Posts in Procedure/Trial Rules
February 26, 2013
Discrimination Allegations Unavailing For Borrower In Post-Foreclosure Eviction
Today’s post follows-up on a theme from my February 15th post with respect to evictions following a sheriff’s sale. That post dealt with eviction of tenants. Today’s post, regarding United States of America v. Cotton, 2012 U.S. Dist. LEXIS 341 (N.D. Ind. 2012) (rtclick/save target as for .pdf), deals with mortgagors/owners.
Backdrop. Borrower owned real estate subject to a bank’s mortgage and a junior mortgage held by the United States Department of Agriculture (“USDA”). Due to a failure to make payments, the bank filed a foreclosure action against the borrower and obtained a summary judgment that authorized a sheriff’s sale. At the sale, third-party bidders purchased the real estate. The USDA thereafter asserted its redemption rights under federal law (28 U.S.C. § 2410(c)). In exchange for a deed, the USDA paid the purchasers an amount equal to what the purchaser’s paid at the sheriff’s sale, plus interest. After recording the deed, the USDA sent the borrower a notice to vacate the premises within thirty days. The borrower refused to comply.
Procedural maneuvering. To obtain possession of the real estate, the USDA, in a lawsuit separate from the state court foreclosure, filed a motion for judgment on the pleadings pursuant to F.R.C.P. 12(c). The Court in Cotton noted that the USDA had to establish “that [bank’s] lien on the [subject real estate] stood in first priority, ahead of the USDA’s; that it timely exercised its redemption right in the [subject real estate]; and that it followed the proper procedures under Indiana law to perfect legal title in the [real estate].” The Court concluded that the USDA had met its burden.
Right to possession. The USDA’s right of redemption vested upon the sale of the real estate at the sheriff’s sale. The USDA timely redeemed the real estate and properly recorded the subject deed. This served to perfect the USDA’s legal title in the real estate. In Indiana, property law grants to property owners the absolute and unconditional right “to exclude from their domain those entering without permission.” The Court stated that: “as the owner of an undivided fee simple interest in the [real estate], the United States is entitled to permit, or exclude, whomever it desires from the property; including [the borrower].”
Borrower’s contentions. The borrower did not contest the action upon the legal formalities of the acquisition by the USDA, but rather upon notions of equity. The borrower asserted that the USDA did not have “clean hands,” an equitable doctrine I discussed in a December, 2012 post. Generally, “one who seeks relief in a court of equity must be free of wrongdoing in the matter before the court.”
First, the borrower argued that the USDA had an obligation to intervene on his behalf and to provide him with legal representation and advice in the state court foreclosure proceedings. The Court noted that, while the USDA might have an obligation under federal law to assist minority and impoverished individuals in efforts to obtain affordable housing, such obligation does not extend to the requirement to provide free legal services to those persons.
Second, the borrower asserted that “because the USDA previously defended against allegations of race discrimination in a class action lawsuit, this alleged misconduct should either be imputed or presumed into the context of the instant case.” The cases upon which the borrower relied involved alleged racial discrimination in applying for mortgage loans. In Cotton, the borrower received a mortgage from the USDA without any complications. The borrower invited the Court “to entertain a presumption that because the USDA discriminated against similarly situated persons in the past, it necessarily follows that he too was a victim of discrimination. Because the evidence in the pleadings [did] not substantiate this allegation, the Court [was] not inclined to leap to such a conclusion.”
The Court in Cotton held that the actions of the USDA did not make it inequitable for the Court to order the requested relief. The Court granted the USDA’s motion for judgment on the pleadings and found that the borrower was in wrongful possession of the subject real estate. The Court ordered him to vacate the premises accordingly. One point Cotton illustrates is that, in Indiana, a sheriff’s sale terminates the borrower’s (former owner’s) rights to the mortgaged real estate.
Posted at 09:48 PM in Procedure/Trial Rules
, Sheriff's Sales
February 15, 2013
Foreclosing Party, As Owner, May Evict Tenants In Breach
Secured lenders repossessing real estate collateral at a sheriff’s sale normally keep tenants in place to maintain income. There are instances, however, when a plaintiff lender, or a third-party sheriff’s sale purchaser, may desire to evict a tenant. Ellis v. M&I Bank, 960 N.E.2d 187 (Ind. Ct. App. 2011) sheds light on a new owner’s rights, following a sheriff’s sale, vis-à-vis tenants.
Unusual circumstance. In Ellis, a developer leased the subject real estate to tenants (husband and wife), but then defaulted on its line of credit. As a result, the developer’s lender foreclosed and ultimately acquired the real estate at a sheriff’s sale. The court’s decree of foreclosure was against the developer and the husband only, not the wife/co-tenant. When the lender pursued a writ of assistance to evict the tenants, the wife asserted that her interest in the real estate had not been extinguished in the mortgage foreclosure case. She was right.
To terminate, name tenants. The Court in Ellis noted that, in Indiana, the purchaser at a sheriff’s sale “steps into the shoes of the original holder of the real estate and takes such owner’s interest subject to all existing liens and claims against it.” Because the lender did not make the wife a party to the foreclosure case, the sheriff’s sale could not be enforced against her. This is because, in Indiana, “where a mortgagee knows or should know that a person has an interest in property upon which the mortgagee seeks to foreclose, but does not join that person as a party to the foreclosure action, and the interested person is unaware of the foreclosure action, the foreclosure does not abolish the person’s interest.” See my 10/07/11 and 07/09/10 posts for more on this area of the law. Because the wife was not named or served in the foreclosure action, the trial court found that her interest was not extinguished by the foreclosure judgment and that the lender’s interest in the real estate remained subject to her leasehold interest.
How did the lender obtain possession of the real estate from the wife?
Option 1 – strict foreclosure. One option available to the lender was to terminate the interest of the wife through a strict foreclosure action. I have written about this remedy, including Indiana’s 2012 legislation, extensively. Please click on the category Strict Foreclosure to your left for more. The lender in Ellis did not pursue this option.
Option 2 - eviction. The lender elected, as the then-owner of the real estate, to pursue eviction based upon the subject lease agreement. The eviction action was separate and distinct from the foreclosure action. The evidence in Ellis was clear that the tenants had breached the lease and that the lender had the corresponding right to terminate. The trial court entered an order of possession for the lender based on the lease, and the Court of Appeals affirmed.
Plaintiff lenders, after the entry of the foreclosure decree and sheriff’s sale, usually can evict parties in possession of the subject real estate through the mechanism of a writ of assistance, about which I have written in the past, assuming the mortgage lien is senior to the possessory interest. That remedy generally is effective only when the targets of the writ of assistance were made parties to the underlying action. The rub in Ellis was that one of the parties in possession of the real estate (the wife) was not named in the case. Rather than embarking on what may have been a relatively costly, complicated and lengthy strict foreclosure action, the lender in Ellis chose a simpler approach by filing a straightforward landlord/tenant eviction action based upon the terms of the subject lease. This turned out to be a good solution to the problem caused by failing to name the wife.
Posted at 10:57 AM in Procedure/Trial Rules
, Sheriff's Sales
, Strict Foreclosure
February 02, 2013
More On Indiana’s Service Of Process Rules and Pitfalls
My December, 2010 post “Service Of Process” Fundamental For The Plaintiff Lender addressed the matter of inadequate service of process, which can result in defective judgments. The subsequent decision in Norris v. Personal Finance, 957 N.E.2d 1002 (Ind. Ct. App. 2011) allows me to supply a complementary post. Since “do overs” should be avoided, secured lenders and their foreclosure counsel need to have a good grasp on how to initiate a suit against someone.
How service occurred. In Norris, a borrower failed to make payments on the subject loan, and the lender filed a collection action. The sheriff delivered the complaint to the address of the parents of the borrower and sent another copy to that address by first class mail. Since the borrower failed to appear at the trial, the court entered a default judgment against him. In a post-judgment hearing, the borrower argued that service of process at his parents’ address was insufficient and that the default judgment should be set aside. The trial court denied the requested relief, and the borrower appealed.
The lender’s argument. The promissory note identified the borrower’s parents as references and gave their home address. Two emails involving the lender’s lawyer’s secretary and the borrower indicated that the borrower had knowledge of the suit and the trial date. Previous phone conversations between the borrower and the lender’s representative occurred in which the borrower stated that he was living with his parents due to the loss of his home. At one point the lender’s representative called the parents’ home, and the borrower answered the phone. In short, the evidence was overwhelming that the borrower knew about the suit.
The borrower’s argument. The borrower claimed that he did not reside at his parents’ address when the complaint was served and, as such, the court did not have personal jurisdiction over him when it entered the default judgment. The borrower had not appointed his parents as his agents or otherwise authorized them to accept service on his behalf.
Rule 4.1. This trial rule governs service on an individual, and section (A)(3) provides service may be made by “leaving a copy of the summons and complaint at his dwelling house or usual place of abode.” The Court held that the record in Norris was devoid of such evidence. In footnote 4 of its opinion, the Court provided a nice summary of Indiana law on the “extremely fact-sensitive” question of whether an address is a party’s “dwelling house or usual place of abode.”
Rule 4.16. Instead of focusing on Rule 4.1(A), the trial court based its decision upon this trial rule, which essentially states that one who accepts service for another is under a duty to notify that person. The trial court presupposed that the parents either did or could accept service for their son. Since it was undisputed the parents received the complaint, the trial court reasoned that the parents had a duty to inform their son of the suit or to inform the court that the borrower did not live with them. The borrower asserted that this rule only applies to those with authority to accept service for another, and the Court agreed. Parents of competent adults are not, under Indiana law, persons having authority to accept service. And there was no evidence in Norris establishing that the parents in fact did not have such authority.
Rule 4.15(F). This trial rule basically provides that service shall not be deemed insufficient when it “is reasonably calculated to inform the person to be served that an action has been instituted against him.” Although this somewhat nebulous rule had the potential to save the lender, the Court rejected its application because the purpose of the rule is only to cure “technical defects in service of process, not a total failure to serve process,” which was the situation in Norris.
Actual knowledge not the test. The evidence established that the borrower in Norris had actual notice of the collection action and the trial. Nevertheless, Indiana law is well settled that the mere fact that the defendant had knowledge of the action will not grant the court personal jurisdiction. Plaintiffs must follow the guidelines in the Rule 4 series and constitutional due process.
In Indiana, the seemingly simple step of serving a defendant borrower with a summons and complaint can sometimes become a frustrating obstacle to overcome. One of the lessons of Norris, together with the Elliott and Yoder cases I discussed in my December, 2010 post, is to get service right the first time. An expedient default judgment based on questionable service may, in the end, prove to be a waste of time and money. Ultimately, the foolproof method of service upon an individual is to deliver a copy of the summons and complaint to him personally. See, T.R. 4.1(A)(2).
Posted at 08:36 AM in Procedure/Trial Rules
January 25, 2013
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.
Posted at 06:28 PM in Mortgages
, Procedure/Trial Rules
, Promissory Notes