July 16, 2012
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 at 05:46 PM in Guarantors
, Promissory Notes
July 09, 2012
Forgery Defense Must Be Raised Immediately
Weinreb v. TR Developers, 943 N.E.2d 856 (Ind. Ct. Ap. 2011) dealt with a guarantor’s claim that he did not sign the guaranty upon which the judgment entered against him was based. The Court’s opinion involves technicalities surrounding a couple rules of procedure, but there is a broader message for defendants in Indiana foreclosure cases: denials of document execution should be raised right away.
Case history. In September, 2008, the lender filed its complaint, including copies of the subject guaranty. The guarantor filed an answer to the complaint and asserted a general denial to all of the allegations. The lender subsequently filed a motion for summary judgment that resulted in the entry of judgment in May of 2009. In June, 2009, after the period for filing an appeal had run, the guarantor filed a Rule 60(B) motion and submitted for the first time evidence suggesting that the guaranty had been forged. The trial court denied the motion, and the guarantor filed a second Rule 60(B) motion on the same grounds, plus an allegation of negligence on the part of the guarantor’s original attorney. The trial court denied the second motion as well, and the guarantor appealed.
Operative rule of procedure. Indiana Trial Rule 9.2(B) provides that, when a complaint is founded on a written instrument (such as a guaranty) and such instrument is filed with the complaint, “execution . . . shall be deemed to be established and the instrument, if otherwise admissible, shall be deemed admitted into evidence in the action without proving its execution unless execution be denied under oath in the [answer] or by an affidavit filed therewith.” In Weinreb, the Court noted that an attorney’s signature on a general denial does not constitute an oath by which the defendant denies execution of an instrument. Because the guarantor failed to deny, under oath, that he executed the guaranty, “execution . . . was deemed established by operation of Trial Rule 9.2(B).”
Summary judgment. The Court hinted that the defect in the pleadings could have been cured during the summary judgment stage. Nevertheless, in Weinreb, “the trial court properly presumed execution of [the guaranty] at summary judgment because [the guarantor] failed to introduce in a timely manner any evidence that would support a contrary finding.” Ultimately:
[the guarantor] failed to respond to [the lender’s] motion for summary judgment within the time limits prescribed by Trial Rule 56(C). Despite notice and two distinct opportunities to challenge [the lender’s] documentation, [the guarantor] failed to raise his forgery defense at any stage of the proceedings before final judgment was entered against him.
Explanation. The Weinreb opinion discussed at length the principles and standards applicable to Trial Rule 60(B) motions. In the final analysis, the Court concluded that “newly discovered” evidence did not exist. Rather, the guarantor’s failure to use due diligence was the compelling factor. The Court held:
With this equivocal evidence before it, distilling essentially to a swearing contest that should have been raised long before, the trial court was well within its discretion to reject [the guarantor’s] equitable demands that the trial court set aside the judgment entered against him under Trial Rule 60(B)(8). [The guarantor’s] second Trial Rule 60(B) motion did not present any grounds that would entitle him to relief from judgment that were unknown or unknowable at the time he filed his first such motion.
Take away. Borrowers and guarantors, and their counsel, should raise in their initial response to the lender’s complaint the defense of forgery, assuming there is evidence supporting such a defense. Even if the guaranty was forged in Weinreb, the guarantor (or his lawyer) was too late in asserting the defense. On the other hand, for lenders and their counsel, the Weinreb is a reminder to attach to the complaint any and all loan documents that form the basis of the action.
Posted at 05:26 PM in Guarantors
, Procedure/Trial Rules
June 28, 2012
Mortgagee Prevails In Claim For Indiana Tax Sale Surplus
What happens if a lender’s real estate collateral is sold at a tax sale, which nets a surplus (funds remaining over and above payment of the tax lien)? Does the money go back to the owner, or can the lender/mortgagee recover it? Beneficial Indiana v. Joy Properties, 942 N.E.2d 889 (Ind. Ct. App. 2011) helps answer these questions.
Course of events. In 2003, lender made a mortgage loan to borrowers. In 2008, following the failure by the borrowers to pay real estate taxes, the county held a tax sale that resulted in a $42,000 surplus. No party redeemed within the one-year period, so the county issued a tax deed in November of 2009. However, the tax sale purchaser did not immediately record it. In December of 2009, lender filed a motion in the county trial court for the auditor to hold the surplus. At the hearing on the motion, the lender established a default under the mortgage loan and losses of approximately $100,000. Shortly after the hearing, borrowers, who did not participate in the hearing, deeded the real estate to a third party, which recorded the deed in January of 2010. In February of 2010, lender filed a motion to compel the auditor to turn over the surplus, and then the the tax sale purchaser recorded its tax deed.
The problem. Who should have received the $42,000 tax sale surplus - the lender or the third party (subsequent owner)?
Statute. I.C. § 6-1.1-24-7 is the provision within Indiana’s tax sale statutory scheme that speaks to the surplus issue, and subsection (b) authorizes a claim by the:
(1) owner of record of the real property at the time the tax deed is issued who is divested of ownership by the issuance of a tax deed; or
(2) tax sale purchaser or purchaser’s assignee, upon redemption of the tract or item of real property.
Since there was no redemption, subsection (b)(2) did not apply. Beneficial Indiana focused on subsection (b)(1), which seems to suggest that the borrowers would be entitled to the funds because they were the owners of record at the time the tax deed was issued. Since they had conveyed their interests to a third party by the time the matter came before the trial court, the third party essentially stepped into their shoes and claimed subsection (b)(1) mandated the turnover of the surplus to it.
Statutory work around. In Indiana, persons with “an interest in the real estate, including those who did not own the real estate at the time of the tax sale or who did not purchase the real estate at the tax sale, may assert a claim for a tax sale surplus directly with the trial court.” The lender asserted that it was entitled to the surplus because its mortgage lien attached to the surplus. Indiana law indeed provides that, even though the lender’s lien against the real estate was extinguished by the tax sale deed, its lien “attached to the tax sale surplus, and has priority over the interest conveyed to [the third party].”
More substantial interest. The Court’s rationale rested upon the following test: “which claimant has the more substantial interest in the real estate?” The Court’s ruling in favor of the lender was, in my view, fair and sensible:
It is undisputed that [lender’s] mortgage was duly recorded on April 21, 2003. It is further undisputed that the [borrowers] not only failed to pay their property taxes but also were in default on their mortgage, owing a balance that greatly exceeded the tax sale surplus held by the auditor. Hence, [lender] had a substantial interest in the real estate prior to the issuance of the tax sale deed. [Third party] acquired its interest in the real estate by a quitclaim deed executed by the [borrowers] after they had failed to make mortgage payments to [lender’s] for more than a year; and they had failed to redeem the real estate during the statutory one-year period following Allen County’s tax sale of real property due to the owners’ failure to pay real estate taxes. Thus, at the time of the conveyance to [the third party] by the [borrowers], the interest conveyed was subject to the issuance of a tax deed to [the tax sale purchaser] and to [lender’s] recorded security interest. In other words, the interest conveyed to [the third party] by the [borrowers] is significantly less substantial than and inferior to the interest of [lender].
Favorable to lenders. As suggested here before on November 16, 2010 and most recently on March 19, 2012, delinquent real estate taxes and resulting tax sales can be a minefield for lenders in Indiana. In Beneficial Indiana, the lender lost its loan collateral and incurred damages of about $100,000.00. Luckily, the somewhat unique set of circumstances opened the door for the lender’s recovery of the surplus that mitigated its losses.
Posted at 10:58 AM in Mortgages
, Tax Sales
June 16, 2012
Priority Of HOA Liens In Indiana
Last week’s post dealt with a lien priority dispute between a mortgagee and a commercial property management association. I thought that a natural follow-up post would be to clarify priorities between a more traditional residential homeowner’s association’s lien and a mortgage. Secured lenders may from time to time foreclose upon its real estate loan collateral and discover that homeowner’s association liens have also been recorded on the subject property. These issues are not exclusive to consumer foreclosures. The can bubble up in commercial cases such as foreclosures upon failed residential subdivision developments.
HOA statute. Indiana has a separate and distinct statute devoted to homeowner’s association liens at Ind. Code § 32-28-14. Homeowner’s associations (HOAs) may claim an interest in real estate that is the subject of a lender’s foreclosure case, and the HOA may even file its own case pursuant to I.C. § 32-28-14-8.
Priority. In determining priority, the critical question is - when did the HOA record its lien on a particular lot? Pursuant to I.C. § 32-28-14-5, the priority of the lien of the HOA “is established on the date the notice of the lien is recorded . . ..” See also, I.C. § 32-28-14-6. Pursuant to Indiana’s recording statute, I.C. § 32-21-4-1(b), a lender’s mortgage will take priority according to the date of its filing. Thus both liens take priority according to their filing/recording. If the mortgage filing predated the filing of the HOA lien, then the mortgage will hold priority. If, on the other hand, the HOA lien was recorded before the mortgage, then the HOA lien will have priority.
Nothing unique. HOA liens carry no special weight or any kind of super priority in Indiana. Like most other liens, Indiana law determines the priority of an HOA lien based upon the date of its recording.
Posted at 01:39 PM in Mortgages
, Other Liens