Background
Merchants Bank of Indiana lent approximately $22.7 million to two entities that purchased assisted-living facilities in Arkansas and Tennessee. The loans were secured by mortgages on the properties and continuing guaranties executed by David Craik, Jason Craik, and Stephen Suske. The guaranties broadly authorized Merchants to proceed directly against the guarantors and included waivers of suretyship, anti-deficiency, and election-of-remedies defenses.
After the borrowers defaulted, Merchants sued the guarantors in federal court and later filed separate foreclosure actions in Arkansas and Tennessee state courts. The district court entered summary judgment sua sponte for the guarantors, concluding that Indiana Code § 32-30-10-10 barred Merchants from pursuing the guaranty and foreclosure actions simultaneously. Although the court found that the guarantors had contractually waived the statute’s protections, it held the waivers unenforceable as contrary to Indiana public policy.
The Court’s Holding
The Seventh Circuit did not decide whether Indiana’s “One Action” statute applies to mortgage guaranties or whether its protections can be waived. It found the statutory text ambiguous as applied to separate guaranty actions and concluded that Indiana courts had provided no controlling guidance. Decisions from other states interpreting similar statutes also did not yield a consensus.
Because the unresolved questions are dispositive, important to borrowers, commercial entities, and lenders, and likely to recur, the court certified two questions to the Indiana Supreme Court: whether § 32-30-10-10 prohibits a mortgage lender from foreclosing while separately suing on guaranties securing the mortgage, and, if so, whether guarantors may waive the statute’s protection. The Seventh Circuit stayed resolution of the merits pending the Indiana Supreme Court’s decision.
Key Takeaways
- The Seventh Circuit made no merits determination about the validity of Merchants’ simultaneous foreclosure and guaranty actions.
- The Indiana Supreme Court will be asked to determine whether § 32-30-10-10 reaches guaranties securing mortgage debt.
- If the statute applies, the state court will also consider whether guarantors may contractually waive its protection.
Why It Matters
The certified questions could define the remedies available to mortgage lenders seeking recovery from both collateral and guarantors in separate proceedings. The answers may also affect how Indiana loan guaranties are drafted and whether sophisticated commercial parties can waive statutory restrictions on simultaneous collection actions.