Indiana Commercial Foreclosure Law

Investors Not Protected By FDCPA

2009-12-18T11:11:41-05:00

In my November 16, 2006 post “Worried About The Fair Debt Collection Practices Act?” I explained that the Fair Debt Collection Practices Act (“FDCPA”) generally does not apply to commercial foreclosures or the collection of business debts. The recent decision by the Indiana Court of Appeals in Baird v. ASA Collections, 2009 Ind. App. LEXIS 961 (Ind. Ct. App. 2009) (.pdf) supports this conclusion.

HOA dues. Plaintiff ASA Collections filed a lawsuit against defendant Baird to recover past-due homeowner’s association fees and dues. Baird filed a counterclaim against ASA based upon alleged FDCPA violations. The issue was whether the FDCPA applied to the case. Since the FDCPA regulates “consumer debts,” which are defined at 15 U.S.C. § 1692(a)(5) as obligations “primarily for personal, family, or household purposes,” one might expect homeowner’s association dues to fall under the FDCPA. Indeed in Newman v. Boehm, 119 F.3d 477 (7th Cir. 1997), the Seventh Circuit held that the plaintiff’s delinquent condominium dues and assessments constituted “consumer debts” under the FDCPA.

Investor. Baird was distinguishable from Newman, however. Baird had purchased six vacant lots at a tax sale for investment purposes. Baird sold the lots to purchasers who wanted access to recreational facilities on the property. Baird never built on the lots, and she did not reside in any structure in the development. Instead, she bought the properties and sold them to various owners once the land was developed. Thus Baird’s FDCPA counterclaim failed as a matter of law:

The evidence demonstrated that Baird may be characterized as an investor rather than a consumer in the transaction, and she has failed to show that the dues and fees that were assessed involved a “consumer debt” within the meaning of the FDCPA.

Only consumer debts. Baird provides additional comfort for lenders and their counsel involved in Indiana commercial foreclosure litigation. In general, the regulations and pitfalls of the FDCPA should not apply to the collection of an investment-related debt - even if the underlying nature of the debt seems to be personal in nature. The FDCPA is designed to protect consumers, not investors.

Seventh Circuit Remands Prepayment Premiums Case For Trial

2009-12-09T16:16:18-05:00

I previously blogged about yield maintenance provisions, also known as prepayment premium clauses, on 1-25-07 and 2-2-07. My prior posts addressed whether Indiana law permitted lenders to pursue yield maintenance remedies and the rules that may apply. Then, on 9-11-08, I discussed BKCAP, LLC v. CAPTEC, a decision from the Northern District of Indiana that tacitly recognized the validity of prepayment premiums/yield maintenance provisions.

Reversed. On 7-13-09, the Seventh Circuit issued its opinion in the appeal of the BKCAP case. Here’s the cite: BKCAP, LLC v. CAPTEC, 2009 U.S. App. LEXIS 15369 (7th Cir. 2009, amended Aug. 5, 2009). The decision reversed the District Court’s holding and remanded the case “for a trial on the question of the parties’ intended meaning of the prepayment premium.” Click here to review the opinion.

The lesson of the latest BKCAP opinion is that the contract language should be simple and clear. Note Judge Tinder’s opening remarks:

This case demonstrates that even experienced, sophisticated business entities can encounter difficulty when drafting carefully negotiated loan documents. Since July 2007, the plaintiffs and the defendant have been at loggerheads over the meaning of just a handful of lines out of several hundred in their five-page, single-spaced Note. Unfortunately, this appeal cannot bring their stalemate to an end, and more litigation lies ahead.

Judge Tinder ultimately concluded that “the meaning of the prepayment premium is a question of fact that requires an examination of relevant extrinsic evidence.” Since trials translate to further delays and expense for lenders, as a practical matter Judge Tinder’s holding is a bad result. For more on how the Seventh Circuit reached its conclusion and how a court might analyze the meaning of a yield maintenance provision/prepayment clause, please review the opinion.

Still fine. Despite the remand, the Seventh Circuit did not in any way, shape or form question the validity of yield maintenance fees. As such, it would appear that my prior conclusions remain true as they related to Indiana’s view of the legitimacy of prepayment premiums under certain circumstances.

Real Estate Appraisals Are Important, But Not Required, In Indiana Foreclosures

2009-11-24T17:43:22-05:00

You work for a bank or commercial lending institution. You oversee a loan secured by commercial real estate that is underperforming or nonperforming. You are considering your options and have referred, or will be referring, the matter to outside counsel. One of your questions is whether to order an appraisal of the loan collateral. The answer is -- you should strongly consider it but don’t have to.

Big picture. Before entering into workout negotiations and/or filing a foreclosure complaint, it is advisable that lenders and their counsel undertake certain steps to analyze the loan collateral. This would include a determination of priority in title and value. For example, my September 14, 2009 post states that secured lenders should always consider an environmental liability analysis of commercial real estate collateral. In the same vein, my October 14, 2009 post talks about obtaining a title commitment. Likewise, a property appraisal should be on one’s list of things to consider.

Not necessary. Similar to a Phase I, we recommend that lenders contemplate getting an appraisal even though an appraisal is not legally or procedurally required to initiate a mortgage foreclosure suit, to obtain a judgment or to acquire the real estate at a sheriff’s sale. Appraisals can be expensive, and the benefits of obtaining an appraisal should be weighed against the costs. Depending upon the age of the loan, a prior appraisal report already in a lender’s file could provide sufficient data going forward. Having said that, the valuation landscape, particular with regard to commercial property, has changed substantially over the last several months.

Caveat. Although not legally required for purposes of foreclosure, clients have told me that bank regulators and examiners, or perhaps internal bank policies, mandate that at a certain stage in the process an appraisal must be obtained. But please do not mistake this post as an opinion about regulatory matters. This article is limited to what Indiana state court mortgage foreclosure law requires in terms of filing the lawsuit, obtaining a judgment and bidding at the sheriff’s sale. An appraisal technically is not required at any stage. (Caveat No. 2: as articulated in my April 22, 2008 post “How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale?”, an appraisal could play a role in the lender’s bid at the sheriff’s sale.)

Wise. Although not necessary, lenders should strongly consider an appraisal of the property. Along these same lines, depending on the particular type and location of the real estate, an inspection of the property also may be warranted. A determination of the market value and condition of the property may drive decisions with regard to pre-suit settlement or subsequent workout negotiations, or whether to move forward with a foreclosure in the first place. Foreclosure and repossession often may not the best options.

The bottom line is that it is good practice, when dealing with problem loans, to have an understanding of the value of the loan collateral vis-à-vis the amount of the debt. Knowing the present value of the collateral (is that possible these days?) will be helpful with decisions regarding its disposition and will assist in estimating the potential amount of a deficiency judgment. It’s all about putting yourself in the best position to evaluate the further handling of the case.

“Lease” Lien Vs. Possessory Lien

2009-11-13T10:40:27-05:00

This is Part II of my discussion of Gangloff Industries v. Generic Financing, 2009 Ind. App. LEXIS 897 (Ind. Ct. App. 2009) (.pdf). Click here for last week’s post. Having concluded that Generic had a security interest in the semi-truck, the Indiana Court of Appeals turned to whether Gangloff had a possessory lien and, if so, whether Generic’s security interest had priority over Gangloff’s lien. Asset-based lenders who find themselves in a dispute with a mechanic or storage facility over the rights to possession of loan collateral should find this post informative.

Possessory lien. The Court first explained that Gangloff did in fact have a possessory lien. In Indiana’s “Scrapping Motor Vehicles” statute, specifically I.C. § 9-22-5-15(a) and (b), a “possessory lien” is granted to an entity that “performs labor, furnishes material or storage, or does repair work on a . . . semi-trailer . . . at the request of the person who owns the vehicle” or that provides towing services on the vehicle “for reasonable value of the charges for such labor, materials, storage, repairs or towing.” In Indiana, this possessory lien “is perfected by retention of possession of the vehicle by the person asserting the lien.” Gangloff had a possessory lien because it fronted the semi-truck’s repairs, towing expenses and storage fees for which Bougher did not pay. Gangloff perfected its lien because it retained possession of the semi-truck (until the trial court ordered Gangloff to relinquish possession to Generic).

Priority dispute. Indiana’s portion of the UCC dealing with secured transactions, at I.C. § 26-1-9.1-333(a), generally defines a possessory lien as:

an interest, other than a security interest or an agricultural lien: (1) that secured payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business; (2) that is created by statute or rule of law in favor of the person; and (3) whose effectiveness depends on the person’s possession of the goods.

The Court acknowledged that the UCC recognized Gangloff’s statutory, possessory lien. Pursuant to Section 333(b), the possessory lien “has priority over a security interest . . . unless the lien is created by a statute that expressly provides otherwise.” Since I.C. § 9-22-5-15 is silent as to the priority of competing liens, Gangloff’s possessory lien took priority over Generic’s security interest. As such, the Court of Appeals reversed the trial court’s judgment awarding damages and attorney’s fees in favor of Generic and remanded the case for further proceedings.

The risks/rewards of possession. The trial court originally held that Gangloff owed Generic excess repossession expenses, lost lease income, witness travel expenses and attorney’s fees. The trial court seemingly based its conclusion upon Gangloff’s wrongful possession of the semi-truck. The reversal and remand by the Court of Appeals signaled, however, that it was Gangloff who should recover damages, consistent with its lawful, perfected possessory lien. It appears that, before Generic can act upon its security interest in the semi-truck, Generic must satisfy Gangloff’s possessory lien. But ironing out the wrinkles going forward may be complicated due to the trial court’s initial, erroneous order of possession. Perhaps the alleged damages incurred by the respective parties will be offset against one another in order to arrive at a conclusion as to who owes money to whom.

One of many lessons from Gangloff is that, if you’re a possessory lien holder and if you feel strongly about the validity of your lien, you should stand firm and not surrender the collateral until your lien is satisfied. On the other hand, possessory lien holders can be exposed to liability to a secured lender if the lien is flawed or it wrongfully retains control over the collateral. These cases can be tricky and expensive, as documented in the Gangloff litigation.

Indiana Court Of Appeals Tackles True Lease Vs. Secured Loan Question

2009-11-05T17:35:45-05:00

When commercial asset-based lenders and their collection counsel are confronted with defaults under agreements labeled a “lease,” such as an equipment lease, often there is a question of whether the transaction was a true lease as opposed to a secured loan. A detailed discussion of the differences between the two transactions goes beyond the scope of this post, but generally the nature of the underlying transaction will affect, among other things, the remedies available to the lender/lessor upon a default. My focus here simply is to outline how Indiana courts might evaluate whether the underlying deal is a lease or a secured loan in the first place. The recent Indiana Court of Appeals opinion in Gangloff Industries v. Generic Financing, 2009 Ind. App. LEXIS 897 (Ind. Ct. App. 2009) (.pdf) is informative.

The circumstances. Generic Financing entered into a “Lease Agreement” with Robert Bougher concerning a semi-truck. The Court outlined portions of the agreement on pages 2-4 of the opinion. Bougher’s wife and Gangloff entered into a separate “Owner Operator Service Contract” by which the wife agreed to operate the semi-truck and to haul goods for Gangloff. A couple years later, the semi-truck broke down and required $6,000 in repairs. Gangloff paid for the repairs. Bougher was to re-pay Gangloff, but Bougher died before he could do so. Gangloff took possession of the semi-truck pending the wife’s payment of recovery and storage expenses.

The litigation. While Gangloff had the semi-truck in storage, Generic filed a lawsuit. There were multiple causes of action and legal theories asserted between Gangloff and Generic concerning who was entitled to possession of the semi-truck and who owed damages to whom. In order to resolve the damages and possession issues, the Court of Appeals had to address the question of whether the “Lease Agreement” between Generic and Bougher was a true lease or a security interest (a loan secured by the semi-truck).

The test. The Court initially turned to Indiana’s UCC, specifically Ind. Code § 26-1-1-201(37), which defines a security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.” The Court next noted that “the primary issue to be decided in determining whether a lease is ‘intended as security’ is whether it is in effect a conditional sale in which the ‘lessor’ retains an interest in the ‘leased’ goods as security for the purchase price.” The UCC refuses to recognize form over substance, which is why Indiana’s UCC includes a lease intended as security in the statutory definition of security interest.

The Court in Gangloff explained that I.C. § 26-1-1-201(37) “unequivocally” states that a lease will be deemed a security interest if:

(1) the consideration the lessee is to pay the lessor is an obligation for the term of the lease and the lessee may not terminate the obligation; and
(2) one of four enumerated conditions [a-d outlined in the statutory subsection] apply.

Here is a .pdf of the portion of the statute quoted by the Court, including subsections (a)-(d). In Gangloff, the “only potentially relevant condition” was subsection (d), which involves the lessee’s option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease.

The application of the test. The Generic/Bougher agreement obligated Bougher to pay Generic monthly installments totaling $43,051.95 over a period of thirty-eight months. This consideration was loosely based upon the price of the semi-truck plus interest. Furthermore, Generic alone had the option to terminate the “Lease” before the fixed term. As such, the written agreement met part (1) of the statutory test.

Regarding part (2), specifically subsection (d) under the statute, the Court cited case law for the following proposition:

The courts are clear upon one thing, which is that where the terms of the lease and option purchase are such that the only sensible course of action for the lessee at the end of the term is to exercise the option to purchase and become the owner of the goods, then the lease is one intended to create a security interest.

Bougher had the option to purchase the semi-truck for $3,190.00, which was 10% of the financed amount. Had Bougher fully complied with the agreement for three years use of the semi-truck, he would have paid, including the down payment, a total of $45,762.00. The Court held that subsection (d) was satisfied because “the only sensible course of action would have been to exercise the option and purchase the truck for a fraction of the total rent price.” Thus, the “Lease Agreement” created a security interest rather than a true lease.

The consequences. The Court’s conclusion that the Generic/Bougher “lease” created a security interest (like a loan secured by the semi-truck) clarified all sorts of issues regarding the relative rights of the parties. Next week’s follow-up post will address the second part of the Gangloff opinion concerning a lien priority dispute between Gangloff and Generic. The objective of today’s post was to highlight the importance of recognizing that not all “lease” agreements will be treated as leases.

IndyStar - On the block: Mortgage for Keystone Towers

2009-11-05T11:37:14-05:00

Today's Indianapolis Star has a story about how the mortgagee for the local Keystone Towers complex is auctioning off its defaulted-upon loan as opposed to pursuing a foreclosure suit. Click here for the article. A lender's sale of a distressed loan (the assignment of the loan documents for a price) is not unusual, but doing so via an on-line auction is. If you have experience or insight into this process, please email me or post a comment. I'd like to learn a little more about the transaction, thanks.