The confusing role of Mortgage Electronic Registration Systems, Inc. (“MERS”) in the holding of mortgages has been a hot topic across the country for the last few years. The May 17, 2011 opinion by the Indiana Court of Appeals in CitiMortgage v. Barabas, 2011 Ind. App. LEXIS 892 (.pdf) is the first instance in which Indiana has spoken definitively about MERS – “little more than a ‘straw man’ for lenders,” according to the Court. Here, in Part I about CitiMortgage, we look at the Indiana statute that dictates the parties, including assignees, to be named in a foreclosure suit.
The history. CitiMortgage arose out of a foreclosure case, which made its way to the Court of Appeals by virtue of the trial court’s refusal to set aside a default judgment that terminated the senior mortgage on the property. The 2005 senior mortgage was given to MERS, “as nominee” of Irwin, the lender. In June, 2008, junior mortgagee ReCasa initiated a foreclosure action and named only Irwin (not MERS), the purported senior mortgagee, as a defendant. Irwin promptly filed a disclaimer of interest and was dismissed from the case. The trial court entered a default judgment for ReCasa in September, 2008. ReCasa acquired the property at the January, 2009 sheriff’s sale and sold the property to third-party Sanders two months later.
The rub. A month after the March, 2009 Sanders sale, Citi recorded an assignment of the MERS/Irwin mortgage, even though the evidence showed that Citi acquired an interest in the mortgage as early as July, 2008. In October, 2009, Citi moved to intervene in the ReCasa foreclosure action, requested relief from the default judgment and sought to set aside the sheriff’s sale. Citi asserted that, as assignee of MERS, it held a first-priority mortgage on the property. The fundamental question was whether ReCasa’s failure to name MERS as a defendant rendered ReCasa’s foreclosure judgment ineffective as to Citi. (See, 12-21-06 post.)
The critical statutes. Ind. Code § 32-29-8 “Parties to Foreclosure Suit; Redemption” controlled the Court’s analysis. Here are all three sections of the statute:
Mortgagee or assignee; purchaser at judicial sale
Sec. 1. If a suit is brought to foreclose a mortgage, the mortgagee or an assignee shown on the record to hold an interest in the mortgage shall be named as a defendant.
Failure to record or join foreclosure action
Sec. 2. A person who fails to:
(1) have an assignment of the mortgage made to the person properly placed on the mortgage record; or
(2) be made a party to the foreclosure action;
is bound by the court's judgment or decree as if the person were a party to the suit.
Good faith purchaser at judicial sale
Sec. 3. A person who purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree, buying without actual notice of an assignment that is not of record or of the transfer of a note, the holder of which is not a party to the action, holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale.
The ruling, and Section 3. CitiMortgage relied heavily on Section 3. The Court denied the relief requested by Citi and reasoned that:
over a year after ReCasa first foreclosed on the Property [filed suit] and nearly six months after the Property was sold and recorded, Citi sought to assert its interest in the first mortgage. Based on this information, it is clear that the trial court did not abuse its discretion when it found that I.C. § 32-29-8-3 precluded Citi’s claim because it failed to intervene until more than a year after it first acquired interest in the Property.
Citi’s intervention, in October, 2009, was indeed over a year after Citi first acquired an interest in the property –July, 2008 or earlier. But interestingly those facts don’t track the language in Section 3, which speaks to redeeming – not intervening – within a year of the sheriff’s sale – not the assignment date.
The redemption right. Admittedly, I don’t fully grasp the Court’s suggestion that Citi somehow had a right of redemption but failed to exercise it within a year. The CitiMortgage sheriff’s sale was in January of 2009, and Citi moved to intervene nine months later. Perhaps I’m misinterpreting the Court’s rationale. I further confess that I’m having trouble reconciling the last sentence in Section 3, particularly the “like any other creditor” phrase, with well-settled Indiana law providing that a sheriff’s sale terminates the right of redemption. (See, 5-15-08 post.) This assignee-related/redemption wrinkle will have to be a topic for another day….
The Section 2 impact. It appears to me that Section 2, not Section 3, more clearly supports the Court’s conclusion because Citi failed to timely record the assignment of mortgage and intervene sooner. There was evidence that Citi knew about ReCasa’s foreclosure action long before it intervened. Reading between the lines, perhaps CitMortgage’s ultimate lesson is that assignees should record their assignments immediately and then promptly intervene in a known foreclosure action. (See, 5-28-09 and 10-14-09 posts.)
In the second part of the CitiMortgage opinion, which I’ll discuss next week, the Court specifically hashes out the enigma that is MERS and rejects Citi’s argument around Section 3.
Note: The Court, on rehearing, clarified its reasoning related to Section 3. Here's my 11-1-11 follow-up post. Furthermore, on 4-10-12, the Supreme Court granted transfer, and on 10-4-12 reversed the trial court.