Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 83 C 631--S. Hugh Dillin, Judge.
Before CUDAHY and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge
Lowry and Helen McCord ("the McCords" or the buyers") arranged to purchase the property of John and Esther Looney ("the Looneys" or the "appellees") in Rush County, Indiana. When the McCords fell into financial troubles, they secured an emergency loan through the Farmers Home administration (the "FmHA" or the "government"). In exchange, the FmHA received a second mortgage on the property. Later, after paying $123,280 to the Looneys, the McCords defaulted. The Looneys filed suit in the District Court for the Southern District of Indiana seeking forfeiture under the forfeiture clause in the buyers' contract. The FmHA filed a counterclaim asking instead for foreclosure, the usual remedy in cases of default. The court granted forfeiture, concluding that the buyers had paid too small an amount toward the contract principal to justify foreclosure. In light of the totality of circumstances surrounding the transactions at issue, we believe that foreclosure was the more appropriate remedy and therefore reverse.
On October 7, 1976, the Looneys and the McCords entered into a conditional land sales contract to convey 260 acres of property to the McCords for $250,000. The contract specified that this sum was to be amortized over a 20-year period at an annual interest rate of seven per cent. The McCords were to make annual payments of $23,280 on November 15 of each year until the purchase price and all accrued interest was paid. They also agreed to pay real estate taxes, insurance and maintenance costs for the property.
Four years after agreeing to these terms, the McCords received an economic emergency loan for $183,800 from the FmHA under the 1978 version of the Emergency Agricultural Credit Adjustment Act, 7 U.S.C. § 1961. In return for the loan, the McCords executed a promissory note for the amount of the loan plus 11% annual interest. As security for the note, the McCords granted the FmHA a mortgage on the land subject to the land sales contract. The Looneys were aware of and consented to this mortgage.
The McCords subsequently defaulted on their payment obligations to the Looneys. At the time of their default, the McCords had paid $123,280 to the Looneys but still owed $249,360.12 on the contract price. In 1983, the Looneys brought suit against the McCords and the FmHA seeking ejectment and forfeiture of the contract. Both the Looneys and the McCords moved for summary judgment and the court granted the Looneys' motion. On June 5, 1984, the government sought leave to file a counterclaim seeking foreclosure of its mortgage. The court allowed the government to file. The government then moved for summary judgment. Together with its motion, the government included two affidavits stating that the property had appreciated in value to $455,000.
The district court denied the government's motion for foreclosure. It held that the traditional presumption under Indiana law in favor of foreclosure did not apply because the McCords had made only minimal payments on the contract and had not paid their full taxes or insurance installments. Because $249,360.12 was still owed on an initial base price of $250,000, the court found the McCords' equity in the property to be $639.88, only .26% of the principal. The court therefore found forfeiture appropriate, awarded the FmHA $639.88 and extinguished the FmHA's mortgage.
The FmHA appeals. It contends that foreclosure was the appropriate remedy because it would have protected all parties' interests. In receiving forfeiture, the government argues, the Looneys got a windfall. They kept the $123,280 that the buyers had paid over 7 1/2 years and got back property which the government's two uncontested affidavits stated had appreciated substantially. Moreover, the government states, the court miscalculated the McCords' payments on the contract and equity in the property and thus greatly undervalued what the government could justly recover. The court's theory, in effect, left the government's mortgage unsecured for much of the contract period.
In response, the Looneys note that the government had the opportunity to cure the buyers' default but did not. If the government really believed the property to have appreciated, appellees argue, it would have protected its interest by paying up the full amount of the annual installments and expenses. Since the government did not do this, it accepted the consequences. The Looneys also contend that the government cannot challenge the court's valuation of the McCords' equity because it never disputed or even responded to appellees' requests for admission which stated that the McCords' equity in the property was only $9,394.30 at the time the McCords secured their emergency loan.
Under Indiana law a conditional land sales contract is considered in the nature of a secured transaction, "the provisions of which are subject to all proper and just remedies at law and in equity." Skendzel v. Marshall, 261 Ind. 226, 241, 301 N.E.2d 641, 650 (1973) (italics omitted), cert. denied, 415 U.S. 921, 39 L. Ed. 2d 476, 94 S. Ct. 1421 (1974). Recognizing the common maxim that "equity abhors forfeitures," the Skendzel court concluded that "judicial foreclosure of a land sales contract is in consonance with the notions of equity developed in American jurisprudence." 261 Ind. at 240, 301 N.E.2d at 650. Foreclosure generally protects the rights of all parties to a contract. Upon judicial sale the proceeds are first applied to the balance of the contract principal and interest owed the seller. Then, any junior lienholders take their share. Any surplus goes to the buyer.
Skendzel recognized, however, two instances where forfeiture was the appropriate remedy:
In the case of an abandoning, absconding vendee, forfeiture is a logical and equitable remedy. Forfeiture would also be appropriate where the vendee has paid a minimal amount on the contract at the time of default and seeks to retain possession while the vendor is paying ...