The doctrine of merger and the remedy of strict foreclosure have been hot topics in Indiana’s appellate courts over the last couple of years. The development of the law has centered upon two cases: Deutche Bank v. Mark Dill Plumbing and Citizens State Bank of New Castle v. Countrywide Home Loans, Inc. In 2009, I posted four articles about Deutche Bank: April 17, April 24, May 4 and July 20. In 2010, I wrote about Citizens State Bank. Earlier this year, the Indiana Supreme Court vacated the Court of Appeals’ opinion in Citizens State Bank and issued its own decision, seemingly closing the books for the foreseeable future on this area of the law (.pdf) . The subject – big picture – relates to the impact of a foreclosing mortgagee’s failure to include a junior lien holder in a foreclosure case.
At issue. I outlined the key facts of the Citizens State Bank in my September 20, 2010 post. The Supreme Court distilled the dispute to its essence:
A mortgage holder foreclosed its mortgage, took title to the subject property at a sheriff’s sale, and then sold the property to a third party. The foreclosing mortgagee subsequently discovered it had inadvertently failed to name a junior lienholder in the foreclosure action. We granted transfer to shed light on the status of the original first mortgage in this context.
Merger. On pages 3 through 5 of the opinion, the Court provides an excellent discussion of Indiana’s doctrine of merger, including an explanation of the “equity of redemption.” The idea of “merger,” as noted by the Court, typically means that the mortgagee, in a foreclosure, acquires both the lien and legal title to the real estate so as to “merge” those two interests. That is, “the mortgage merges with the legal title, and the lien is thereby extinguished.”
Strict foreclosure. As suggested in the line of Deutche Bank’s cases, in my opinion the remedy of strict foreclosure (forfeiture, really) technically doesn’t exist in Indiana, even though lawyers and lenders frequently use that terminology. Here’s what the Indiana Supreme Court said about the remedy as it applied in Citizens State Bank:
But there is nothing particularly sacrosanct about a strict foreclosure action. That is to say, simply alleging that strict foreclosure would be a proper remedy does not make it so, nor does such allegation resolve the question of merger. In the end strict foreclosure as used in this case is merely a mechanism to place before the court the question of whether the doctrine of merger should be enforced.
Presumption. Regarding the enforceability of the doctrine of merger, the Court stated:
As indicated earlier in this opinion our case authority declares, “[w]hether the conveyance of the fee to the mortgagee results in a merger of the mortgage and the fee depends primarily upon the intention of the parties, particularly that of the mortgagee.” This is not, in our view, an “anti-merger” rule. Instead, we view it simply as an exception to the [merger] rule, providing a starting point in determining whether merger occurred in the first instance.
The “presumption” is that a mortgagee intends to do that which is most advantageous to itself. But the presumption is not conclusive and may be rebutted by evidence showing “that a merger had been expressly agreed to, or that the mortgagee’s conduct and action were such as could fairly be ascribed only to an intention to merge.” In basic terms, the question is whether the parties desired to extinguish the mortgage lien.
Holding. The Court ultimately found that the evidence in Citizens State Bank rebutted the presumption that the mortgagee wanted the two estates (mortgage and title) to remain separate. The Court focused on the limited warranty deed that transferred the property to the third party, FNMA. “Countrywide’s intent was manifest: conveyance of title in fee simple, free of all encumbrances.” The Court reasoned that “simply because in retrospect it might not have been in Countrywide’s ‘best interest’ to extinguish its mortgage lien when it conveyed the property to FNMA cannot change Countrywide’s intent after the fact.” The Court held that the third party, FNMA, acquired the property subject to the valid judgment lien. (This result may have been prevented had the mortgagee and FNMA used the “anti-merger” language typically used in deeds-in-lieu of foreclosure.)
Not always. The Court noted that there may be circumstances under which the equitable remedy of strict foreclosure (actually quiet title relief, in my view) still may be appropriate. Certainly a mortgagee’s intent is of primary importance. An example of this would be a case in which a junior lien was not joined in the foreclosure action due to an indexing error that prevented the lien from appearing in court records. Under the facts of Citizens State Bank, however, the record was clear that the junior lien on the real estate was properly recorded and indexed, and the lien simply was overlooked due to the senior mortgagee’s mistake and/or inadvertence.
Citizens State Bank is another one of those decisions that drives home the point that an owner’s policy of title insurance is a wise investment for foreclosing lenders.