Source: https://commercialforeclosureblog.typepad.com/indiana_commercial_forecl/promissory-notes/
Timestamp: 2019-08-22 06:57:59
Document Index: 525803099

Matched Legal Cases: ['§ 23', '§ 26', '§ 26', '§ 26', '§ 26', '§ 26', '§ 32', '§ 26', '§ 215', '§ 215', '§ 26', '§ 34', '§ 34', '§ 26', '§ 33', '§ 26']

Promissory Notes - Indiana Commercial Foreclosure Law
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.
Posted by John Waller on August 15, 2019 at 12:44 PM in Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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.
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 john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.
Posted by John Waller on January 18, 2019 at 08:00 AM in Judgment Enforcement, Promissory Notes | Permalink | Comments (0)
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.)
Trustees Have Authority To Foreclose For Trusts
Posted by John Waller on October 28, 2016 at 06:13 PM in Mortgage Servicing, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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 john.waller@woodenmclaughlin.com. I’d be curious as to any thoughts or input.
Now, back to March Madness….
Posted by John Waller on March 11, 2016 at 10:16 AM in Mortgages, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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).
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.
Posted by John Waller on December 23, 2015 at 03:19 PM in Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on July 27, 2015 at 01:22 PM in Mortgages, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on April 16, 2015 at 11:26 AM in News, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on January 05, 2015 at 05:52 PM in Mortgages, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on November 03, 2014 at 03:04 PM in Promissory Notes, Yield Maintenance Fees | Permalink | Comments (0)
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.
Posted by John Waller on October 17, 2014 at 05:10 PM in Promissory Notes | Permalink | Comments (10)
Posted by John Waller on September 27, 2014 at 12:02 PM in Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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.)
Posted by John Waller on May 22, 2014 at 02:39 PM in Mortgages, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on February 28, 2014 at 11:15 AM in Promissory Notes | Permalink | Comments (0)
Posted by John Waller on February 14, 2014 at 10:44 AM in Judgment Enforcement, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on October 25, 2013 at 04:20 PM in Procedure/Trial Rules, Promissory Notes, UCC/Security Interests | Permalink | Comments (0)
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.
Posted by John Waller on September 10, 2013 at 05:02 PM in Procedure/Trial Rules, Promissory Notes | Permalink | Comments (0)
Posted by John Waller on June 19, 2013 at 01:20 PM in Deeds-In-Lieu, Guarantors, Judgment Enforcement, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on January 25, 2013 at 05:28 PM in Mortgages, Procedure/Trial Rules, Promissory Notes | Permalink | Comments (5)
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.”
[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.
Posted by John Waller on January 04, 2013 at 04:53 PM in Guarantors, Promissory Notes | Permalink | Comments (1)
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.)
Posted by John Waller on July 16, 2012 at 05:46 PM in Guarantors, Mortgages, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on September 27, 2010 at 03:27 PM in Procedure/Trial Rules, Promissory Notes | Permalink | Comments (3)
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.
Posted by John Waller on September 13, 2010 at 10:23 AM in Promissory Notes | Permalink | Comments (0)
Posted by John Waller on April 16, 2010 at 02:26 PM in Lender Liability Act, Mortgages, Promissory Notes | Permalink | Comments (0)
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.
Posted by John Waller on March 26, 2010 at 02:58 PM in Promissory Notes | Permalink | Comments (0)
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:
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:”
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.
Posted by John Waller on March 09, 2009 at 05:05 PM in Promissory Notes | Permalink | Comments (1)
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.
Posted by John Waller on February 07, 2009 at 09:28 AM in Promissory Notes | Permalink | Comments (1)
Posted by John Waller on December 07, 2008 at 09:09 AM in Promissory Notes | Permalink | Comments (0)