January 13, 2012
What Are A Lender’s Rights As A “Loss Payee” Under An Insurance Policy In Indiana?
If you work for a lending institution that makes secured loans, then you may have heard of the term “loss payee.” If you are not sure what that means, then the Court’s decision in Monroe Bank v. State Farm, 2010 U.S. Dist. LEXIS 119736 (S.D. Ind. 2010) (.pdf) will help.
The loan and the loss. In Monroe, the lender funded a loan to the borrower that was secured by a lien on the borrower’s boat. The loan agreement between the lender and the borrower called for the borrower to obtain insurance for the boat and to name the lender as a “loss payee.” The borrower did just that. Thereafter, the boat fell on hard times, so to speak, by being stolen twice and ultimately suffering severe damage. As a result, both the borrower and the lender filed an insurance claim but, for reasons not explained in the Court’s opinion, the insurer denied the claim.
Loss payee definition. Black’s Law Dictionary defines “loss payee” as a “person named in insurance policy to be paid in event of loss or damage to property insured.” For more background, here is a link to Wikipedia’s definition of a “loss payee clause.”
Direct suit by lender. Due to the damage to its loan collateral, and in light of the insurer’s denial of the claim, the lender filed suit against the insurer. Specifically, the lender filed a breach of contract claim and sought damages for its losses associated with the damage to the boat. The insurer filed a motion to dismiss under Rule 12(b)(6) and advanced two arguments in support.
Direct action rule. The insurer’s first argument rested upon Indiana’s “direct action rule” that “prohibits a third party or judgment creditor from directly suing a judgment debtor’s insurance carrier to recover an excess judgment.” The Court, concluding that the direct action rule did not apply, rejected the argument. The lender in Monroe was not a “third party,” but rather a loss payee under the policy. As such, the lender “was a third party beneficiary of the contract between [the insurer] and [the borrower].”
Suit limitations clause. In the alternative, the insurer contended that the policy’s suit limitations clause barred the lender’s claim. The clause stated that “no action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.” The premise of the insurer’s argument was that the lender had to include the borrower in the suit. In Monroe, the borrower was not included in the suit, and it was undisputed that more than one year had elapsed since the date of loss. Again, the insurer’s argument failed, and the reason was that the insurer “ignored the fact that as a loss payee, [lender] is a third party beneficiary to the insurance contract.” In Indiana, as a third party beneficiary, the lender can sue the insurer directly to enforce the insurance contract.
Rights, generally. I am no insurance law expert. Such matters for our firm generally are handled by my partner, Dale Eikenberry. Nevertheless, it is important for attorneys like me, who handle litigation involving secured loans, to be conversant with insurance fundamentals. Similarly, representatives of secured lending institutions need to know the basics. Hence this post about Monroe, which teaches us that, generally, in Indiana a secured lender, named as a loss payee under its borrower’s insurance policy, can as the situation warrants file suit directly against the insurer if a claim is wrongfully denied.
Posted at 12:52 PM in Procedure/Trial Rules
December 30, 2011
Indiana Tax Sale Notices To Mortgagees
This follows up my two posts from last year concerning pre-sale notices of Indiana tax sales, which counties hold to satisfy delinquent real estate taxes: (1) Mortgagees Beware: Only Owners Receive Notices of Tax Sale and (2) Indiana Tax Sales, Part II: Redemption. A recent Indiana Court of Appeals opinion – Wells Fargo Bank v. Allen County, 955 N.E.2d 849 (Ind. Ct. App. 2011) –addressed post-sale notice requirements, including where the notices must be sent. These matters are important to lenders/mortgagees because a tax sale can terminate a mortgage lien.
Pre-sale notices. The Court’s opinion teaches us that there are three statutory notices issued by the county. The first relates to the sale itself and was the subject of post (1) above. I.C. § 6-1.1-24-4(a) controls that notice requirement, and it is clear that the initial sale notice only goes to the property owner. In Badawi, the parties did not dispute that the county properly issued the § 24-4(a) notice.
Post-sale notices. Badawi focused upon the post-sale statutory notices required by I.C. § 6-1.1-25-4.5(d) and I.C. § 6-1.1-25-4.6(a), for the right of redemption and for the petition for tax deed, respectively. In addition to the owner, those two notices must be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest,” which includes a mortgagee. I.C. § 6-1.1-25-4.5(d)(2).
Where? In Badawi, the county sent the required post-sale notices to the mortgagee at its local business office and at the address identified on the recorded mortgage. The mortgagee failed to redeem. In an effort to avoid having its mortgage lien extinguished, the mortgagee objected to the county’s petition for issuance of a tax deed, contending that it should have received notice pursuant to the service of process requirements found in Indiana’s trial rules. (See, Service of Process Fundamentals for the Plaintiff Lender.) The mortgagee claimed that the notices should have been served upon an executive officer or a designated resident agent. The Court rejected the mortgagee’s argument:
The sending of tax sale notices is governed by statute, and the fact that the Indiana Supreme Court has set out a different procedure in the trial rules for service of process upon organizations is of no moment. Under both Indiana Code § 6-1.1-25-4.5(d) and § 6-1.1-25-4.6(a)(2), tax sale notices are required to be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest.” Nowhere in the statute does it require compliance with Trial Rule 4.6 when sending tax sale notices.
Practical problem. Badawi is a fairly scary result for secured lenders holding mortgage liens in Indiana. Forbes contributor Peter Reilly noted as much in his November 28 piece. The county sent the notices, and it appears the mortgagee received them. But, from experience, I know that addresses identified in loan documents typically are not addresses of corporate legal departments or of resident agents, which in Indiana are persons or entities specifically designated to process important legal papers and help meet critical deadlines. Evidently, the notices in Badawi slipped through the cracks, and the lender’s mortgage lien was extinguished.
Fixes. My November 16, 2010 post cited to I.C. § 6-1.1-24-3(b), which provides a mechanism for mortgagees to receive pre-sale notices upon submission of written, annual requests to the county auditor. Perhaps every mortgagee doing business in Indiana should make it their New Year’s resolution to send these letter requests. The other solution is to set out, in the mortgage instrument, a contact address designed to deal with legal matters. Also, if you’re an assignee, ensure that you promptly record the mortgage assignment and identify your address on the assignment document. Whatever it takes, mortgagees should be vigilant about real estate tax reconnaissance.
Posted at 11:39 AM in Tax Sales
December 13, 2011
Once Appointed, Receiver Gets Virtually All Property-Related Funds
The Indiana Court of Appeals issued two opinions in DBL v. LaSalle Bank, 2010 Ind. App. LEXIS 2056 (Ind. Ct. App. 2010) and 2011 Ind. App. LEXIS 167 (Ind. Ct. App. 2011). DBL, one of those factually-dense, unique cases, shows what an important tool a receivership can be for a foreclosing lender/mortgagee.
Layers of claims, settlements. DBL involved a mortgage loan secured by a plaza located in a city in Southern Indiana. The borrower’s property was the subject of a condemnation and nuisance lawsuit with the city. The borrower and the city reached a settlement, apparently without the lender’s knowledge, with regard to the nuisance claim in which the city agreed to pay the borrower $1,725,600 in three installments. There was a separate agreed judgment entered regarding the condemnation claim in which the city was to pay the borrower and the lender $224,600, but those funds all went directly to the borrower in error. At some point along the way, the lender filed a foreclosure action and requested the appointment of a receiver. The lender then discovered that the city made sizeable payments to the borrower pursuant to the settlement of the nuisance claim.
Turnover. The lender sought a court order directing the borrower to turn over, to the receiver, the funds the borrower received from the city. The lender alleged that the borrower was in violation of the trial court’s order appointing receiver. The trial court granted the motion and directed the borrower, within a week, to pay $1,365,600 to the receiver.
Scope. One issue in the case surrounded whether the payments made by the city were within the scope of the receivership order. The Court noted generally that in Indiana (a) a receiver ordinarily takes all the property of the debtor that constitutes the subject of the action but (b) does not take property not involved in the action or not included in an order designating the particular property of which the receiver is to have charge. Because the settlement related specifically to the subject real estate, the Court concluded that “the checks paid by [the city to borrower] concerned [the mortgaged real estate] and were within the scope of and subject to the Receivership Order, and [borrower’s] failure to include the monies paid or otherwise notify the Receiver of the [settlement agreement] was a violation of that order.” The Court therefore initially affirmed the trial court’s turnover order.
DBL II. The borrower petitioned the Court of Appeals for a rehearing, which is the method to have the Court reconsider a prior opinion. The problem was that the borrower had immediately disbursed the settlement funds received from the city. The money the trial court ordered the borrower to turn over was gone. As such, upon further review, the Court reversed its initial decision and remanded the case to the trial court for further proceedings.
Non-party technicality. The Court of Appeals, on rehearing, held that there should have been a determination by the trial court whether the borrower was in possession of the funds at the time it issued its turnover order. In Indiana, where a debtor distributes funds to third persons before the establishment of the receivership, “a court or receiver cannot compel the third persons, without due process of law, to turn over such funds to the receiver.” In DBL, if the $1,506,000 paid to the borrower had been distributed to third persons, the receiver, in an attempt to acquire such funds, would first need to amend the complaint to make such outsiders a party to the proceedings or otherwise file a separate action against such outsiders. So, in that respect, the power of a receiver is not unlimited.
But wait. The borrower was not off the hook. The Court stated:
we point out that it appears from the record that [borrower] has concealed the whereabouts of not only the $1,506,000 by not including it in any record which was ordered to be turned over to the Receiver, but also the $360,000 paid to [borrower] after the date of the Receivership Order. Indeed, neither this installment nor the existence of the Settlement Agreement was disclosed to the Receiver. Nevertheless, we believe that these questions are best left to the trial court to resolve by way of a fact-finding hearing and any other procedures which may be necessary.
Although the borrower successfully distributed the settlement money outside of the immediate reach of the receiver, the borrower may still pay a price for its alleged violation of the prior receivership order.
As explained on this blog before, a receivership can be a potent device for foreclosing lenders in Indiana. It can, and generally does, put a choke hold on income generated by the subject property, and DBL illustrates just how broad the scope of a receivership order can be.
Posted at 12:38 PM in Receiverships
December 02, 2011
Indiana Notices Of Sheriff’s Sale Must Identify All Property Being Offered
What must be included in a statutory notice of sheriff’s sale? If you, as a secured lender, intend to sell both the real estate and any business personal property on the premises, the notice must identify both the business personal property and the real estate. Property excluded from any notice is in jeopardy of being excluded from the sheriff’s sale. The recent Indiana Court of Appeals opinion in Surrisi v. Bremner explains why.
The judgment. Surrisi involved a $100,000 loan secured by, among other things, (1) real estate upon which the borrower operated a restaurant and (2) business personal property on site. The borrower defaulted on the loan, and the parties entered into an agreed judgment that granted the lender a money judgment, together with the right to sell the real estate and the business personal property to satisfy the debt.
The problem. After the entry of judgment, the lender filed a praecipe for sheriff’s sale – a simple filing – but the praecipe identified only the real estate. More importantly, the notice of sheriff’s sale – another fairly straightforward form – failed to mention the personal property. (These omissions are somewhat understandable, given that the vast majority of praecipes and sale notices involve only real estate. Sheriff’s sales in mortgage foreclosure cases typically deal only with real estate and fixtures. Indeed, overall, the statutory framework is geared to real estate, and specifics regarding personal property are hard to come by.) The Court of Appeals ultimately concluded that the omissions in Surrisi were fatal to the personal property aspect of the sheriff’s sale. (My June 13, 2011 post discussed a notice case, but the result was different.)
The sale and following events. The sheriff’s sale occurred, and the lender was the winning bidder. The bill of sale issued by the sheriff identified both the real estate and the business personal property. The lender, thinking that it had acquired title to everything, subsequently sold the restaurant and the business personal property to a third party. At some point – the timing is not entirely clear from the opinion – the borrower filed a motion to set aside the sheriff’s sale as it related to the business personal property. The borrower contended that the business personal property was not sold.
The legal question. The issue was whether the sheriff’s bill of sale was faulty so as to negate the personal property side of the sale. The outcome focused on the fact that the praecipe, notice and sales disclosure form identified only the real property.
The statute. Notices of sheriff’s sales are creatures of statute in Indiana. Ind. Code § 32-29-7-3(g) states that notices “must contain a statement, for informational purposes only, of the location of each property by street address, if any, or other common description of the property other than legal description.” The statute also expresses this qualification: “A misstatement in the informational statement under this subsection does not invalidate an otherwise valid sale.” In practice, plaintiff lenders prepare the notices and provide them to the sheriff’s offices for use in connection with the sheriff’s statutory publication obligations.
The interpretation of the statute. In Surrisi, the lender seized upon the statute’s qualifying language and argued that the failure to mention the business personal property in the notice of sale was a misstatement that should not otherwise invalidate the sale. The Court rejected the argument. The Surrisi notice did not involve a “misstatement” in the information about the property “but rather what property was offered for sale.” The Court apparently could not get over the notice flaw, which was compounded by the fact that the praecipe for sale requested only the real property to be sold by the sheriff. There also was evidence that the sales disclosure form completed by the lender specifically indicated that personal property was not included in the transfer. The Court further noted that the agreed judgment did not require the real and personal property to be sold at the same sale.
The outcome. Perhaps the most interesting piece of the Surrisi opinion was its final sentence: “On remand, the trial court should determine the amount of compensation due to the [borrowers] for the loss of their business personal property.” The result suggests that the lender made a full judgment/credit bid at the sale. As previously explained here, such a bid equates to the complete satisfaction of the debt – no deficiency. If there was a deficiency, then the Court would not have remanded the case to determine compensation for the borrower. Instead, the remand would have been to determine whether, or to what extent, the deficiency judgment should be extinguished. Remember the lender got a judgment against the borrower. The irony is that the Court of Appeals has paved the way for the borrower to recover money from the lender for the value of the business personal property. Although the value was not mentioned in the opinion, what a turning of the tables!
The lesson. If personal property is to be a part of any sheriff’s sale, then the notice of the sale should contain a “common description” of such property. While less important, to be consistent, the personal property should also be identified in the praecipe for sheriff’s sale and the sales disclosure form. These seemingly innocuous oversights in Surrisi proved to be quite problematic for the lender, particularly considering that, unlike real estate, to my knowledge the lender couldn’t get any kind of title insurance to cover the personal property piece of the transaction.
Posted at 05:47 PM in Sheriff's Sales