Indiana Commercial Foreclosure Law

Indiana Court Of Appeals Clarifies Its Decision About Strict Foreclosure

I recently posted three articles about Indiana's strict foreclosure remedy in the wake of the Court of Appeals' March 25, 2009 opinion in Deutche Bank v. Mark Dill Plumbing, 2009 Ind. App. LEXIS 524:  Part I, Part II and Part III.  On July 14th, the Court, on rehearing, clarified its earlier opinion and, by doing so, spelled out what should happen when a secured lender's title company or counsel misses a perfected junior lien in the process of foreclosing a senior mortgage.  Here's a .pdf of the new opinion.  We now know that, in most cases, the error will not be fatal.  

Priority.  With respect to the order of priority for payment among the parties on remand (when the case gets back to the trial court for further handling), the Court relied on the Brightwell decision about which I wrote in Part II.  The Court agreed with Deutche Bank that a merger of the mortgage with title, which extinguishes the mortgage lien, did not occur upon the bank's purchase of the property at the prior foreclosure sale.  Thus the bank's first lien is preserved, and there is no leapfrog in priority by the junior lienors, which is something that initially concerned me upon first reading the March 25th opinion.  Significantly, the Court held that, "on remand, Deutsche Bank and the three junior lien holders remain in the priority positions they had before the first sheriff's sale."

Remedy.  The second matter clarified by the Court concerned the trial court's options as to how to clear title to the real estate.  The Court left to the trial court "the decision whether to order another sheriff's sale or provide another remedy equitable to the parties."  As such, there could be a second sheriff's sale of the property, although that could prove to be costly, in terms of both time and expense.  Deutche Bank wanted the Court to explain to the trial court that it could order the junior lienors to redeem the real estate from the bank rather than order another sheriff's sale.  The Court granted Deutche Bank's wish:  "The [trial court] could ... simply give the junior lien holders an opportunity to purchase the property from Deutche Bank...."  Basically, there could be (and probably will be) a decree entered by the trial court requiring the junior lienors to either pay the bank to "redeem" the property or lose their liens.  This seems to be the cheaper and faster way to solve the problem.

Payment amount.  The Court stated that, if the trial court decides to offer the junior lienors an opportunity to redeem, "the amount a junior lien holder should be required to pay is the 'full amount payable under the mortgage,' not the amount of the foreclosure judgment and not the amount the mortgagee bid at the first sheriff's sale."  This would include attorney fees, unpaid principal and interest.  While I understand and agree that the redemption amount should not be the purchase price paid at the first sheriff's sale, I'm somewhat confused as to why the amount would not be the same as the foreclosure judgment, which includes such things as unpaid principal, interest and attorney fees.  I suppose there could be situations when the judgment will not include all items recoverable under the mortgage, and perhaps the Court simply wanted to be clear.  But in most cases, I think the amount of the foreclosure judgment and the redemption amount should be the same, unless I'm missing something.  (Please email or comment.)

RIP, strict foreclosure.  "With these clarifications," the Court ultimately affirmed its original opinion.  The Court left no doubt that it was "denying Deutche Bank's request to simply remove the liens of the junior lien holders from Deutche Bank's title to the property."  For that reason, my view is that the remedy of strict foreclosure as we knew it is dead.  Senior (first) mortgagees still have a remedy, but labeling it "strict foreclosure" (to the extent labels matter) may be inaccurate, as the Court outlined in its original opinion.  The two Deutche Bank opinions from the Indiana Court of Appeals seem to tell us that, if a junior lien was overlooked, then the remedy is to file a suit to quiet title, which will provide the junior lien holder an opportunity to redeem its lien and acquire the property.  Only after the junior lien holder fails to redeem will its lien be extinguished from title. 

But let us not forget the larger lesson of Deutche Bank:  when secured lenders and their counsel foreclose a mortgage in Indiana, be sure to order a title insurance policy commitment, order a date down (update) of the commitment through the date of the filing of the complaint and purchase the owner's policy after acquiring title at the sheriff's sale.  If you do these things, then the negative consequences associated with missing junior liens primarily will be the title company's problem, not yours.     

(I'd like to thank Dean Leazenby, an attorney in Elkhart and periodic reader of my blog, who first alerted me to both Deutche Bank opinions shortly after the Court issued them.  Indianapolis attorney John Carr also has contributed to the discussion, and I've appreciated his emails.)       

If Strict Foreclosure Isn’t The Remedy, What Is?

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.
 

The Demise of Indiana’s Strict Foreclosure Remedy, Part II: Trying To Peel The Onion That Is Deutsche Bank

This follows-up my April 17 post discussing how the recent Deutsche Bank (.pdf) case calls into question whether Indiana recognizes the remedy of strict foreclosure.  Despite the remedy’s potential demise, there appears to be an argument that, under certain circumstances, a senior lender/purchaser at a mortgage foreclosure sale, which didn’t include junior lienors, may not lose the property after all - - it’ll just lose time and money. 

Devil’s in the details - Brightwell.  I shared my prior post with a handful of creditor’s rights lawyers, some of whom pointed out the significance of footnote 5, buried at the end of the Deutsche Bank opinion, which provided:

Because issues regarding division of proceeds may arise during further proceedings in the trial court, we note that, in Brightwell, the Federal District Court, applying Indiana law, explained the procedure for determining the relative rights of the parties in a case like that before us.

That’s all Deutsche Bank really told us about the priority issue – arguably the most important issue in the case.  It’s only after studying the 1992 Brightwell v. United States of America, 805 F. Supp. 1464 (S.D. Ind. 1992) (.pdf) opinion that we can piece together the upshot of Deutsche Bank.  In Brightwell, Judge McKinney more directly tackled the issue of priority and, unlike the Court in Deutsche Bank, discussed Indiana’s “anti-merger” rule.  According to Brightwell, the subsequent execution sale contemplated in Deutsche Bank should be subject to the senior mortgagee’s lien, and the underlying mortgage foreclosure judgment should permit the mortgagee to make a first-priority credit bid at the second sale.  (Beware:  if the foreclosing lender sells the property before clearing title, Brightwell suggests that the mortgagee’s right to assert the mortgage lien against junior lien holders does not pass to subsequent purchasers – a post for another day.)     

Anti-merger.  To fully understand the implications of Deutsche Bank and Brightwell, lenders and their foreclosure counsel need to be aware of Indiana’s “anti-merger” rule: 

• The general rule is that a mortgagee’s acquisition of title to mortgaged property will result “in a merger of the mortgage with the title, thus extinguishing the mortgage lien.”
• The exception to this rule where merger would harm the interests of the mortgagee, thus permitting the lien to be preserved.
• The “key factor” in deciding whether a merger has occurred “is determining what the parties to the sale – primarily the mortgagee – intended.”
• If intent is not express, Indiana courts will presume that no merger was intended if the circumstances indicate that preservation of the lien would “benefit” the mortgagee.
• The exception/presumption allows mortgagees to prevent junior lien holders from stepping-up in priority, foreclosing and reducing the mortgagee’s “already diminished recovery . . . guarantees the mortgagee’s priority in any proceeds.” 

In a nutshell, “anti-merger” is a priority-protection rule:

Put simply, the anti-merger rule gives a mortgagee first crack at any money generated by foreclosures on the property, ahead of any junior lien holders, until it has been paid what it is owed in full. 

Judge McKinney held that there was no evidence in the Brightwell case to overcome the presumption that the mortgagee intended to preserve its lien, so the mortgage was preserved after the mortgagee bought the property at foreclosure.

All may not be lost.  Admittedly, it would appear that I jumped the gun when I stated that the Deutsche Bank “opinion’s implication is that the subsequent sale is not subject to the prior mortgage lien/interest.”  Assuming courts read Deutsche Bank and Brightwell in tandem, the plaintiff/senior lender-mortgagee, who purchases property at a foreclosure sale, ultimately should not lose the property, unless the missed junior lienor or a third party first pays the mortgage debt as established in the underlying foreclosure action.  Having said that, with the elimination of the strict foreclosure remedy by Deutsche Bank, lenders still face substantial headaches, delays and expenses to clear title. 

How senior lenders should proceed under circumstances involving missed junior liens, as well as other practical considerations arising out of the Deutsche Bank case, will be addressed next week in yet another strict foreclosure-related post.  For now, lenders and their counsel should remain mindful of the importance of ordering date downs of title work before proceeding to judgment, and any title insurance representatives reading this should be very sensitive to the consequences of missing perfected junior liens.  More next week…. 

Does Indiana’s Strict Foreclosure Remedy Still Exist?

What happens if your title company or your foreclosure lawyer missed a junior lien in the lawsuit to enforce your mortgage?  Past practice has been to file a strict foreclosure case to extinguish the overlooked interests from title, as mentioned in my March 3, 2008 post.  The validity of that remedy is now in doubt because, on March 25, 2009, in Deutsche Bank National Trust Co. v. Mark Dill Plumbing Co., 2009 Ind. App. LEXIS 524 (.pdf), the Indiana Court of Appeals issued a decision that appears to stand for the proposition that a senior lender/mortgagee, which acquired property at a sheriff’s sale, takes the real estate subject to any junior liens that existed pre-suit, without recourse.  Although I’m still digesting the opinion, which is significant on many levels, my interpretation is that Deutsche Bank basically kills the strict foreclosure remedy in Indiana.  

The litigation.  In the underlying lawsuit, the lender/mortgagee filed suit against the borrower/mortgagor and ultimately took title to the property at a sheriff’s sale.  However, the lender failed to name three judgment lien holders as parties to the foreclosure action, even though the “junior liens were properly recorded.”  Lender thus brought a strict foreclosure action against the judgment lien holders to cut off the rights of the junior lienors to the subject property.  The judgment lien holders countered that the lender’s equity of redemption should be foreclosed and that another sheriff’s sale should be held in order to satisfy the amounts owed to them. 

English law-forfeiture.  At English common law, “strict foreclosure” basically constituted a forfeiture:

 A rare procedure that gives the mortgagee title to the mortgaged property –
 without first conducting a sale – after a defaulting mortgagor fails to pay the
 mortgage debt within a court-specified period.

The Court reasoned that Deutsche Bank could not be deemed a “strict foreclosure” case because the lender already had title to the mortgagor’s property by virtue of Indiana’s statutory foreclosure proceeding.  (But, as noted in the next section, an Indiana strict foreclosure isn’t really a forfeiture because the lien isn’t really being voided outright – the lienor maintains the equity of redemption.) 

Indiana law-remedy.  Interestingly, the Court’s opinion also addressed the definition of strict foreclosure recognized previously by Indiana courts (and me):

 A strict foreclosure proceeds upon the theory that the mortgagee or purchaser
 has acquired the legal title, and obtained possession of the mortgaged estate,
 but that the right and equity of redemption, of some judgment creditor, junior
 mortgagee, or other person similarly situated, has not been cut off or barred. 
 In such a case, the legal title of the mortgagor having been acquired, the
 remedy by strict foreclosure is appropriate to cut off the equity and right of
 junior encumbrances to redeem.

 Such persons have a mere lien upon, or an equity in, the land which is
 subordinate to the right of the owner of the legal title.  A statutory foreclosure,
 in such a case, would be manifestly inappropriate.  The owner of the legal title
 may, with propriety, maintain a proceeding in the nature of a strict foreclosure,
 to bar the interest of persons who have a mere lien upon or right of redemption
 in the land.

This is what I understood the strict foreclosure remedy to mean in Indiana - a lender could file a quiet title (strict foreclosure) suit to give the junior lien holder the opportunity (right) to redeem (to payoff the judgment/buyer).  Absent a payoff, the junior lienor’s equity of redemption is foreclosed, causing the lien on the property to be terminated.

Applying the law:  fairness?  The Court, however, steered away from prior Indiana law and instead focused on the forfeiture concept, stating:  “courts must always approach forfeitures with great caution, being forever aware of the possibility of inequitable dispossession of property and exorbitant monetary loss.”  The Court felt there was nothing fair or just about ordering forfeited the judgment liens “when their junior liens were properly recorded and when the failure to join them as parties in the forfeiture action resulted from the negligence of Deutsche Bank or its agent.”  (But, what about the windfall associated with allowing a subordinate lien to leapfrog a senior mortgage lien?)   

No strict foreclosure.  In Indiana, foreclosure by a senior mortgagee does not affect the rights of a junior lien holder who was not made a party to the foreclosure action.  (See my 12-21-06 post.)  In its analysis, the Court in Deutsche Bank relied upon the following rule applicable to foreclosures and sales:

 Junior lien holders who are not made parties to the foreclosure action were
 not bound by such foreclosure, and their situation “after the foreclosure
 remained the same as it had been before.”  The purchaser at the foreclosure
 sale “simply stepped into the shoes of the original holder of the real estate and
 took such owners’ interest subject to all existing liens and claims against it.”

The Court ultimately agreed with the judgment lien holders’ argument that it would be erroneous to allow their interests to be eliminated without notice and due process.  (But, doesn’t the subsequent strict foreclosure suit present junior interest holders with notice and due process?)

The upshot - stunning.  According to Deutsche Bank, Indiana junior lien holders, who are not named in a foreclosure suit, have valid liens against the title held by the purchaser at a sheriff’s sale and can have the real estate sold to satisfy their liens.  The opinion’s implication is that the subsequent sale is not subject to the prior mortgage lien/interest.  So, unless the foreclosure sale purchaser (usually, the mortgagee) buys off the junior liens, the purchaser, like the borrower/mortgagor before it, will lose the property.   Deutsche Bank seems to signal a dramatic change in Indiana foreclosure law and practice, but the party’s not over because I’m told the lender is appealing the Court of Appeals’ decision.  Stay tuned and, because I can’t tackle all issues in one post, I intend to write a follow-up article addressing some of the more practical implications of this case next week.  Please call, email or post a comment with your thoughts.

An Indiana Federal Court Discusses Strict Foreclosure

If you’re wondering what “strict foreclosure” means in Indiana, look no further than Judge Barker’s opinion in the CIT Group v. United States of America, 2007 U.S.Dist. LEXIS 96180 (S.D. Ind. 2007) (CITOpinion.pdf) case.  The opinion provides a straightforward discussion of strict foreclosure, with a federal tax lien twist. 

What happened.  Lender entered into a purchase money mortgage transaction with borrower.  Borrower defaulted, and lender foreclosed.  The real estate was sold at a sheriff’s sale, and the lender was the successful bidder.  Unbeknownst to the lender, a federal tax lien had been filed against the borrower and had been recorded before the filing of the foreclosure action, albeit after the recording of the lender’s mortgage.  Presumably due to inadvertence, the lender failed to name the United States in its foreclosure action, so the tax lien survived the foreclosure case.  The lender brought an action for strict foreclosure against the federal government with the goal of cutting off the federal tax lien.

Strict foreclosure, generally.  In Indiana, strict foreclosure is defined as “the means by which a party, who acquires title through or after a foreclosure sale (or by deed in lieu of foreclosure), may cut off the interests of any junior lienholders who, for some reason, were not parties to the foreclosure action.”  Strict foreclosure is a remedy that operates to cut off the right of junior lienholders to redeem.  In CIT, seemingly the lender (senior lien holder) should have been entitled to strict foreclosure because it purchased the property at the sheriff’s sale after foreclosure of the borrower’s/owner’s/mortgagor’s interests. 

The rub.  Only later did the lender discover that the United States had recorded a tax lien on the property.  Even though the lien undoubtedly was junior to the lender’s mortgage lien, the United States argued that its lien should not be extinguished in the strict foreclosure action given its unique, statutorily-protected nature.  The statue at issue was 26 U.S.C. § 7425(a) entitled “Discharge of Liens.”  The United States argued, based on the statute, that because the government was not joined as a party to the action, the judicial sale should be subject to the federal tax lien.  Judge Barker adopted this “defense” and concluded that the federal tax lien should survive and continue to encumber title to the property, no matter who holds title, until it is satisfied.  Judge Barker stated “but for the fact that, by federal statute, primacy is given to the federal tax lien, we believe strict foreclosure likely would be available to a mortgagee so as to extinguish any other junior lienholders’ interests.” 

Survival.  As explained in CIT, strict foreclosure normally provides a remedy to senior lienholders, after the sale of the property at a foreclosure sale, to bring an action for the purposes of clearing title and extinguishing any subordinate liens or interests.  But the CIT case illustrates a unique scenario involving the treatment of a federal tax lien.  Here is Judge Barker’s explanation of, in essence, the upshot of her decision:

Provided [lender] continues to hold title to the real estate it acquired by Sheriff’s Deed at the foreclosure sale, equity allows it to assert its mortgage lien position as against the United States even though the United States was not named in the foreclosure action.  If title to the property is thereafter conveyed to a third-party purchaser, however, that purchaser would no longer be able to assert [lender’s] mortgage lien priority so as to extinguish the federal tax lien.  So long as [lender] continues to hold legal title to the real estate, the United States’s lien remains in effect, but inchoate – dormant, as it were – because it is uncollectible against [lender].  Should the property be sold by [lender] to a third party, the government is entitled to execute on its lien and be paid, presumably from the proceeds of the sale.

Do due diligence.  This was a bad result for the lender because it acquired the property at the sheriff’s sale subject to a $10,200 lien, which will have to be satisfied when the lender liquidates the property.  It is my understanding the result could have been avoided had the United States been made a party to the foreclosure action, although rules and exceptions surrounding federal tax liens could be (and someday will be) the subject of their own blog post.  The failure to name the United States in CIT probably stemmed from a defective title insurance policy commitment (title search) or possibly the lender’s failure to order a title search to begin with.  Lenders and Indiana counsel should remain mindful to purchase a title insurance policy commitment before filing a complaint, with a “date down” thereafter, which commitment will help identify all parties, with interests in the property, that should be named in the suit.  If that was in fact done by the lender in CIT, and if the title company missed the federal tax lien, then the lender may have been indemnified by the title insurance company for the loss associated with the $10,200 tax lien.