Indiana Foreclosure and Expectations Post-Moratoria

As loan servicers prepare for the official end of federal moratoria that have halted many foreclosures initiated prior to March 2020, it is a good time to re-evaluate Indiana’s judicial process in terms of what is known and what remains undecided.   ‍

Colvin v. Taylor

‍As mentioned in the September 2020 MDK Quarterly update on Indiana’s COVID-19 procedures, Indiana’s Executive Order (‘EO”) prohibiting the initiation of foreclosures expired on August 15, 2020. However, language existing in orders beginning with EO 20-41, has caused litigation delays regarding whether an extension had occurred inadvertently. State court judges have determined an extension was not created, and their opinions are supported by the Indiana Court of Appeals in Colvin v. Taylor, No. 21A-MF3, N.E. 3d (Ind. Ct. App. April 15, 2021) wherein the Court stated that “Governor Holcomb did not extend the moratorium when it expired on August 14.” Although Plaintiffs may see delays for this type of litigation, orders should ultimately favor Plaintiffs and there is no need to be concerned with proceeding cases despite the state’s previous EO.  

‍The CDC Eviction Moratorium

‍Another issue that previously delayed foreclosures involved the CDC eviction moratorium, which some Indiana judges interpreted to extend to foreclosure judgments and post sheriff sale eviction language included therein. The Indiana Supreme Court issued a clarifying memorandum to judges which provides that the CDC order does not include mortgage foreclosure, in an attempt to resolve some of the misunderstandings presented. Although designated counsel can educate courts as to this distinction, delays will  occur if pleading timelines and process are required. The Indiana Supreme Court’s memorandum has greatly reduced the delays by educating judges before the issue can be raised.  

‍Court Operations

In the late spring of 2021, most of Indiana’s 92 counties showed reduced community transmission rates for the COVID-19 virus. As a result, all courts resumed operations at full capacity, but with the authority to change operating procedures as needed if staff and community positivity rates increased. As the Delta variant increases positivity rates, courts may reinstitute limited operating procedures. Please note that as of the date of this publication, we are not aware of any courts or sheriffs with significant or unusual delays in processing cases and sheriff sales.  

Additionally, as it pertains to hearings and court appearances, “although courts should make it a priority to resume holding hearings live and in person when conditions safely permit…,” the Indiana Supreme Court order of May 7, 2021 also provides that safety conditions may require more flexibility in attendance options than in pre-pandemic times. In practice, it appears many courts will continue with no-contact hearings, either designated by the nature of case type and status, or by request of either party. Considering the saved time and costs associated with remote hearing attendance, these are often welcome options in mortgage foreclosure cases. However, default counsel should consider the issue being argued, status of the case and any local bar concerns before converting cases to video or telephonic options.  

Interest Due

‍Despite clarification in several key areas, unknowns persist. Notably, the Indiana Supreme Court Administrative Rule 17 Orders, which include provisions indicating that “no interest shall be due or charged during [a] tolling period”. This includes the time frame during which the state EOs prevented certain foreclosures from proceeding, and it remains unclear as to whether this order intended to prohibit collection of contractually due interest as opposed to statutorily due interest. Several state courts throughout Indiana have refused to enter foreclosure judgments inclusive of interest generally accruing from March 23, 2020 to August 14, 2020, pursuant to the Administrative 17 orders.  

Earlier in 2021, interested parties petitioned the Supreme Court to clarify its position and intent regarding contractually due interest. The Indiana Supreme Court ultimately declined to provide clarification, writing in its March 18, 2021 order that Plaintiffs have sufficient “…opportunities to adjudicate this issue on appeal…” This decision leaves Plaintiffs with a choice to let the interest go in courts that find it prohibited or appeal the state court decision through the formal appeals process, which carries significant delays and an uncertain result. Default servicers should continue to work with their designated counsel to determine the best course of action for proceeding cases wherein this issue arises.  

‍Post Judgment Costs

‍Another issue that default servicers can expect to see is an increase in judicial scrutiny surrounding what constitutes “reasonable” post judgment costs. The likelihood of litigation has increased due to delays in foreclosures caused by the pandemic along with rising prices paid by third party purchasers. High purchase prices create larger than usual surplus funds which are mainly distributed by order of the court rather than by the sheriff directly. As a result, default servicers can expect an uptick in demands of proof, and judicial questioning of reasonableness of expenses incurred post judgment before funds may be distributed to foreclosing plaintiffs. Although courts have historically allowed significant latitude to servicers who are able to produce documentary evidence of costs incurred, unusually prolonged delays in foreclosures and the extended holding of taxes, insurance, and property preservation costs may create a perception of unreasonableness. Servicers should work with their default counsel to properly advocate reimbursement for these amounts.  

‍Loss Mitigation

‍Finally, Indiana Code 32-30-10.5 provides a statutory process that provides certain debtors the right to a settlement conference prior to obtaining a mortgage foreclosure judgment. The intent behind the statute is to avoid unnecessary foreclosures and facilitate “…the modification of residential mortgages in appropriate circumstances.” While Indiana case law has made clear that judges cannot require agreements to be made, it is intended to encourage loss mitigation efforts and provides significant discretion to judges and facilitators to determine when a creditor has met its statutory burden to move to the judgment stage.  

Accordingly, many courts throughout Indiana are actively involved in the review and exchange of documents associated with loss mitigation, inclusive of both retention and non-retention options. Due to the proactive nature of Indiana’s code, it is likely that the servicers will see increased requests for specific information on COVID-19 forbearance eligibility, timelines of communication, and how a debtor was reviewed for post COVID-19 forbearance options in accordance with CFPB rules. Although affected loan servicers are certainly complying with these rules in advance of initiating foreclosure, servicers should also consider and prepare for how they may best organize this information to be proved up at various stages of foreclosure litigation.  

There will certainly be other unknown and unexpected issues that arise as foreclosure volume returns, case filings increase, and existing cases proceed. MDK remains committed to providing clients with updates, information, and practical solutions to provide the best possible outcomes in these changing and complex times.