Robert R. Setree, II, and Beverly L. Setree v. River City Bank (mem. dec.)

MEMORANDUM DECISION May 13 2015, 9:37 am Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be regarded as precedent or cited before any court except for the purpose of establishing the defense of res judicata, collateral estoppel, or the law of the case.

ATTORNEYS FOR APPELLANTS ATTORNEY FOR APPELLEE Eric C. Bohnet Jason A. Lopp Indianapolis, Indiana Wyatt, Tarrant & Combs, LLP New Albany, Indiana Ninamary Buba Maginnis Maginnis Law Office Louisville, Kentucky

IN THE COURT OF APPEALS OF INDIANA

Robert R. Setree, II, and Beverly May 13, 2015 L. Setree, Court of Appeals Case No. 10A04- 1409-MF-450 Appellants-Defendants, Appeal from the Clark Circuit Court v. The Honorable Jerry Jacobi, Judge The Honorable Kenneth R. Abbott, River City Bank, Magistrate Appellee-Plaintiff Case No. 10C02-1201-MF-68

Crone, Judge.

Case Summary [1] Robert R. Setree, II, and Beverly L. Setree (“the Setrees”) executed three

promissory notes secured by various mortgages to River City Bank (“Bank”).

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Two of the mortgaged properties were in Indiana and two were in Kentucky.

The Setrees breached the terms of one of the Indiana mortgages by failing to

pay property taxes on the mortgaged property. Bank filed actions to foreclose

on the Kentucky mortgages in Kentucky and was awarded the right to foreclose

on both properties. Bank also filed an action in Indiana to foreclose on the

property that the Setrees had failed to pay property taxes on. Setree v. River City

Bank, 10 N.E.3d 30 (Ind. Ct. App. 2014), trans. denied (2015) (“Setree I”). In

Setree I, another panel of this Court held that the issues raised in the Setrees’

challenge to Bank’s foreclosure had already been addressed in the Kentucky

cases and therefore were barred by res judicata. Id. at 37. Finally, Bank sought

foreclosure of the Setrees’ property on Holly Drive in Jeffersonville, Indiana

(“the Holly Drive Property”), the property in issue here. The trial court entered

a summary judgment order granting Bank the right to foreclose on the Holly

Drive Property. The Setrees appeal, arguing that Bank does not have the right

to foreclose on this property. Bank contends that the Kentucky foreclosure

cases already decided the issues involved in the Setrees’ default in Bank’s favor,

and therefore the Setrees’ challenge is barred by the doctrine of res judicata.

We agree with Bank. We are also unpersuaded by the Setrees’ argument that

foreclosure of the Holly Drive Property is an unconscionable remedy.

Accordingly, we affirm the summary judgment order.

Facts and Procedural History [2] At all times relevant to this appeal, the Setrees owned the Holly Drive Property.

In 2005, the Setrees executed a promissory note (“2005 Note”) in favor of Bank

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for $45,667 plus interest, which they secured with a mortgage in favor of Bank

on the Holly Drive Property. In 2006, the Setrees executed a second

promissory note (“2006 Note”) in favor of Bank for $15,484.19 plus interest,

secured by a second mortgage on the Holly Drive Property (we refer to the first

and second mortgages collectively as “the Holly Drive Mortgages”). In 2007,

the Setrees executed a third promissory note (“2007 Note”) in favor of Bank for

$91,380.50 plus interest and secured it with a mortgage in favor of Bank on

property on Cardinal Lane, Jeffersonville (“the Cardinal Lane Mortgage”). The

provisions regarding events of default and right to cure in the Holly Drive

Mortgages are identical to the corresponding provisions in the Cardinal Lane

Mortgage. [3] Subsequently, the Setrees executed two additional mortgages in favor of Bank

on their Louisville, Kentucky properties, one on Virginia Avenue and one on

Roederer Drive (“the Virginia Avenue Mortgage” and “the Roederer Drive

Mortgage”). These two mortgages provided further security for the 2005 and

2006 Notes. The Roederer Drive Mortgage provided further security for the

2007 Note. In sum, the 2005 and 2006 Notes were secured by mortgages on the

Holly Drive, Virginia Avenue, and Roederer Drive Properties, and the 2007

Note was secured by mortgages on the Cardinal Lane and Roederer Drive

Properties. [4] Relevant to this appeal, all three Notes contain the same provisions. Each Note

contains a cross-default clause, which provides that the “[f]ailure to make any

payment when due under this Note or any Note payable to [Bank]” constitutes

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a default. Appellants’ App. at 18, 29; Appellee’s App. at 106. Each Note

provides that the “[v]iolation of any covenant of this note or any note payable

to [Bank]” constitutes an event of default. Appellants’ App. at 18, 29;

Appellee’s App. at 106. All three Notes also contain an acceleration clause,

which provides, “Upon occurrence of any event of default under the

Agreement, all of the indebtedness shall immediately become due and payable

without any notice or demand by [Bank].” Appellants’ App. at 18, 29;

Appellee’s App. at 106. [5] In 2009 and 2010, the Setrees failed to pay Indiana real estate taxes on the

Cardinal Lane Property. This constituted a default under the 2007 Note.

Pursuant to the cross-default clauses in the Notes, the default under the 2007

Note constituted a default of the 2005 and 2006 Notes and activated Bank’s

right to accelerate all debts due and owing under all three Notes and to

foreclose on all of the mortgages it held on the Setrees’ properties. Appellee’s

App. at 106; Setree I, 10 N.E.3d at 32. In the fall of 2010, the Cardinal Lane

Property was sold at a tax sale due to the Setrees’ failure to pay taxes. The

Setrees and Bank attempted to resolve this problem. However, by the end of

September 2011, the Setrees had not paid the delinquent taxes. On September

29, 2011, Bank paid $9455.73 to redeem the Cardinal Lane Property from the

tax sale buyer and an additional $3116.55 in taxes to bring the delinquent real

estate taxes current. The tax redemption amount and all other outstanding

taxes had to be paid by October 3, 2011, or Bank would have lost its mortgage

lien against the Cardinal Lane Property. See Ind. Code § 6-1.1-25-4 (providing

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that redemption period for real property sold for delinquent taxes is one year

after date of sale). [6] In October 2011, the Setrees wrote a letter to Bank stating as follows:

We know these taxes are our responsibility. We notified River City Bank more than a year ago to let you know we didn’t have the means to pay them because they had increased so much. We asked if you could pay them.

Appellants’ App. at 38. [7] Bank initiated foreclosure actions on its four mortgages. The Kentucky cases

proceeded first. In September 2012, the Jefferson Circuit Court entered a final

judgment and order of sale in favor of Bank on the Roederer Drive property,

which had secured the 2007 Note. In January 2013, it issued a similar order in

favor of Bank on the Virginia Avenue property, which had secured the 2005

and 2006 Notes. The January 2013 order concluded that the Setrees failed to

pay property tax on the Cardinal Lane Property, that their failure to pay

property taxes constituted a default on the 2007 Note, and that pursuant to the

cross-default clauses, default under the 2007 Note constituted a default on all

notes payable to Bank. Appellants’ App. at 60-61; Setree I, 10 N.E.3d at 33. In

addition, the January 2013 order rejected the Setrees’ contention that they were

not provided notice or an opportunity to cure. The January 2013 order

concluded that the Setrees admitted in their October 2011 letter that they were

given more than one year to cure the default, and therefore they had notice and

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an opportunity to cure the default but failed to do so. Appellants’ App. at 60-

61; Setree I, 10 N.E.3d at 33. [8] The Indiana cases followed. In October 2013, the Clark Circuit Court issued

summary judgment in favor of Bank granting it the right to foreclose on the

Cardinal Lane Property. The Setrees appealed. In May 2014, another panel of

this Court affirmed summary judgment in favor of Bank, holding that (1) we

were required to afford full faith and credit to the Kentucky foreclosure

judgments and (2) because those judgments considered the same issues as those

the Setrees raised to challenge Bank’s right to foreclose on the Cardinal Lane

Property, res judicata prevented relitigation of the Setrees’ default. Setree I, 10

N.E.3d at 36, 37. [9] As for the Holly Drive Property, in September 2014, the trial court granted

summary judgment in favor of Bank and ordered foreclosure and sale of the

property. The Setrees appeal.

Discussion and Decision

Standard of Review [10] When reviewing a grant of summary judgment, our standard of review is the same as that of the trial court. Considering only those facts that the parties designated to the trial court, we must determine whether there is a “genuine issue as to any material fact” and whether “the moving party is entitled to a judgment as a matter of law.” Ind. Trial Rule 56(C). In answering these questions, the reviewing court construes all factual inferences in the non-moving party’s favor and resolves all doubts as to the existence of a material issue against the moving party. The moving party bears the burden of making a prima facie showing that there are no genuine issues of material fact and that Court of Appeals of Indiana | Memorandum Decision 10A04-1409-MF-450 | May 13, 2015 Page 6 of 14

the movant is entitled to judgment as a matter of law; and once the movant satisfies the burden, the burden then shifts to the non-moving party to designate and produce evidence of facts showing the existence of a genuine issue of material fact.

Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267, 1270 (Ind. 2009)

(citations omitted).

Section 1 - The Setrees’ challenge to Bank’s foreclosure of the Holly Drive Property is barred by res judicata. [11] The Setrees argue that the trial court erred in granting summary judgment in

favor of Bank because (1) a breach of the Cardinal Lane Mortgage is not a

breach of the Holly Drive Mortgages and (2) even if they are in default under

the Holly Drive Mortgages, the Holly Drive Mortgages require Bank to provide

notice and an opportunity to cure and it has not done so. Bank contends that

the Kentucky foreclosure cases already decided issues relating to the Setrees’

default in Bank’s favor, and therefore the Setrees’ arguments are barred by the

doctrine of res judicata. We agree with Bank. [12] In Setree I, another panel of this Court considered whether the Setrees’ challenge

to Bank’s right to foreclose on the Cardinal Lane Property was barred by res

judicata. We noted that “[t]he effect Indiana must accord the Kentucky

judgments depends on the treatment that judgment would receive in

Kentucky.” 10 N.E.3d at 36. We explained,

Pursuant to Kentucky precedents, res judicata prevents the relitigation of the same issues in a subsequent appeal. Miller v. Administrative Office of Courts, 361 S.W.3d 867, 871 (Ky. 2011), reh’g denied. Three elements

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must be met for res judicata, or claim preclusion, to apply: (1) there must be an identity of the parties between the two actions; (2) there must be an identity of the two causes of action; and (3) the prior action must have been decided on the merits. Id. at 872. A close cousin to the doctrine of res judicata is the theory of collateral estoppel, or issue preclusion. Id. In order for issue preclusion to operate as a bar to further litigation, certain elements must be established: (1) at least one party to be bound in the second case must have been a party in the first case; (2) the issue in the second case must be the same as the issue in the first case; (3) the issue must have been actually litigated; (4) the issue was actually decided in that action; and (5) the decision on the issue in the prior action must have been necessary to the court’s judgment and adverse to the party to be bound. Id. Res judicata, being the older term, is thought of as an umbrella doctrine that contains within it both claim and issue preclusion. Id. at 871. A pending appeal does not affect the finality of a judgment for preclusion purposes. See Stemler v. City of Florence, 126 F.3d 856, 871 (6th Cir. 1997); Roberts v. Wilcox, 805 S.W.2d 152, 153 (Ky. Ct. App. 1991).

Id. [13] The Setree I court concluded that the Setrees’ challenge to Bank’s right to

foreclose on the Cardinal Lane Property was barred by res judicata, specifically

issue preclusion. Id. at 37. We reasoned as follows:

The same issues–the Setrees’ failure to pay Indiana property tax pursuant to their 2007 Note and their right to cure–between the same parties–the Setrees and [Bank]–governed the Kentucky cases and this appeal. [Bank’s] right to foreclose on all three notes was triggered as a result of the Setrees’ failure to pay their Indiana taxes on the Cardinal Lane Property. Because of cross-default provisions in the three notes executed between the Setrees and [Bank], the Setrees’ default under the 2007 Note constituted a default under the previously executed two notes as well. Therefore, the Kentucky courts’ decisions to grant [Bank] the right to foreclose on the Setrees’ Kentucky properties necessarily included a determination of default under the 2007 Note–the issue before the trial court. Moreover, the order issued by the Jefferson Circuit Court on

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January 15, 2013, analyzed the Setrees’ right to cure under the note, an identical claim made by the Setrees in the current case, as being without merit. Accordingly, although the Kentucky cases concerned different mortgages and different property than the instant cause, they litigated the same issues between the same parties: the Setrees’ failure to pay the Indiana taxes on the Cardinal Lane Property and the Setrees’ right to cure its failure under the 2007 Note.

Id. (emphasis added). [14] The Setrees contend that although Setree I concluded that the Kentucky cases

decided the issues relevant to the breach of the Cardinal Lane Mortgage and the

2007 Note, the breach of the Cardinal Lane Mortgage has no relationship to the

Holly Drive Mortgages, and thus the Kentucky cases did not address issues

related to the Holly Drive Mortgages. Although the Holly Drive Mortgages

were not directly involved in the Kentucky cases, we nevertheless conclude that

the Setrees’ challenge to Bank’s right to foreclose on the Holly Drive Property is

barred by issue preclusion. We do so for two reasons. [15] First, we are unpersuaded by the Setrees’ argument that the breach of the

Cardinal Lane Mortgage has no relationship to the Holly Drive Mortgages.

They emphasize that the Cardinal Lane Mortgage secured only the 2007 Note,

while the Holly Drive Mortgages secured the 2005 and 2006 Notes. This

distinction is immaterial. As the Setree I court observed, the Kentucky cases

concluded that based on the cross-default provisions in the 2005, 2006, and

2007 Notes, the Setrees’ default under the 2007 Note constituted a default

under the 2005 and 2006 Notes. Significantly, the Setrees do not dispute that

they are in default of the 2005 and 2006 Notes. Further, the Setrees

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conveniently ignore that one of the Kentucky foreclosure cases was based on

the Virginia Property Mortgage, which, like the Holly Drive Mortgages,

secured the 2005 and 2006 Notes and not the 2007 Note. [16] The Setrees’ argument also disregards relevant language in the Holly Drive

Mortgages. Before examining this language, we observe,

Interpretation and construction of contracts are questions of law. In reviewing questions of contract interpretation and construction upon appeal, we read the contract as a whole when trying to ascertain the parties’ intent, and we will make all attempts to construe the language in a contract so as not to render any words, phrases, or terms ineffective or meaningless. Further, we must accept an interpretation of the contract that harmonizes its provisions, as opposed to one that causes the provisions to conflict.

Fischer v. Heymann, 943 N.E.2d 896, 900-01 (Ind. Ct. App. 2011) (citations and

quotation marks omitted). [17] Under the section labeled “Events of Default” The Holly Drive Mortgages

provide that, at Bank’s option, an event of default includes the following:

Other Defaults. [The Setrees fail] to comply with or to perform any other term, obligation, covenant, or condition contained in the Mortgage or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between [Bank] and [the Setrees]. …. Breach of Other Agreement. Any breach by [the Setrees] under the terms of any other agreement between [the Setrees] and [Bank] that is not remedied within any grace period provided therein, including without limitation any agreement concerning any indebtedness or other obligation of [the Setrees] to [Bank], whether existing now or later.

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…. Right to Cure. If such failure is curable and if [the Setrees have] not given a notice of a breach of the same provision of this Mortgage within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if [the Setrees], after [Bank] sends written notice demanding cure of such failure: (a) cures the failure within twenty (20) days; or (b) if the cure requires more than twenty (20) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

Appellants’ App. at 22-23, 32-33; Appellee’s App. at 110-11 (emphases added). [18] The Setrees argue that the cross-default clause in the Holly Drive Mortgages

does not include unrelated agreements and that the Cardinal Lane Mortgage is

unrelated to the Holly Drive Mortgages. They assert that the phrase “any other

agreement” as used in the “Other Defaults” clause cannot apply to mortgages

which were executed later or otherwise have no connection to the Holly Drive

Property. However, the Setrees focus only on the latter part of that sentence.

They completely ignore the first part, which refers to the failure “to comply

with or to perform any term … in the Mortgage or in any of the Related

Documents.” Id. If the failure to comply with the mortgage itself and any

related documents is an event of default, then “any other agreement” must refer

to agreements between the parties that are unrelated, including the Cardinal

Lane Mortgage. Therefore, we conclude that the Kentucky court’s

determination that a breach of the Cardinal Lane Mortgage constituted a

default of all three notes and gave Bank right to foreclosure on all its mortgages

includes the Holly Drive Mortgages.

Court of Appeals of Indiana | Memorandum Decision 10A04-1409-MF-450 | May 13, 2015 Page 11 of 14 [19] Second, the Kentucky cases have decided the issue of notice and opportunity to

cure. By its own terms, the Holly Drive Mortgages do not provide the Setrees

with an additional layer for notice and an opportunity to cure above that

provided in the Cardinal Lane Mortgage. In the “Breach of Other Agreement”

clause, the Holly Drive Mortgages state, “Any breach by [the Setrees] under the

terms of any other agreement between [the Setrees] and [Bank] that is not

remedied within any grace period provided therein, including without limitation

any agreement concerning any indebtedness or other obligation of [the Setrees]

to [Bank], whether existing now or later” constitutes, at Bank’s option, an event

of default. Id. at 23, 33 (emphases added). Thus, in the event of the Setrees’

breach of another agreement, the Holly Drive Mortgages provide the Setrees

with the opportunity to remedy that breach as provided for in the agreement

that they breached. Here, the Setrees breached the Cardinal Lane Mortgage by

failing to pay property taxes on it. They knew that the failure to pay the taxes

was a breach and were given nearly a year to remedy the breach. No additional

notice and opportunity to cure are provided under the Holly Drive Mortgages.

As a practical matter, we fail to see how the Setrees could have cured this

particular default under the Holly Drive Mortgages when they failed to pay the

delinquent taxes and cure their default under the Cardinal Lane Mortgage. The

Setree I court concluded that the issue of notice and opportunity to cure under

the Cardinal Lane Mortgage had already been decided by the Kentucky cases.

There is no other issue to explore here. We conclude that the Setrees’ challenge

to the foreclosure of the Holly Drive Property is barred by issue preclusion.

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Section 2 – Foreclosure of the Holly Drive Property is not an unconscionable remedy. [20] The Setrees also argue that foreclosure is an unconscionable remedy. We

observe,

When a party can show that the contract, which is sought to be enforced, was in fact an unconscionable one, due to a prodigious amount of bargaining power on behalf of the stronger party, which is used to the stronger party’s advantage and is unknown to the lesser party, causing a great hardship and risk on the lesser party, the contract provision, or the contract as a whole, if the provision is not separable, should not be enforceable on the grounds that the provision is contrary to public policy.

Weaver v. Am. Oil Co., 257 Ind. 458, 464, 276 N.E.2d 144, 148 (1971). [21] The Setrees argue that the judgments Bank received on the Cardinal Lane,

Roederer Drive, and Virginia Avenue Properties far exceed their delinquent

taxes of $3116.55, which provided the basis for the foreclosures. Such a

comparison is misplaced and inconsequential. The amount recovered by Bank

is relevant to the amount of the Setrees’ indebtedness. More importantly, the

Setrees have made no showing that Bank used a prodigious amount of

bargaining power to impose a contractual provision that was unknown to them

and placed great hardship and risk upon them. We are unpersuaded by the

Setrees’ argument that foreclosure of the Holly Drive Property is

unconscionable. [22] Based on the foregoing, we affirm the summary judgment order granting

foreclosure and sale of the Holly Drive Property.

Court of Appeals of Indiana | Memorandum Decision 10A04-1409-MF-450 | May 13, 2015 Page 13 of 14 [23] Affirmed.

Brown, J., and Pyle, J., concur.

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