Lesson. A Chapter 7 bankruptcy discharge negates personal liability of debtors, such as borrowers or guarantors, for loans, but the discharge does not terminate mortgage liens on the real estate that secured the debt.
Case cite. Klunder v. Bank of N.Y. Mellon, 247 N.E.3d 789 (Ind. Ct. App. 2024)
Legal issue. Whether the trial court improperly granted Lender and Servicer summary judgment concerning their sending to the Borrowers allegedly “deceptive correspondence . . . despite knowing [Borrowers] were not personally liable for the Note.”
Vital facts. Borrowers filed a Chapter 7 bankruptcy case that led to their discharge from personal liability under their mortgage loan. Borrowers continued to live in the mortgaged property and made loan payments for a few more years, at which point the servicing of the loan changed to Servicer, which did not initially send mortgage statements to Borrowers. Borrowers initiated a round of communications with Servicer about the statements and ended up ceasing to make loan payments. Years later, Servicer starting sending statements again, with language related to bankruptcies and discharges. Because Borrowers did not make loan payments for several years, Lender initiated foreclosure proceedings against the property (not the Borrowers individually). Borrowers counterclaimed for alleged violations of the Deceptive Consumer Sales Act (DCSA) based on correspondence from Servicer related to the collection of the unpaid loan.
Procedural history. The trial court granted the motion for summary judgment filed by Lender and Servicer related to the counterclaim.
Key rules.
BK discharge: The opinion in Klunder initially pointed out that a Chapter 7 “discharge extinguishes only ‘the personal liability of the debtor.’” However, the “discharge of debt has no bearing on the validity of the mortgage lien.” What this means is that a Chapter 7 discharge “removes the ability of creditors to seek to collect against the [a borrower or guarantor] individually (known as in personam liability),” but liens—like a mortgage—are “in rem meaning they are rights against the property which are enforceable” even after Chapter 7 discharge.
DCSA: The Court noted that the DCSA is designed to “protect consumers from suppliers who commit deceptive and unconscionable sales acts.” I.C. § 24-5-0.5-1(b)(2). A supplier “may not commit an unfair, abusive, or deceptive act, omission, or practice in connection with a consumer transaction.” I.C. § 24-5-0.5-3(a) (2019). The DCSA allows a “person relying upon an uncured or incurable deceptive act [to] bring an action for the damages actually suffered[.]” I.C. § 24-5-0.5-4(a) (2019). Importantly, however, the DCSA “does not apply” to an act or practice “required or expressly permitted by federal law, rule, or regulation . . . or . . . state law, rule, regulation, or local ordinance.” I.C. § 24-5-0.5-6.
Holding. The Indiana Court of Appeals affirmed the summary judgment ruling.
Policy/rationale. The Court found that the DCSA did not apply because the subject correspondence was permitted by law. For example, under federal law “a creditor shall—to the extent applicable—furnish a consumer with a periodic statement disclosing several items, including some information particular to home-equity plans.” Also, 12 C.F.R. § 1026.5(b)(2)(i) provides that creditors “shall mail or deliver a periodic statement as required by § 1026.7 for each billing cycle at the end of which an account has a debit or credit balance of more than $1 or on which a finance charge has been imposed.” Since Borrowers had defaulted by not making payments, Lender could lawfully foreclose the mortgage.
The Court felt that Borrowers misunderstood two “different but interrelated concepts: the loan due on the mortgage as shown by the [promissory note], and the lien on the property as shown by the mortgage.” The Chapter 7 bankruptcy discharge merely protected Borrowers from personal liability on the loan. However, the mortgage lien on the property survived and was enforceable as an in rem action.
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