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Technical Errors In Mortgage Language May Not Be Fatal

On August 2, 2007, Judge Philip Simon of the Northern District of Indiana, Hammond Division, issued an opinion about the impact of a mortgage that incorrectly defined the borrowers.  See, In Re:  Camp, 2007 U.S. Dist. LEXIS 57292 (N.D. Ind. 2007) (CampOpinion.pdf).  Judge Simon’s opinion discusses some of the general rules applicable to Indiana mortgage instruments, and there are lessons to be learned from the case.

Background.  Only husband signed the note.  But, both husband and wife executed the mortgage as “borrowers.”  Husband subsequently filed a Chapter 13 petition for bankruptcy, and the assignee of the note and mortgage filed a secured claim in the bankruptcy proceeding.  Husband-debtor argued that the secured claim should be avoided because the mortgage was invalid.  He wanted the property to be free and clear of all liens.  The legal basis of his argument was that the mortgage did not sufficiently describe the debt it purported to secure. 

Bankruptcy context.  11 U.S.C. § 544(a)(3) governed the ruling.  The two specific issues were (1) whether the debt was adequately described in the mortgage and (2) whether the mortgage provided constructive notice to a bona fide purchaser as required by federal bankruptcy law.  (11 U.S.C. § 544 (a)(3) is known as the “strong-arm statute”.)  Generally, an encumbrance can be avoided if a bona fide purchaser would not have constructive notice of it.

Indiana mortgage laws.  Here are some of the relevant Indiana statutes and common law rules:

1.  Ind. Code § 32-21-4-1 provides that constructive notice is given by a properly-recorded instrument.

2.  I.C. § 32-21-2-3 states that a mortgage must be acknowledged by the grantor to be recorded.

3.  I.C. § 32-29-1-5 sets forth the requirement for a form mortgage.  Among other things, the mortgage must describe the debt sought to be secured, and it must be dated and signed, sealed and acknowledged by the grantor. 

4.  The mortgage must be properly acknowledged and recorded to provide constructive notice to subsequent purchasers.  The mortgage must be recorded in the proper county and must contain an accurate legal description of the property. 

5.  The mortgage must be in the chain of title.

6.  In Indiana, the recording of a document not entitled to be recorded (due to statutory violations) does not afford constructive notice.  Exceptions to this general rule could include, for instance, a mortgage that omits the preparer’s name.  Although technically in violation of I.C. § 36-2-11-15(b) , constructive notice is still afforded because the defect “was not one which would have been fatal to a conveyance or encumbrance.  Thus, a title searcher wishing to verify the legal title of the property would have found all the formalities necessary to prepare a valid conveyance or [encumbrance].”  Camp at 8.

Camp technicality.  The mortgage indicated that husband and wife collectively were the “borrower.”  Actually, only husband executed the note.  This error breached the statute requiring a proper description of the debt.  I.C. § 32-29-1-5.  The question for the Court in Camp was whether this statutory violation defeated constructive notice or whether it was, in the final analysis, immaterial.  Here is what a prior Indiana opinion stated:

  The description in the mortgage of the indebtedness secured
  need not be literally accurate, but must be correct so far as it
  goes, and full enough to direct attention to the sources of correct
  information in regard to it, and be such as not to mislead or
  deceive, as to the nature or amount of it, by the language used.

Pioneer v. First Merchants, 349 N.E.2d 219, 222 (Ind. Ct. App. 1976). 

The mortgage in question “complied with almost all of Indiana’s statutory requirements.”  Camp at 9.  It expressly stated that an encumbrance (by virtue of the note) existed on the property.  The Court found that “any bona fide purchaser would have constructive notice of the existence of the Note and its amount - - the most important aspects of the debt - - even if the defined executor of the Note was incorrect.”  Id.  The Court further concluded that a bona fide purchaser then would have a duty to inquire into the substance of the note and, ultimately, would find that the note and the mortgage were signed on the same day, stated the same amount, described the same lender and included the same repayment date.  Accordingly, the mortgage passed the operative test:  a proper examination of the record would have led a reasonable man to conclude that the property to be mortgaged was subject to a prior encumbrance.  As such, the husband-debtor’s objection to the mortgage lender’s secured claim was overruled.

Be careful.  Sometimes technical errors will be fatal.  Sometimes they won’t.  Fortunately for the lender in Camp, other accuracies in the loan documents trumped the isolated inaccuracy.  Despite the ultimate victory, however, it appears much time and effort went into litigating the issue.  Aside from the obvious lesson that not all language errors will be fatal to a mortgage lien, perhaps a more important lesson is that the loan documents on the front end of a deal should be perfect.  Time and legal fees would have been saved had the borrower been described properly.  A simple, innocent oversight I’m sure, but a costly one nonetheless.

What If A Borrower Ignores A Lender's Foreclosure Suit?

Can a borrower in default simply disregard a lawsuit?  Of course not.  If the plaintiff/lender properly serves the borrower with a Summons and the Complaint, and if the borrower/defendant takes no action, then the borrower will face a "default judgment."  A July 23, 2007 opinion from the U.S. District Court for the Northern District of Indiana in United States of America v. Sheetz, 2007 U.S. Dist. LEXIS 53918 illustrates this. 

Rules.  The procedural rule giving courts the power to enter default judgments is Rule 55.  Click here for the federal rule.  Click here for the Indiana rule.  The rules essentially are the same.  Sheetz is a federal court action and thus applies the federal version of the rule. 

The Sheetz opinion on page 2 outlines the following guidelines utilized by federal courts asked to enter a default judgment:

  1. The entry of default is discretionary - a judgment call by the court.
  2. Factors that will be considered include (a) the amount of money involved, (b) whether there are issues of fact, (c) whether substantial public importance is in question, (d) whether the default is "largely technical", (e) whether the plaintiff has been prejudiced by the delay caused by the defendant and (f) whether the grounds for default are "clearly established or are in doubt." 

(Indiana state courts articulate the guidelines slightly differently, and that case law will be the subject of a future post.)

Liability.  Sheetz was an easy call for Judge Simon.  The defendant borrower had defaulted on a student loan.  The circumstances satisfied each of the factors.  Given the lender's motion and supporting materials, there were no issues of fact, and the grounds were clearly established.  The default went beyond a mere technicality as three months had passed since the defendant was served.  "Defendant cannot be allowed to completely ignore this suit."  Id at 2.  Finally, the money involved was a relatively small figure (under 10k). 

Damages.  A lawsuit usually concerns a determination of two basic things:  liability and damages.  The first question is whether the borrower owes the money.  The second question surrounds the amount of money owed (and, in foreclosure cases, the nature and extent of the lien).  A motion for a default judgment is way to expedite those determinations.  The motion triggers the same two-step analysis. 

Sometimes, a court will grant a default judgment (determine liability) on the pleadings, without a hearing, but later conduct an evidentiary hearing to determine damages.  However, sometimes a court will determine damages immediately and without a hearing.  Sheetz is one of those cases.  At least in federal court, if damages are "capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits," then a hearing isn't necessary.  The key is whether the court has the information it needs to calculate damages.  Id. at 3.  The plaintiff/lender in Sheetz (the United States) properly filed an affidavit (sworn written statement) outlining the debt and how the final amount should be calculated based on the loan documents.  Judge Simon saw no reason to hold a hearing, and the plaintiff got its final, enforceable judgment as to both liability and damages quickly and without a court appearance. 

When faced with a borrower ignoring a foreclosure suit, and after you've assured yourself that service of process has been perfected and the appropriate time has passed, you or your counsel should follow Rule 55 and the Sheetz road map to reduce your claim to a judgment quickly and with limited expense.