ERC I, LLC v. Whiteacre Funding, LLC, Riverdale Funding, LLC, Woodbridge Mortgage Investment Fund 2 LLC (mem. dec.)
82A05-1606-MF-1316
| Ind. Ct. App. | May 4, 2017Background
- ERC I, LLC (owned by Alan Brill) defaulted on a commercial mortgage for the Woolen Mill Building; debt grew to over $3 million by trial. ERC executed an Estoppel Certificate acknowledging default and waiving defenses as to seller/buyer when a third-party note sale closed in Feb. 2014.
- ERC sought replacement financing from Riverdale (a hard‑money originator) funded by Woodbridge; Riverdale/Woodbridge conditionally approved a $900,000 loan contingent on (inter alia) an appraisal ≥ $1.5 million and a BPO satisfactory to lender in its sole discretion.
- Riverdale obtained a BPO (initially ~ $1.475M with 18‑month marketing) and an updated BPO (quick‑sale estimate $750K–$900K); an appraisal later returned $1.34M. Riverdale declined to fund; Woodbridge purchased the note and later assigned it to Whiteacre, which foreclosed.
- ERC sued and asserted affirmative defenses (equitable estoppel, constructive fraud, unclean hands) and related counter/third‑party claims, arguing Woodbridge/Riverdale acted in bad faith (e.g., changed BPO standard; failed to disclose anticipated low appraisal).
- At a four‑day bench trial, the court entered detailed findings and concluded for Whiteacre/Woodbridge; ERC appealed only the denial of its affirmative defenses.
Issues
| Issue | Plaintiff's Argument (Whiteacre/Woodbridge) | Defendant's Argument (ERC) | Held |
|---|---|---|---|
| Effect of Estoppel Certificate—does ERC’s Feb. 2014 estoppel bar defenses? | Estoppel waived defenses in existence at signing; bars ERC’s claims. | Estoppel does not bar defenses based on post‑execution conduct or bad faith that caused loan failure. | Court: Estoppel did not bar defenses based on post‑execution acts; trial court erred to the extent it relied solely on estoppel, but rejected defenses on the merits. |
| Duty to speak / equitable estoppel based on silence about anticipated low appraisal | No duty to speak in an arm’s‑length deal between sophisticated parties; Loan Commitment expressly required ≥ $1.5M appraisal. | Woodbridge/Riverdale knew appraisal would be ~ $1.3M and remained silent, creating estoppel/fraud. | Court: No duty to speak; sophisticated parties in arm’s‑length transaction owed no fiduciary duty; findings support enforcement of the $1.5M appraisal contingency. |
| Application of Hamlin doctrine / duty of good faith in satisfying BPO contingency | Even if Hamlin applies, lender reasonably and in good faith considered appraisal + BPOs; rejection was not sabotage. | Riverdale improperly obtained or applied a “fire‑sale” BPO standard after initial BPO and acted in bad faith to defeat the condition. | Court: Hamlin doctrine applies to conditions controlled by a party, but the record shows Riverdale/Woodbridge acted in good faith in rejecting BPOs and appraisal—no bad faith. |
| Overall validity of rejecting ERC’s affirmative defenses | Defenses are meritless because ERC knowingly signed contingencies and pressured fast closing; lender’s due diligence was legitimate. | Defenses should bar foreclosure because lender’s conduct denied the loan and facilitated foreclosure. | Court: Trial court’s rejection of ERC’s defenses was not clearly erroneous; judgment for Whiteacre affirmed. |
Key Cases Cited
- Hamlin v. Steward, 622 N.E.2d 535 (Ind. Ct. App. 1993) (party controlling satisfaction of a condition precedent must act in good faith to fulfill it)
- Ind. State Highway Comm’n v. Curtis, 704 N.E.2d 1015 (Ind. 1998) (Hamlin doctrine prevents contractual sabotage of conditions precedent)
- First Fed. Sav. Bank of Ind. v. Key Markets, Inc., 559 N.E.2d 600 (Ind. 1990) (courts will enforce unambiguous commercial contracts between experienced parties without imposing extra duties of fairness)
- Olcott Int’l & Co., Inc. v. Micro Data Base Sys., Inc., 793 N.E.2d 1063 (Ind. Ct. App. 2003) (no fiduciary/confidential relationship from ordinary arm’s‑length commercial dealing)
- Huntington Mortg. Co. v. DeBrota, 703 N.E.2d 160 (Ind. Ct. App. 1998) (lenders generally do not owe fiduciary duties to borrowers absent special circumstances)
- Town of New Chicago v. City of Lake Station, 939 N.E.2d 638 (Ind. Ct. App. 2010) (silence gives rise to estoppel or fraud only when there is a duty to speak)
- Bayview Loan Servicing, LLC v. Golden Foods, Inc., 59 N.E.3d 1056 (Ind. Ct. App. 2016) (standard of review for findings of fact and conclusions of law)
- Barton v. Barton, 47 N.E.3d 368 (Ind. Ct. App. 2015) (appellate standard for reviewing findings and conclusions)