Lender’s Redirection Of Rents Does Not Constitute “Unclean Hands” When Supported By Loan Documents
Note: This is the fourth post about the 410 case, cited below, that grants a lender’s motion for summary judgment against a borrower (and other defendants), despite the defendants’ assertions of multiple defenses and counterclaims. For background and context, here are links to the prior three posts: May 6, May 20 and May 27.
Lesson. A lender’s demand for a tenant to redirect rents from the landlord/borrower will not trigger a claim for “unclean hands” when the action is supported by a loan document.
Legal issue. Whether the doctrine of “unclean hands” precluded summary judgment for a lender in a commercial foreclosure action.
Vital facts. Following a loan default, Lender directed the commercial tenant of the mortgaged real estate to make rent payments directly to Lender instead of the borrower/landlord. The tenant evidently complied with the request. In turn, the absence of rental income apparently created a cash flow problem for the borrower that hampered Defendants’ ability to settle with Lender. The problem was that the borrower had previously entered into a Subordination, Non-Disturbance and Attornment Agreement (commonly called an SNDA) as part of the underlying loan documents. In the SNDA, the borrower consented to such direct payments and released the tenant from all liability to the borrower on account of any such payments. (Typically, an assignment of rents will contain similar rights in favor of a lender/mortgagee.)
Procedural history. In response to Lender’s motion for summary judgment, Defendants raised the “unclean hands” defense.
Key rules. The Court in 410 summarized Indiana state and federal court law regarding the doctrine of unclean hands:
The doctrine is designed to prevent a party that behaved inequitably or acted in bad faith from benefitting from that improper behavior. There is no exact formula for applying the doctrine and courts thus generally have discretion when determining whether to apply it. The doctrine is not favored under Indiana law “and must be applied with reluctance and scrutiny.”
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For a defendant to successfully assert the doctrine in Indiana, the defendant generally must show that: 1) the plaintiff’s misconduct was intentional; 2) the plaintiff’s wrongdoing concerned the defendant and has an immediate and necessary relation to the matter in litigation; and 3) the defendant was injured because of the plaintiff’s conduct.
Holding. The Court rejected the unclean hands defense and granted Lender’s motion for summary judgment. The Defendants have appealed the decision to the 7th Circuit Court of Appeals. I will follow-up as warranted.
Policy/rationale. Defendants contended that Lender “exacerbated” the loan default by taking the rents. The Court easily rejected the theory. The borrower could not, on the one hand, grant Lender rights to the rents in an SNDA while, on the other hand, claim misconduct in asserting such rights.
Related posts.
- Defendants’ “Unclean Hands” Defense Fails In Lender’s Indiana Foreclosure Case
- Commercial Construction Mortgages Stand Tall Over Later-Recorded Mechanic’s Liens In Indiana
- Mortgagee Not Liable For Tragic Drowning
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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.