Today’s article provides further guidance to secured lenders facing situations in which your title company or foreclosure counsel missed a perfected junior lien during the suit to enforce your mortgage. This is Post III of my ongoing analysis of Indiana strict foreclosure law in the wake of Deutsche Bank. Here are links to Parts I and II: April 17 Post and April 24 Post.
Worst case. In the event the Indiana Supreme Court on appeal of the Deutsche Bank case were to either disregard or not apply the anti-merger rule addressed in Brightwell, things could get ugly for attorneys and title companies. Rather than simply dealing with the time and expense of clearing up title with litigation post-sale, there could be financially devastating consequences if a junior creditor were to leapfrog a senior mortgagee. Recently, I handled a case involving a debt of about $1,500,000. As we proceeded to a foreclosure judgment, we ordered a date down of our title work that disclosed for the first time two judgment liens on the property totaling about $12,000,000. We quickly amended our complaint and included the interests of the judgment lien holders. Had we failed to do so, or if our title company had missed the liens, the judgment creditors could try to spin Deutsche Bank and ask the court to trump our client’s senior mortgage lien, effectively negating our client’s interest in the collateral. Our client would realize no recovery whatsoever on its $1,500,000 debt. Before Deutsche Bank, had we missed the junior liens, we would’ve filed a strict foreclosure suit to remedy the situation. Now, it’s unclear exactly what we’d do, or the cheapest way to do it.
How to clear title. The Court in Deutsche Bank held that the property must be sold to satisfy the liens belonging to the judgment creditors. The court’s ordering of this execution sale helped, or will help, to bring the title issues to a head. (Generally, an execution sale is a tool to collect a money judgment previously entered in a lawsuit and involves a judicial sale of the real estate of a defendant/judgment debtor. There are, however, differences between an execution sale and a foreclosure sale that go beyond the scope of today’s post.) The point is - in Deutsche Bank, the question of lien priority will be determined as a result of action taken by the junior lien holders.
But what if a junior lienor doesn’t incur the time and expense of pursing its lien and forcing an execution sale? It’s not unusual for liens to remain dormant. Indeed some liens are recorded in error. Title could remain clouded indefinitely. Upon discovery of the encumbrances, usually when it’s time to resell the property, the senior mortgagee will want to clear title. At this point, I’m not sure anyone knows for certain what to do, but there appear to be at least two avenues for relief.
Second bite at the apple. First, assuming the lender/mortgagee is in title, it might be able to bring a second mortgage foreclosure suit. Admittedly, I haven’t comprehensively researched this. But Brightwell seems to support the notion that the mortgagee, assuming the mortgage hasn’t merged with title, could bring a new, albeit unconventional, mortgage foreclosure proceeding solely against the overlooked junior lien holders. The foreclosure action would lead to a determination of priority in title, lien amounts, etc., followed by another sheriff’s sale giving the junior lienors an opportunity to recover any sale proceeds or to make a credit/judgment bid at the sale.
Do-over. A second, and perhaps more viable, possibility would be to set aside the first sheriff’s sale and obtain an amended judgment in the original case that includes the overlooked junior lien holders. Indiana law recognizes setting aside sheriff’s sales and, in essence, having a do-over of that phase. The Court in Deutsche Bank said:
Accordingly, trial courts have considerable equitable discretion to set aside sales of property resulting from their foreclosure judgments. In addition, trial courts have full discretion to fashion equitable remedies that are complete and fair to all parties involved.
Both the second foreclosure sale and the do-over sale “remedies” raise all sorts of procedural and evidentiary problems about which I could write for pages and pages. My only real point is that there may be feasible alternatives to a strict foreclosure suit. Perhaps the Deutsche Bank case, or a subsequent decisions, will fashion an equitable remedy tied to Indiana’s statutory action to quiet title, Ind. Code § 32-30-3-13 to 21.
Where to go from here? Whatever the legal theory, secured lenders, foreclosure lawyers, trial courts and title companies need direction from Indiana’s appellate courts concerning how to solve these problems. My hope is that the Indiana Supreme Court accepts the Deutsche Bank case and clarifies, once and for all, the proper method for senior mortgagees to clear title after a foreclosure sale. For now, it’s simply important for lenders to be reminded that accurate date-downs are critical and that Indiana’s strict foreclosure remedy is either dead or is in the process of being reformed.