November 7, 2014
by Bryan K. Redmond
Feiwell & Hannoy, P. C.
USFN Member (Indiana)
In August of this year, the Indiana Court of Appeals looked at a case with allegations of “dual tracking” in a mortgage foreclosure action [Kretschmer v. Bank of America, NA., 2014 WL 3970507 (Ind. Ct. App. 2014)]. While it has been a fairly common practice for Indiana courts to find that allegations of dual tracking, or a lender/servicer failing to respond to a short sale offer, could state a claim for relief from a default judgment under Indiana Trial Rules 60(B)(1) and 60(B)(3), the courts have always required an additional meritorious defense. In a case of first impression, the Kretschmer court found that those same allegations can simultaneously state a meritorious defense, as required by the rule.
In Kretschmer, the appellate court heard an appeal of the trial court’s denial of a borrower’s TR 60(1) and 60(B)(3) motion for relief from a default. In support of the motion, Kretschmer alleged that: (1) after being served with a copy of the complaint, but prior to the entry of a default, he contacted lender’s counsel to notify them that he was working on a short sale. The borrower further alleged that he was, in turn, notified by counsel’s office “not to worry about anything and to continue with the short sale;” and (2) after the entry of default, the lender failed to timely respond to two short sale offers, causing the potential buyers to rescind their offers. Kretschmer contended that under these facts, it was excusable neglect that he failed to timely respond to the complaint. Further, the borrower maintained that the communications of the lender and its counsel constituted misrepresentations or fraud, upon which he reasonably relied to his detriment, and induced him to allow a default to be entered in the matter.
The lender countered that even if those alleged facts constituted excusable neglect, or even a misrepresentation, that Kretschmer had wholly failed to allege a meritorious defense — as required by the rule — when he failed to challenge any of the underlying contract elements including: the validity of the promissory note or mortgage, standing to enforce the note or mortgage, breach/default under the agreements, or accrued damages. The lender further argued that it was under no obligation to accept less than it was owed, and that any acceptance was purely discretionary.
Applying an abuse of discretion standard, the Kretschmer court held that the trial court did abuse its discretion when it denied Kretschmer’s motion for relief. After emphasizing that default judgments are an extreme remedy, and are generally disfavored, the court found that the borrower’s failure to timely respond to the complaint was due to his own excusable neglect, as well as the alleged fraud or misrepresentations of the lender and its counsel. The court further held that the very same allegations, without more, also constituted two meritorious defenses; namely, (1) estoppel; and (2) contractual sabotage under the Hamlin doctrine. The Hamlin doctrine prevents a party from committing contractual sabotage by acting in bad faith to cause the failure of a contractual provision to the detriment of another contracting party. In Kretschmer, the court found that once the lender promised to provide the borrower additional time to obtain an acceptable short sale offer, it was incumbent upon the lender to give due consideration to any offers that the borrower presented. To do otherwise was acting in bad faith and violated the Hamlin doctrine. Lastly, the court noted that the lender might be liable for additional damages pursuant to Ind. Code § 24-4.4-2-201 and 12 U.S.C. 2605(f) (RESPA), if the borrower’s allegations were proven.
One is left to wonder how the Kretschmer court would have interpreted similar facts in the context of a motion for a summary judgment, instead of a default. Is the court’s ruling truly intended as an expansion of TR 60(B), or simply another admonishment — in the many recent ones —from the appellate court that it takes a dim view of default judgments (particularly in equity cases), and that relief should be liberally granted?
Copyright © 2014 USFN. All rights reserved.
Autumn 2014 USFN Report