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Land Contract Vendee Defeats Mortgagee’s Foreclosure Case

In the event you ever deal with priority disputes involving an Indiana mortgage and a land sale contract, or related issues, the October 15, 2007 opinion of the Indiana Court of Appeals in Pramco v. Yoder, et al., 2007 Ind. App. LEXIS 2320 (PramcoOpinion.pdf) will be instructive.  The Court denied mortgage holder Pramco’s request to foreclose on property occupied by Jose Arellano through a land sale contract. 

The loan and contract.  Steven Yoder entered into a promissory note with Bank in the amount of $33,000, which note was secured by a mortgage on residential real estate Yoder owned.  The Bank recorded the mortgage on July 31, 2001.  Subsequently, Yoder entered into a land sale contract with Arellano in the amount of $54,000 that got recorded on January 16, 2002, after the recordation of Bank’s mortgage. 

Subsequent loans and defaults.  Yoder and Bank later entered into other loan transactions worth several hundred thousand dollars secured by mortgages on thirteen different properties, including the property in question.  Yoder ultimately defaulted on his loan obligations, and Bank sold/assigned the notes and mortgages to Pramco.  Before this particular case, Pramco had foreclosed on and liquidated all the properties except for the property occupied by Arellano.  The residual debt totaled about $415,000. 

Status of land contract.  Plaintiff Pramco sought to foreclose on the property Arellano occupied pursuant to the land contract.  Arellano already had made, in addition to a $15,000 down payment, thirty-nine other payments for a total amount paid under the contract of about $45,000.  Remember, the original mortgage between Yoder and Bank was for only $33,000. 

The equitable result.  The trial court held that its equitable powers could prevent the injustice that would result from the foreclosure of the mortgage, including specifically Arellano’s forfeiture of the $45,000 he paid pursuant to the land sale contract.  Yoder had used Arellano’s payments to make mortgage payments to Bank. With a foreclosure, all that money would be lost.  And to add insult to injury, Arellano would lose possession of the property.  The Indiana Court of Appeals reasoned that to grant foreclosure would be to grant Pramco a double recovery.

If forfeiture were allowed, Pramco would have received the benefit of Arellano’s down payment, and subsequent monthly payments, which were taken by Yoder to the Bank, which in turn sold the mortgage to Pramco.  Pramco would then be allowed to sell the Property at sheriff’s sale, as Pramco did with the twelve other parcels of real estate, and retain the proceeds from the sale.

Id. at 14.  The Court of Appeals relied, in part, on the landmark Indiana Supreme Court decision in Skendzel v. Marshall, 301 N.E.2d 641 (Ind. 1973) concerning forfeiture/land sale contracts. 

Fair to the lender?  The mortgage Pramco sought to foreclose had been recorded before the land contract, had never been released and had remained unpaid.  Had the competing lien been another mortgage, Pramco would have prevailed.  Land contracts, however, are treated differently in Indiana, and one must remember that foreclosure actions “are essentially equitable.”  Id. at 11.  When trial courts make decisions with regard to equitable remedies (generally, remedies other than money damages), they are not compelled to strictly follow particular rules of law but rather have great latitude to promote fairness and justice.  (Mortgage foreclosure actions seek an equitable court order to sell real estate to satisfy a debt.)  Lenders thus may not always get what they want or perhaps even deserve.  This is particularly true in Indiana when there is a collision of interests between a mortgage holder and a land contract vendee.