount to pay off the debt.  Not surprisingly, the lender did not accept that payment either.  Later, in response to the lender’s summary judgment motion, the borrowers presented a document to the lender labeled “International Promissory Note…” written for an amount sufficient to satisfy the debt.  The document was not written against any bank account but rather against the Lenton Trust as Drawee with Lenton himself as the Drawer.  Again, the lender refused to accept this as payment.

Borrowers’ contention.  The trial court granted summary judgment in favor of the lender.  On appeal, the borrowers asserted that they tendered three payments to the lender, through Lenton, which should have discharged the debt.  The Indiana Court of Appeals concluded that the borrowers’ payment attempts were not done through normal banking channels but rather a “confusing” effort by Lenton to compel the U.S. Treasury Department to pay off the borrowers’ mortgage.

Redemptionist movement.  The Court wrote that the borrowers’ arguments appeared to be an outgrowth of the so-called “redemptionist movement,” which has been explained as follows:

“[T]he “Redemptionist” theory…propounds that a person has a split personality: a real person and a fictional person called the “strawman.”  The “strawman” purportedly came into being when the United States went off the gold standard in 1933, and, instead, pledged the strawman of its citizens as collateral for the country’s national debt.  Redemptionists claim that government has power only over the strawman and not over the live person, who remains free.

Wow.

Vapor money theory.  The Court also identified a philosophy, closely related to the redemptionist theory, that evidently played a role in the borrowers’ arguments:

The “vapor money” (or “no money lent”) theory posits that Congress has never given banks the authority to extend credit and, thus, banks act beyond their charters when making loans.  Proponents claim banks create money “out of thin air,” through ledger entries and bookkeeping tricks, by “depositing” a borrower’s promissory note without the borrower’s permission, listing the note as an “asset” on the bank’s ledger entries, and then lending a borrower back his own “money.”  Since banks do not have enough “real money in their vaults” to cover the sums lent, loans are not backed by actual money--the only real money is gold or silver; paper money is worthless since it is created by an illegitimate Federal Reserve--making them invalid ab initio and creating no obligation for repayment.

Alrighty then.

Uh, no.  The Court noted that both the vapor money and redemptionist theories have been “roundly rejected by courts across the nation.”  Lenton’s attempts to pay off the borrowers’ mortgage debt “were not only unorthodox but also legally unacceptable.”  The Court’s summary is fairly amusing:

It is unclear who Lenton is or what his relationship to the [borrowers] is and whether he represented to them that he knew the “secret formula” to accessing money locked away in a clandestine Treasury Department account but, in any event, he clearly failed to access or provide the funds needed to pay off their mortgage.

The Court affirmed the trial court’s summary judgment for the lender accordingly.

Indiana Court of Appeals Concludes That Prepayment Premium Enforceable In Foreclosure Case

The opinion in Weinreb v. Fannie Mae, 993 N.E.2d 223 (Ind. Ct. App. 2013) is full of Indiana commercial law tidbits, and I intend to write more about the case later this week.  Today, I’d like to highlight quickly one of the important, stand-alone holdings by the Court related to “yield maintenance fees” a/k/a “prepayment premiums.”  To my knowledge, Weinreb is the first Indiana state court opinion since 1991 commenting on a lender’s right to recover these damages. 

Education.  For background and context, please click on my 2007 posts:  Yield Maintenance Fees, Part I:  Indiana Law and Yield Maintenance Fees, Part II:  Applying Indiana Law.  Weinreb does not change Indiana law.  Rather, the case officially extends it.  The Weinreb decision for first time upholds prepayment premium damages in a foreclosure (debt acceleration) action, as opposed to a mere pre-maturity payoff scenario. 

Recovery of lost interest.  The Court in Weinreb first determined that the subject clause constituted a liquidated damages provision.  The promissory note stated that, upon a default, the borrower was liable for repayment of “all of the Indebtedness,” which specifically included a recovery of the prepayment premium.  (The details of the language used will matter in your particular case.)  When a loan is prepaid, the lender is deprived “of interest it was to receive as consideration for making the loan.”  It follows that prepayment premiums “insure the lender against the loss of his bargain if interest rates decline.”    For a handful of reasons, the Court viewed the subject language as an enforceable liquidated damages clause as opposed to an unenforceable penalty provision. 

Amount okay.  The defendant guarantor in Weinreb contended that the premium could not be enforced in his case because it was too high.  Generally, a lender will need to demonstrate “some proportionality between the loss and the sum established as liquidated damages.”  Under the specific facts of Weinreb, which involved a $6MM loan payable over ten years at 6.37%, the 25% of unpaid principle premium was not grossly disproportionate to the lender’s losses, especially considering that the default occurred about two years after closing.  

Re-lent at higher rate?  The guarantor’s second argument was that the lender could have re-lent at a higher interest rate and thus may not have lost any money as a result of the default.  The Court rejected this point.  “All that is required is that the prepayment premium be reasonable and bear a relation to [the lender’s] loss.”  In Weinreb, the note articulated this idea, and prior Indiana precedent established that such provisions generally are enforceable.  The Court held that the prepayment premium fairly compensated the lender for the interest lost. 

The Court’s opinion sets out the yield maintenance provision in the Weinreb promissory note.  Since the language held up, lenders -  both on the front end of transactions and during post-default workout negotiations - might want to compare their clauses to the one in Weinreb.      

Promissory Notes “Endorsed In Blank” Are Perfectly Fine

Sometimes assignees of promissory notes, or foreclosure counsel asked to enforce assigned notes, will see within the chain of title to the note an allonge (or assignment) that is signed by the assignor but that fails to identify the name of an assignee.  This is referred to as an endorsement “in blank.”  Can the note still be enforced?  You bet.

Note holder.  A promissory note is a negotiable instrument governed by Article 3 of the Uniform Commercial Code.  Indiana Code § 26-1-3.1-301 provides that a negotiable instrument may be enforced by “the holder of the instrument.”  The “holder” of the instrument is “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person if the identified person is in possession of the instrument.”  I.C. § 26-1-1-201(20)(A).  Under Indiana law, to demonstrate that it is entitled to enforce a note, an assignee need only establish (1) possession of the note and (2) that the note is payable to the assignee.    

Possession.  But how can a note be payable to the assignee if the assignee is not identified?  By operation of law.  I.C. § 26-1-3.1-205(b) is the provision in the UCC that permits blank endorsements:  “when endorsed in blank, an instrument becomes payable to bearer and may be negotiated  by transfer of possession alone….”  If a note is endorsed in blank, the note is payable to the bearer.  I.C. § 26-1-1-201(5)(B) defines a “bearer” as one in possession of the note endorsed in blank.  In short, possession of the promissory note is the key here. 

Like a check.  If an assignee has possession of a note, and even if the note is not specifically endorsed to the assignee, the assignee meets the requirements to be the “holder” of and “person entitled to enforce” the note under Indiana law.  See also, Egbert v. Egbert, 80 N.E.2d 104 (Ind. 1948)   Contrary to borrowers’ arguments – really, misunderstanding of the law - nothing more is needed to establish standing to enforce an assigned note.  Think of it this way - a promissory note and a check are basically the same.  Most of your parents probably taught you at some point that, once you endorse a check, anyone can cash it. 

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).

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.)

Lender’s Acceptance Of Partial Payments Did Not Waive Default

A situation may arise in which, post-default, a borrower will make, and a lender will accept, partial payments on the debt.  For instance, the borrower may be buying time until it can either bring the promissory note current or pay it off.  The question becomes – what are the consequences of accepting such payments?  Mark Line Industries, Inc. v. Murillo Modular Group, Ltd., 2013 U.S. Dist. LEXIS 13434 (N.D. Ind. 2013) (rtclick, save target as for .pdf) addresses this set of circumstances. 

The payments.  The parties to the Mark Line litigation entered into a promissory note in the principal amount of $743,000, with a maturity date (due date) of November 15, 2009.  The Maker/Payor did not pay the balance of the promissory note by the maturity date.  However, the Payee/Holder received a partial payment of nearly $80,000 in January, 2010 and applied that payment to the principal and interest due.  In April, 2010, via a third party, a second payment in the amount of $317,000 was made to the Holder/Payee.  Despite accepting the payments, the Holder/Payee proceeded with its collection case against the Maker/Payor. 

The defense.  The Maker/Payor’s only argument in the case was that, by accepting the partial payments, the parties modified their agreement to allow the Maker/Payor to continue to make partial payments.  Essentially, the Maker/Payor contended that the promissory note had not actually matured and that the Holder/Payee could not claim a default.

Modification rules.  In Indiana, a contract modification may be implied from the parties’ conduct.  As such, a modification need not be in writing.  For a finding of a contract modification, however, the conduct must have differed in some way from the terms of the original contract. 

No modification.  Importantly, the promissory note in Mark Line contained language in which the parties explicitly agreed that the Holder/Payee could accept partial payments without impacting its ability to demand full payment.  The note stated “[a]cceptance of partial payments by Payee will not alter the rights for the remaining balance due under this Note.”  By keeping partial payments, the Holder/Payee “was doing exactly what it had negotiated to do in the promissory note.”  The Court granted summary judgment to the Holder/Payee accordingly. 

One of the takeaways from Mark Line is to check the language of the promissory note when there are questions about a particular party’s rights.  I think most promissory notes contain anti-waiver language similar to that in the Mark Line note, but before accepting any partial or post-default payments, check to be sure.  Without such language, lenders may open the door for an argument that they have waived the prior payment default.

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.

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.

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. 

Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?

A deed-in-lieu of foreclosure (DIL) is one of many alternatives to foreclosure.  For background, review my post Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why And How.  Today I discuss the Indiana Court of Appeals’ opinion in GMAC Mortgage v. Dyer, 965 N.E.2d 762 (Ind. Ct. App. 2012), which explored whether a DIL in a residential mortgage foreclosure case released the defendant borrower from personal liability. 

Deficiency.  In GMAC Mortgage, the borrower sought to be released from any deficiency.  The term “deficiency” typically refers to the difference between the fair market value of the mortgaged real estate and the debt, assuming a negative equity situation.  Exposure to personal liability arises out of the potential for a “deficiency judgment,” which refers to the money still owed by the borrower following a sheriff’s sale.  The amount is the result of subtracting the price paid at the sheriff’s sale from the judgment amount.  (For more on this topic, please review my August 1, 2008, June 29, 2009 and March 9, 2012 posts.) 

DIL, explained.  GMAC Mortgage includes really good background information on the nature of a DIL, particularly in the context of residential/consumer mortgages.  According to the U.S. Department of Housing and Urban Development (HUD), a DIL “allows a mortgagor in default, who does not qualify for any other HUD Loss Mitigation option, to sign the house back over to the mortgage company.”  A letter issued by HUD in 2000 further provides:

[d]eed-in-lieu of foreclosure (DIL) is a disposition option in which a borrower voluntarily deeds collateral property to HUD in exchange for a release from all obligations under the mortgage.  Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure . . ..  Also, a DIL is generally less damaging than foreclosure to a borrower’s ability to obtain credit in the future.  DIL is preferred by HUD because it avoids the time and expense of a legal foreclosure action, and due to the cooperative nature of the transaction, the property is generally in better physical condition at acquisition.

Release of liability in FHA/HUD residential cases.  The borrower in GMAC Mortgage had defaulted on an FHA-insured loan.  The parties tentatively settled the case and entered into a DIL agreement providing language required by HUD that neither the lender nor HUD would pursue a deficiency judgment.  The borrower wanted a stronger resolution stating that he was released from all personal liability.  The issue in GMAC Mortgage was whether the executed DIL agreement precluded personal liability of the borrower under federal law and HUD regulations.  The Court discussed various federal protections afforded to defaulting borrowers with FHA-insured loans, including DILs.  In the final analysis, the Court held that HUD’s regulations are clear:  “A [DIL] releases the borrower from all obligations under the mortgage, and the [DIL agreement] must contain an acknowledgement that the borrower shall not be pursued for deficiency judgments.”  In short, the Court concluded that a DIL releases a borrower from personal liability as a matter of law. 

Commercial cases.  In commercial mortgage foreclosure cases, however, a lender/mortgagee may preserve the right to pursue a deficiency, because the federal rules and regulations outlined in GMAC Mortgage do not apply to business loans or commercial property.  The parties to the DIL agreement can agree to virtually any terms, including whether, or to what extent, personal liability for any deficiency is being released.  The point is that the issue of a full release (versus the right to pursue a deficiency) should be negotiated in advance and then clearly articulated in any settlement documents.  A release is not automatic. 

GMAC Mortgage is a residential, not a commercial, case.  The opinion does not provide that all DILs release a borrower from personal liability, and the precedent does not directly apply to an Indiana commercial mortgage foreclosure case. 

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.

Must Banks Provide Advice To Their Customers During Loan Transactions?

When making a commercial loan, do lenders have a fiduciary duty to their Indiana borrowers or guarantors?  The Indiana Court of Appeals, in Paul v. Home Bank, 953 N.E.2d 497 (Ind. Ct. App. 2011), said no.

The loans.  Paul dealt with two loans to a borrower for the development of a hotel.  The first loan involved a promissory note, assignment of leases, a mortgage and a set of guaranties signed by the individual investors, who were also physicians.  The second loan, executed the same date, was a line of credit and also involved a promissory note, a mortgage and a set of guaranties signed by the same individuals.  The borrower defaulted on both loans, and the bank obtained a summary judgment permitting a sheriff’s sale of the mortgaged property.  Since the sheriff’s sale satisfied only the first (larger) loan, the bank moved for summary judgment against the guarantors to collect the debt owed on the second loan. 

The “confusion defense.”  The guarantors filed their own summary judgment motion making all sorts of arguments, only one of which I will discuss today.  The guarantors asserted they should prevail because “they are not lawyers, and [the bank] failed to advise them as to the meaning of the [guaranties].”  The guarantors thought the guaranties executed for the first loan released the guaranties for the second loan.  The guarantors believed the documents meant one thing and faulted the bank for not advising them that the documents said something else.  I have labeled this the “confusion defense.”

No fiduciary duty.  The Court dismissed the guarantors’ argument and relied upon the following well-settled Indiana law applicable to the relationship between banks and customers:

[A] business or “arm’s length” contractual relationship does not give rise to a fiduciary relationship.  That is, the mere existence of a relationship between parties of bank and customer or depositor does not create a special relationship of trust and confidence.  In the context of mortgagor/mortgagee relationship, mortgages do not transform a traditional debtor-creditor relationship into a fiduciary relationship absent an intent by the parties to do so.  Absent special circumstances, a lender does not owe a fiduciary duty to a borrower. 

The “special circumstances” are “when one party has confidence in the other party and is ‘in a position of inequality, dependence, weakness, or lack of knowledge.’”  The evidence must show that the dominant party improperly influenced the weaker party so as to gain an “unconscionable advantage.” 

Big boys shouldn’t cry.  Applying Indiana law to the facts in Paul, the Court noted that the guarantors were physicians who “embarked upon a sophisticated business venture . . . [and] cannot now complain because they failed to read the [guaranty] or seek the advice of legal counsel before signing [it].”  In Indiana, one is presumed to understand the document he signs and cannot be released from its terms due to his failure to read it.  The Court affirmed the summary judgment in favor of the bank. 

Paul is another illustration of the enforceability of solid loan documents.  In Indiana, a well-written guaranty is tough to beat.  If you click on the “Guarantors” category to the left, you will see several posts that address a number of defenses that were roundly rejected in Indiana cases.  Certainly there are circumstances when a guaranty may not be enforceable or a guarantor may be released, but those cases are rare. 

Indiana District Court Examines “Material Adverse Change” Default Provision

The most common loan default is for non-payment.  But there are many other events that can trigger a default.  Indeed loan documents, including guaranties, typically contain a multitude of default-related provisions.  One provision that we often see, but rarely apply, looks something like this:

Insecurity.  Lender determines in good faith that a material adverse change has occurred in Guarantor’s financial condition from the conditions set forth in the most recent financial statement before the date of the Guaranty or that the prospect for payment or performance of the Debt is impaired for any reason.

Greenwood Place v. The Huntington National Bank, 2011 U.S. Dist. LEXIS 78736 (S.D. Ind. 2011) (rt click/save target as for .pdf) addresses a similar material adverse change (“MAC”) clause. 

Summary judgment.  In Greenwood Place, Southern District of Indiana Judge Tanya Walton Pratt issued a ruling on a motion for summary judgment filed by a lender against two borrowers based on the theory that there had been a “material adverse change in the financial condition of” the guarantor of the loans.  The opinion did not quote the entire clause, but it was clear that the subject loan agreement provided that “any material adverse change in the financial condition of” the guarantor constituted an event of default.  (Note that an alleged default occurred even though the loan payments were current.) 

The change.  Since the execution of the loan agreement, the guarantor’s cash had been almost completely depleted, his net worth had decreased by 60%, his equity in real estate had diminished by 80%, and he had unpaid judgments against him for several million dollars.  According to the Court, “to be sure, [guarantor] has experienced an adverse change in his financial condition.”  But, “whether this change has been material . . . is a more difficult question.”

The Court’s struggle.  The Court conceded that “at first blush, it would appear that this change has been material as that word is used in common parlance.”  Nevertheless, the Court noted that the loan documents did not define “any material adverse change.”  Evidence from six witnesses suggested different definitions.  Although the lender urged the Court to accept a “know it when you see it” interpretation, the Court was “uncomfortable” with applying such an approach at the summary judgment stage.  “Materiality,” noted the Court, is an “inherently amorphous concept.”  The guarantor still had a sizeable net worth that, based on certain assumptions, could be enough to absorb any liability stemming out of the underlying loans.  “This cushion creates questions as to whether the adverse change in [guarantor’s] financial condition is, in fact, material.” 

Ambiguous.  The Court denied the lender’s motion for summary judgment:

Given the “sliding scale” nature of materiality, coupled with the lack of a definition or objective standard found in the [loan agreement], the Court cannot help but find that the term is ambiguous because reasonable people could come to different conclusions about its meaning.  . . .  [T]herefore, “an examination of relevant extrinsic evidence is appropriate in order to ascertain the parties’ intent.”

Essentially, the Court held that the issue of materiality was a question of fact for trial. 

What we learned.  The Court’s analysis of the relevant financial conditions provides a road map for prosecutors (or defenders) of similar defaults.  The Court’s opinion does not question the fundamental validity or enforceability of MAC provisions.  The opinion does, however, raise the question of whether such a provision can form the basis for a pre-trial disposition of the case:  “when it comes to materiality, it’s all relative.”  The implication is that every case (financial condition) is different, and facts may need to be weighed.  On the other hand, Greenwood Place does not go so far as to proclaim that summary judgment should be denied in every case.  The opinion merely demonstrates how difficult summary judgment might be to achieve. 

Attorney Fee Awards in Indiana

Parties that foreclose commercial mortgages, and collect debts based upon promissory notes or guaranties, almost always seek to recover their attorney’s fees.  Today’s post sets out why such a claim can be made and how the fees should be calculated.

American rule – contract needed.  Indiana follows the so-called “American Rule,” which provides that, in the absence of statutory authority or an agreement between the parties to the contrary, a prevailing party has no right to recover attorney’s fees from the opposition.  (Under the “English Rule,” the losing party pays the fees to the winning.)  Loparex v. MPI Release, 964 N.E.2d 806 (Ind. 2011).  Indiana’s foreclosure and commercial collection statutes generally do not authorize the recovery of attorney’s fees.  That’s why virtually every loan document I’ve seen contains an attorney fee clause. 

40% flat fee.  Corvee, Inc. v. Mark French, 934 N.E.2d 844 (Ind. Ct. App. 2011) teaches litigants about the amount of attorney’s fees a trial court may award to the plaintiff in a successful collection action in Indiana.  Corvee did not involve a promissory note but a similar written agreement between the parties related to the collection of reasonable attorney’s fees in a suit to recover a debt.  The provision in Corvee stated that the defendant was responsible “for reasonable interest, collection fees, attorney fees of the greater of a) forty percent (40%) or b) $300 of the outstanding balance, and/or court costs incurred in connection with any attempt to collect amounts I may owe.”  There was no dispute that the contract unambiguously required the defendant to pay the 40% amount.  The question was whether such provision was enforceable.

Liquidated damages.  The Court in Corvee concluded that the attorney fee provision in the contract was in the nature of a liquidated damages clause, which means that the contract provided for the forfeiture of a stated sum of money without proof of damages.  In Indiana, courts will not enforce a liquidated damages provision that operates as a penalty.  Liquidated damages clauses generally are valid only if the nature of the contract is such that damages resulting from a breach “would be uncertain and difficult to ascertain.”  The calculation of attorney’s fees incurred in litigation is not difficult to ascertain.  The Court said:  “it strikes us as unnecessary to transform a standard attorney fee provision in a contract into, effectively, a liquidated damages provision that may or may not have any correlation to actually incurred attorney’s fees.” 

The right way.  In Indiana, even with specific contract language, “an award of attorney’s fees must be reasonable.”  Citing to a case involving promissory notes, the Court stated that provisions “for the payment of attorney’s fees ‘should not extend beyond reimbursing the holder of the note for the necessary attorney’s fees reasonably and actually incurred in vindicating the holder’s collection rights by obtaining judgment on the note.’”  In Corvee, there was no evidence of the amount of attorney’s fees that the plaintiff actually incurred in attempting to collect the debt.  Thus the 40% recovery could have given rise to a windfall at the defendant’s expense.  “Collection actions should permit creditors to recover that to which they are rightfully entitled to make themselves whole, and no more.”  As such, Corvee held the 40% attorney fee provision to be unenforceable.

Assuming the existence of an attorney fee provision, lenders in loan enforcement actions may recover fees that are reasonable and actually incurred.  According to Corvee, flat-fee or percentage-based attorney fee clauses may be difficult to enforce in Indiana. 

(See also:  Unsettled:  Recovery of Attorney's Fees for In-House Counsel.)

Credit Card Debt's 6-Year Statute Of Limitations Held To Commence When Account Due

Quickly, and noting this is off topic, I wanted to post about the Indiana Court of Appeals' decision in Smithner v. Asset Acceptance, 2010 Ind. App. LEXIS 4 (.pdf) in which the Court granted summary judgment in favor of the defendant/borrower based upon the running of the six-year statute of limitations.  As outlined here, promissory notes also involve a six-year limitations period, but the Court in Smithner concluded that a credit card account is an "open account" governed by Ind. Code 34-11-2-7(1) that deals with "actions on accounts and contracts not in writing."  This distinction affects the date upon which the statute is triggered. 

Generally, "the date the account is due" is when the statute of limitations commences for an action on an open account.  In Smithner, the borrower last made a payment on 2-9-2000, and the plaintiff/lender requested a minimum payment on the account by 3-11-2000.  The borrower never made another payment.  Because the Court considered the statute to have begun running either on the date of the last payment or the date the next payment was due, the lender's suit filed 5-30-2006 was beyond the six-year deadline and thus time-barred.  Please review the decision for possible exceptions to the rule or facts that could affect the relevant dates, however.     

To Be Enforceable, Promissory Notes Must Be Endorsed And Delivered

As articulated in FH Partners v. Cajbin, 2009 U.S. Dist. LEXIS 109986 (N.D. Ind. 2009) (.pdf), under Indiana law to be an enforceable negotiable instrument, such as a promissory note, it must be validly negotiated.  Representatives of commercial lending institutions and their counsel need to know that both endorsement and delivery must occur for a promissory note to be enforceable. 

The situation.  The loan at issue in FH Partners was pretty standard.  It involved a 1999 promissory note, a mortgage and personal guaranties.  The twist surrounded a Chapter 11 bankruptcy filing by the borrower/mortgagor and specifically an effort to renegotiate the underlying promissory note in 2007, after approval of the bankruptcy reorganization plan.  Counsel for the lender sent a new promissory note and mortgage to counsel for the borrower, and requested that the documents be executed and delivered back.  Evidently the borrower may have signed the promissory note, but the note was never delivered back to the lender.  The lender/mortgagee ultimately sued to enforce the original (1999) loan.  

The defense.  In response to the lender’s motion for summary judgment, the defendants (borrower/mortgagor and guarantors) contended that the suit was based upon the wrong debt instrument.  Specifically, the defendants asserted that the 2007 proposed promissory note served to extinguish the 1999 promissory note, as well as the individual guaranties of that note. 

Enforceability of note.  Magistrate Judge Nuechterlein of the Northern District of Indiana found the defendants’ arguments to be “unpersuasive.”  In Indiana, to have an enforceable negotiable instrument, “there must be a valid negotiation.”  The Court noted that a valid negotiation is a “two-step process” that “requires the endorsement and the delivery of the instrument.”  Ind. Code § 26-1-3.1-201. 

Applying the legal principles.  It was undisputed in FH Partners that the 2007 promissory note was never returned to the lender/mortgagee.  “This undisputed fact is fatal to the defendants’ argument.”  Although the 2007 proposed promissory note may have been signed and thus validly endorsed, the defendants offered no evidence to establish that the note was transferred to the lender/mortgagee.  As such, the note was not properly negotiated between the parties and thus was not enforceable.

Novation.  A similar, alternative legal theory asserted by the defendants surrounded the defense of “novation.”  The defendants claimed that the failed attempt to renegotiate the original promissory note amounted to a novation.  But, “to have a novation there must be a valid new contract which extinguishes the old contract.”  In FH Partners, the Court found that there was no new contract between the parties, so “obviously [there] could be no novation.”  The defendants failed to complete the necessary conditions of the proposed new note, and those failures “precluded the formation of a new contract.” 

Judgment for lender.  The defendants in FH Partners argued that they entered into a subsequent, valid and enforceable promissory note that resulted in their release from the original loan obligations.  Normally cases like these surround the lender’s contention that a particular promissory note is valid and enforceable.  Here, the lender succeeded by taking the opposite position for purposes of enforcing a prior loan.  The Court granted the lender/mortgagee’s motion for summary judgment on all counts.

One thing secured lenders can take away from the FH Partners case is to be careful when entering into negotiations to restructure debt.  For example, as I’ve posted here before, certain steps must be undertaken to avoid unwittingly releasing a guarantor from his or her obligations.  In FH Partners, the lender/mortgagee helped to protect itself by utilizing a transmittal letter of the 2007 proposed promissory note, which letter requested that the documents be executed, notarized and delivered back to it.  Those preconditions were not met.  For those and other reasons, the alleged replacement promissory note was neither valid nor enforceable.

Unsigned Cross-Collateralization Agreement Unenforceable In Recent Case

This will supplement my April 5, 2010 post regarding Wells Fargo v. Midland.  If you’re a secured lender struggling with cross-defaulted and cross-collateralized loans, hopefully you have fully-signed agreements clearly capturing the intent of the deal.  Wells Fargo shows what might happen if you don’t. 

Cross-collateralization problems.  One of the two loans at issue in Wells Fargo was not in default.  The borrower thus fought the foreclosure action related to the loan that was current.  The question became whether a non-executed draft of a cross-guaranty, which contained cross-default and cross-collateralization provisions, should have been incorporated into the executed loan documents memorializing two loans.  The subject borrower never executed the cross-guaranty.  Despite that fact, the lender sought to establish that an executed mortgage incorporated the cross-guaranty so as to permit the lender to enforce defaults on both loans.   

Statute of Frauds.  If you have ever heard the term “Statute of Frauds” and wondered what it meant in the foreclosure context, Wells Fargo provides guidance.  The applicable statute in this case is I.C. § 32-21-1-1(b).  Generally, contracts subject to this statute “must be in writing and signed by the party against whom enforcement is sought.”  In Wells Fargo, the cross-guaranty in question was subject to the Statute of Frauds because it was “a promise to answer for the debt of another.” 

Exception to statute?  In Indiana, there are limited circumstances in which an unsigned document can satisfy the Statute of Frauds.  A memorandum satisfying the statute may consist of several writings even though only one writing is signed.  The test is:

The signed instrument must so clearly and definitely refer to the unsigned one that by force of the reference the unsigned one becomes a part of the signed instrument.

Thus the question in Wells Fargo was whether the signed mortgage “so clearly and definitely [referred] to the unsigned cross-guaranty that by force of that reference, the cross-guaranty became a part of the mortgage.”  The Court examined the loan documents and ultimately concluded that they did not satisfy the test. 

Lender Liability Act.  The lender in Wells Fargo got creative with a second theory around the Statute of Frauds that focused on Indiana’s Lender Liability Act, about which I wrote on July 11, 2008.  The lender argued that the conclusion not to enforce the cross-guaranty necessarily meant that the original mortgage had been amended.  Because the ILLA provides that a credit agreement may not be amended without a written agreement, the lender asserted that the signed mortgage must control all the material terms and conditions of the loan, including the alleged cross-collateralization term.  (See I.C. § 26-2-9-5).  But the Court rejected the premise that there was a change and/or revision to the mortgage, stating “that the cross-guaranty provision in the mortgage was, essentially, meaningless” from the start:

When the parties either failed to agree upon the terms of a cross-guaranty, or failed to ensure that the final version was executed, their own conduct resulted in a document that contained a provision referring to a document that did not exist.

Get signatures.  The Court stood firm that the unexecuted cross-guaranty did not survive the Statute of Frauds and that the result did not run afoul of the ILLA.  The obvious lesson here is to make sure all the relevant papers memorializing the terms and conditions of a loan are signed by the appropriate parties.  The absence in Wells Fargo of a signed cross-collateralization agreement, which may have been a simple oversight, prevented the lender from fully enforcing rights that even the borrower may have intended to be a part of the deal.

Next week’s post will explain how the lender’s cross-default/cross-collateralization problem complicated its efforts to have a receiver appointed.

Judgment Granted To Lender Despite Absence Of Signature On Promissory Note

Has your lending institution failed to maintain an original or copy of an executed promissory note?  Similar to the case discussed in my February 7, 2009 post No Signatures, No Promissory Notes, No Problem, the Indiana Court of Appeals in Baldwin v. Tippecanoe Land & Cattle, 2009 Ind. App. LEXIS 1491 (Ind. Ct. App. 2009) (.pdf) upheld a summary judgment for the plaintiff lender even though the lender could not produce the signed promissory note. 

Procedural history.  Lender filed a claim to foreclose its second mortgage and attached to the complaint a promissory note that was not signed.  (The mortgage did, however, appear to contain the borrower’s signature, and the unsigned note referred specifically to the accompanying mortgage.)  In his response to the lender’s claim, the borrower entered a “general denial” pursuant to Indiana Trial Rule 8(B).  The lender later filed a motion for summary judgment that the trial court granted.

The borrower’s contentions.  The borrower argued that the mortgage was unenforceable because the note was not signed by him. 

The lender’s contentions.  The lender’s theory to get around the absence of the signature rested upon Ind. T. R. 9.2(B), which states:

When a pleading is founded on a written instrument and the instrument or a copy thereof is included in or filed with the pleading, execution of such instrument . . . shall be deemed to be established . .  . unless execution be denied under oath in the responsive pleading or by an affidavit filed therewith.

The lender’s point was that the execution of the note was deemed to be established pursuant to this trial rule. 

Rule 8(B) versus 9.2(B).  The Court of Appeals analyzed the technical requirements of Trial Rules 8(B) and 9.2(B), as well as Rule 11(A) dealing with signatures on court filings.  Those rules, collectively, “mean that the attorney’s signature on a general denial [per Rule 8(B)] rejects the assertions in the claim, but does not constitute an oath by which the pleader denies the execution of an instrument attached to a claim [per 9.2(B)].” 

Must deny under oath.  Because the borrower failed to deny, under oath, the execution of the subject note, the Court affirmed the summary judgment granted in favor of the lender:

As [lender] attached the Note and Second Mortgage to  its cross-claim, execution of both would be deemed to be established, by operation of Trial Rule 9.2(B), unless [borrower] denied under oath that they were executed.  [Borrower], himself an attorney, filed a general denial.  He signed it as “respectfully submitted.”  He omitted to include a statement that his general denial was truthful and made under penalty for perjury.  Thus, [borrower] failed to deny under oath the execution of the Note.  We therefore conclude that execution of the Note was deemed to be established . . ..

As was the case with the Bonilla opinion, which was the subject of my February 7, 2009 post, Indiana law seemingly allowed the lender in Baldwin to dodge a bullet in order to obtain a pre-trial judgment in its favor.

Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years

Lenders filing loan enforcement cases in Indiana should know that their actions may be time-barred if not filed within six years. 

What is a “statute of limitations”?  When trying to describe general legal concepts, I often turn to (what else?) Black’s Law Dictionary:

Statute of limitations.  A statute prescribing limitations to the right of action on certain described causes of action . . . that is, declaring that no suit shall be maintained on such causes of action . . . unless brought within a specified period of time after the right accrued.  Statutes of limitation . . . are such legislative enactments as prescribe the periods within which actions may be brought upon certain claims or within which certain rights may be enforced.

Basically, a statute of limitations is a deadline to file a lawsuit. 

2 statutes – 6 years.  The Indiana Code’s provisions applicable to statutes of limitation include Ind. Code § 34-11-2-9 “Action upon promissory notes, bills of exchange, or other written contracts for payment of money:”

An action upon promissory notes . . . or other written contracts for the payment of money executed after August 31, 1982, must be commenced within six (6) years after the cause of action accrues.

Indiana’s version of the Uniform Commercial Code, specifically Chapter 3.1 “Negotiable Instruments,” has a similar provision at I.C. § 26-1-3.1-118 “Action to enforce obligation of party--”:

(a)  Except as provided in subsection (e) [not applicable], an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

Both statutes seemingly apply to promissory notes, although as noted in my January 16, 2008 post, not all notes are negotiable instruments under the UCC.  While the two different statutes create some confusion as to which statute applies and when, both statutes fortunately have a six-year limitations period – a “distinction without a difference” kind of situation. 

The complicator - accrual.  Although Indiana law may be clear as to when the limitation period ends (six years), the more difficult issue surrounds when the limitation period begins.  What event, date, etc. causes the statute of limitations to start running?  Based upon my limited research for this post, there is not a readily-available, crystal-clear answer to the question. 

The “after the cause of action accrues” language in I.C. § 34-11-2-9 has been, and continues to be, subject to debate in all sorts of cases.  That language usually refers to the date the plaintiff knew or should have known it had a cause of action (i.e. a known default).  Here, the law is complicated by the fact that most promissory notes contain “no waiver” clauses, which serve to negate what could be various default-related triggers. 

I.C. § 26-1-3.1-118(a) is a little more clear, however, and suggests the applicability of a couple of different accrual dates:  either (1) the date of maturity or (2) the date of acceleration. 

The basics.  Although I have not comprehensively researched Indiana law on the subject, I think it’s safe to say that, generally, the day after the note’s maturity date usually will be the first day of the six-year limitations period.  If, however, the lender accelerated the note, then the date of acceleration may trigger the limitations period.  Of course there are many circumstances that might call for a different result.  The primary purpose of today’s post simply was to address the six-year time period and advise lenders and their counsel that, normally, you’ve got six years to initiate a promissory note enforcement action.  Given the negative consequence of an untimely lawsuit (i.e. loss of the case), it is good practice to be conservative in calculating deadlines of this type.

No Signatures, No Promissory Notes, No Problem

Has your lending institution lost its promissory note?  Is the defaulting mortgagee claiming she did not sign the mortgage?  As explained in Bonilla v. Commercial Services, 2009 Ind. App. LEXIS 112 (Bonilla.pdf), all may not be lost.

History.  In the mid-1980’s, husband arranged for two loans that were secured by real estate upon which a gasoline service station operated.  The mortgages contained the signatures of both husband and wife as co-mortgagors.  Husband died in 1991.  The mortgagee filed a foreclosure action against wife in 2000.  Wife lost at trial, and appealed.  Her appeal centered on two arguments:  (1) she did not sign the subject mortgages and (2) the plaintiff (mortgagor) failed to produce the underlying promissory notes.

Signatures.  Wife claimed that she adequately established her non-participation in the mortgage executions.  She even submitted handwriting samples to contest the alleged signatures.  The trial court found the samples to “clearly show a distinct difference between the signatures of wife in the exemplars and the purported signature of wife on the mortgages.”  Wife’s purported signatures on the mortgages, however, were notarized, which created a presumption that wife signed them.  Ind. Code § 33-42-2-6 provides that the “official certificate of a notary public, attested by the notary’s seal, is presumptive evidence of the facts stated in cases where, by law, the notary public is authorized to certify the facts.”  The trial court concluded that wife’s evidence was inadequate to rebut the presumption, and the Indiana Court of Appeals affirmed.  Significantly, the trial court found that wife admitted she knew of the debts and of her husband’s unsuccessful attempts to settle them before his death.  Furthermore, she made no effort during any of the intervening twenty years to either set aside the mortgages, to quiet title to the property or to return any of the funds associated with the mortgages.  Finally, wife admitted at trial that she benefited from the funds received from the loans associated with the mortgages. 

Damages.  Wife’s second argument on appeal was that the trial court erred in determining the damages owed.  The mortgages had been submitted into evidence, but the promissory notes were not.  Based upon the Indiana Supreme Court’s decision in Yanoff v. Muncy, 688 N.E.2d 1259 (Ind. 1997) and I.C. § 26-1-3.1-309 "Enforcement of lost, destroyed, or stolen instrument", the notes’ absence was not a bar to recovery.  In Indiana, a plaintiff in a foreclosure action does not necessarily need to produce the promissory note to recover the debt.  The debtor in Yanoff provided testimony of the essential terms of the debt, such as the amount of the original debt, the interest rate, the existence of a mortgage securing the debt, and the schedule of payments.  Such evidence, according to Yanoff, was “enough to prove both the existence of the promissory note underlying the mortgage and its essential terms.” 

In Bonilla, the Court of Appeals found that the record contained undisputed evidence establishing the terms, dates, amounts of, and interest rates on the two mortgages.  Wife also conceded that no payments had been made on the mortgages since they were executed over twenty years ago.  Even though the Court did not have the precise terms of the notes, there was a reasonable inference to draw from the evidence submitted at trial “that the failure to make a single payment on the notes in over twenty years is an event of default.” 

Wife lost the case, even though she presented fairly strong evidence that she did not sign the mortgages and even though the plaintiff mortgagee was unable to produce the promissory notes.  In the end, Indiana law allowed the mortgagee in Bonilla to dodge a bullet.

Promissory Note = Negotiable Instrument

On November 13, 2008,  the United States District Court for the Northern District of Indiana in United States of America v. Lockett, 2008 U.S. Dist. LEXIS 92998 (Lockett.pdf) granted summary judgment in favor of lender in a straightforward promissory note default case.  Lockett provides a nice primer on Indiana’s basic rules surrounding promissory notes and the evidentiary hoops through which a lender must jump in order to obtain a summary judgment in federal court.

Federal court summary judgment standard.  The procedural standard for summary judgments in Indiana’s federal courts is different from Indiana’s state courts.  Without going into detail, the movant’s initial procedural burden is easier to meet in federal court.  For those interested, here is the procedural standard as articulated in Lockett:

Summary judgment is appropriate when “the pleadings, depositions, answers to the interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.”  Fed. R. Civ. P. 56(c).  In deciding whether a genuine issue of material fact exists, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.”  No genuine issue of material fact exists when a rational trier of fact could not find for the nonmoving party even when the record as a whole is viewed in the light most favorable to the nonmoving party.  A nonmoving party cannot rest on mere allegations or denials to overcome a motion for summary judgment; “instead, the nonmovant must present definite, competent evidence in rebuttal.”  Specifically, the nonmoving party must point to enough evidence to show the existence of each element of its case on which it will bear the burden at trial. 

(Indiana’s state court standard requires the movant to designate evidence that definitively negates each element of the nonmovant’s case.)

Promissory note, defined.  Judge Miller reminds us that a promissory note “is a negotiable instrument subject to Indiana’s version of the Uniform Commercial Code.  See, Ind. Code § 26-1-3.1-104.  In Indiana, the holder of a negotiable instrument (usually, a lender) may recover on the instrument simply by:

  producing the signed note, or a copy;
  proving that the note was executed; and
  showing that the note is due and unpaid.

See, I.C. § 26-1-3.1-308.  Typically, these matters easily are established by filing an affidavit from a lender representative.  At that point, the only way the defendant (the borrower) can avoid entry of judgment is to prove some defense to liability.  The potential defenses are too voluminous to list or discuss here, but they would involve, for instance, evidence that the borrower did not sign the note or that the borrower contests the amounts due. 

In Lockett, the borrower failed to refute any of the lender’s factual allegations and failed to raise any legal defense to negate her responsibility to pay the full amount of the loan.  The borrower, who was unrepresented in the litigation, simply expressed a desire to settle the debt.  Accordingly, the Court concluded that there were no genuine issues of material fact for trial and held that the holder of the note was entitled to a judgment as a matter of law in the amount requested.

The fundamentals.  The Lockett case warranted a short post to remind secured lenders and their counsel involved in Indiana commercial foreclosures of the basic proof needed to obtain a pre-trial disposition of the case through summary judgment.  For the Indiana lawyers who may be reading, Lockett would be a nice case to cite in a summary judgment brief involving a default on a promissory note.

Fried Tomato Grower, Part II: Lack of Consideration

Today’s post will explore the second, and successful, defense asserted by defendant Jackson, namely that the Note was unenforceable for lack of consideration.  Part I of my commentary about Jackson v. Luellen Farms discussed how the Indiana Court of Appeals arrived at its conclusion that Jackson could be personally liable on the Note.  Keep reading, however, to gain an understanding of the concept of “consideration,” particularly in situations involving antecedent debt, and how the Court ultimately ruled in Jackson’s favor.

Consideration, general rules.  Because the Court deemed the Note not to be a negotiable instrument, the UCC and specifically I.C. § 26-1-3.1-303(b) did not apply.  (Section 303 articulates what “consideration” is under the UCC.) 

For a contract to be valid, there must be an exchange of consideration, as noted by the Court in Jackson:

  Consideration is defined as ‘[s]omething of value (such
  as an act, a forbearance, or a return promise) received
  by a promisor from a promisee.’  ‘To constitute
  consideration, there must be a benefit accruing to the
  promisor or a detriment to the promisee.’

The plaintiff creditor, LFI, argued that there was consideration for the Note because of the unpaid balance owed by HPI to LFI at the time of the Note’s execution. 

Past consideration.  In fact, the Note was a promise by Jackson to pay an antecedent (prior) debt of a third party, HPI.  The Indiana Court of Appeals held that the promise was not enforceable because “past consideration” generally cannot support a new obligation or promise.  As stated by the Court, in Indiana:

  if a person has been benefitted in the past by some
  act or forbearance for which he incurred no legal
  liability and afterwards, whether from good feeling
  or interested motives, he makes a promise to the
  person by whose act or forbearance he has benefited,
  and that promise is made on no other consideration
  than the past benefit, it is gratuitous and cannot be
  enforced. 

Neither HPI nor Jackson received any benefit in exchange for the Note.  Jackson, personally, had no liability on the debt when he signed the Note – only HPI did.  There was no evidence that Jackson signed the Note in exchange for LFI’s promise to delay collection (forbear), in which case there would have been consideration.   

Valid guaranty?  LFI actually was angling to assert that the Note was a personal guaranty.  Under Indiana law, “it is not necessary for a guarantor to derive any benefit from the principal contract or the guaranty for consideration to exist.”  But, generally the guaranty must be made “at the time of the principal contract” (for example, when the tomatoes were delivered).  There are exceptions to this general rule, but none of them existed in Jackson.  There was, therefore, no legal consideration to support the alleged guaranty of HPI’s debt to LFI. 

Too late.  The tomato grower lost the case for a lot of reasons, including most importantly the fact that Jackson, individually, did not promise to pay HPI’s debt at the time the tomatoes were delivered.  Even then, once HPI began having trouble paying LFI, there still could have been personal liability had Jackson signed the Note in exchange for LFI’s forbearance in collecting against HPI.  The Court said, “[t]he problem in Jackson is that neither Jackson nor [HPI] received anything of benefit pursuant to the Note.  Instead, the only party that benefitted from the Note’s execution was the promisee, LFI.  Although Jackson had some motive to sign the Note, the Note was not supported by consideration.  Under these circumstances, LFI may not enforce the Note against Jackson.” 

In most commercial cases, there will be appropriate and timely loan documentation.  So, the circumstances present in the Jackson case may not be common in the day-to-day operations of most commercial lending institutions.  If, however, you as a lender agree to forbear on a borrower’s debt and, as a part of that agreement, intend to obtain for the first time some kind of personal guaranty, make sure the loan documents are clear that the parties intend for there to be personal liability and that appropriate consideration (exchange of benefit) exists. 

Fried Tomato Grower, Part I: Personal Liability

Informalities in connection with loans often lead to costly results.  In Jackson v. Luellen Farms, 2007 Ind. App. LEXIS 2754 (JacksonOpinion.pdf), the Indiana Court of Appeals discussed in its December 12, 2007 opinion how a thirty-year business relationship turned into $200,000 in losses for a supplier of raw tomatoes.  This is the first of two posts that address the Jackson case and the efforts of a party owed money to collect an antecedent debt from an owner/operator of a corporation.  Advanced planning and documentation sometimes may be inconvenient, expensive or awkward, but it almost always can help protect lenders against financial losses. 

Context.  The plaintiff was LFI, a grower and supplier of tomatoes.  Defendant Jackson was the owner and operator of HPI, a corporation that purchased and canned tomatoes.  HPI often would not pay LFI on delivery but would wait until the first of the year.  In October, 1999, HPI owed LFI about $225,000 for tomatoes delivered in 1998 and 1999.  LFI evidently became nervous about getting paid, so for the first time the parties executed a Note to memorialize the amount owed.  HPI made some payments on the Note but ultimately went under, owing $2.5-$3.0 million dollars to various creditors.  LFI sought recovery from Jackson individually, and Jackson asserted two defenses:  (1) he was not personally liable on the Note because he signed in a representative capacity and (2) the Note failed for a lack of consideration.  I discuss the first defense in this post.

Was the Note a negotiable instrument?   A sub-issue was whether Indiana’s UCC, specifically I.C. § 26-1-3.1-402 dealing with negotiable instruments, applied.  (Typically, the UCC applies because most promissory notes meet the requirements of a negotiable instrument.)  If the UCC applied, the burden of proof was on Jackson to in essence prove a negative:  that both parties did not intend for him to be personally liable under the Note.  Was the document was in fact a “negotiable instrument” as defined in I.C. § 26-1-3.1-104?  The Court of Appeals concluded it was not, essentially because it purported to incorporate by reference the terms of a separate contract.  The Note not only referred to a non-existent mortgage but, more importantly, indicated that all agreements and covenants in that mortgage applied to the Note – a no-no under the UCC.  So, Jackson was not held to the heavy burden “to show that both parties to the Note intended that Jackson not make himself liable.” 

Contract law.  The issue of personal liability thus turned on the common law of contracts, not the UCC.  And, plaintiff LFI had the burden of proof.  In this scenario, courts apply a set of rules of construction and interpretation to arrive at a decision as to what the parties intended in the written document.  The Court weighed a plethora of details about the language in the Note and the circumstances leading up to its execution.  For example, after his signature, Jackson did not have the word “President.”  In the final analysis, the Court concluded that “based on the manner in which Jackson signed the Note and our consideration of the surrounding circumstances, we conclude that the Note evidences a promise on the part of Jackson to pay LFI the amount owed by [HPI].”  So, despite winning on the UCC/burden of proof issue, Jackson still got beat on his first defense.   

On the hook?  The Court’s conclusion in Jackson is favorable to Indiana creditors, particularly in the rare scenario where a Note does not constitute a negotiable instrument under the UCC.  Absent clear and unambiguous language and/or facts showing that the amount of money was owed solely by the corporate entity, owners purporting to sign in a representative capacity could be at risk.  In part II of this post, however, I’ll explain why the Indiana Court of Appeals ultimately found the Note to be unenforceable as to Jackson.  LFI won a battle, but lost the war.