Indiana Mortgage Foreclosure Sales: Buyers Beware
May 07, 2008
Do junior lenders/mortgagees need to disclose, in the statutory notice of sheriff’s sale, that the real estate is being sold subject to a senior mortgage? On April 22, 2008, the Indiana Court of Appeals in Indi Investments v. Credit Union 1, 2008 Ind. App. LEXIS 793 (Ind. Ct. App. 2008) said no (Indi.pdf). Indiana law generally places the onus on buyers at sheriff’s sales to bid with their eyes wide open.
Those involved. Indi Investments, LLC purchased the property at a sheriff’s sale following a mortgage foreclosure action brought by Credit Union 1, which held a second mortgage. Waterfield Mortgage held the first mortgage on the property but did not foreclose.
Procedural background. Indi filed suit to foreclose its second mortgage and ultimately obtained a judgment, which ordered a sheriff’s sale of the property subject to Waterfield’s first mortgage. Indi purchased the property and obtained a sheriff’s deed that Indi recorded on August 18, 2006. Despite the fact that the sheriff’s deed contained language indicating the property had been acquired subject to Westfield’s mortgage, it was not until June, 2007 that Indi filed a petition to set aside the sheriff’s sale. Indi generally claimed it didn’t know about Waterfield’s mortgage and wanted to unwind the sale. The trial court and the Court of Appeals refused to set aside the sale, however.
Ignorance is not bliss. Indi asserted a number of arguments, all of which centered on its claim that it lacked knowledge of the Waterfield mortgage when it purchased the property. Indiana requires the publication of a notice of sale in advance of sheriff’s sales. In this case, the notice did not mention Waterfield or its senior mortgage. At the sale itself, nothing was disclosed with regard to the Waterfield mortgage. Although the language in the sheriff’s deed identified the Waterfield mortgage, Indi claimed that it “was not immediately aware of the content of the Sheriff’s Deed or the legal impact of the statement.” The Waterfield mortgage, however, had been properly recorded and was in title. What's more, the trial court’s judgment stated that the property was to be sold subject to Waterfield’s interests. In other words, there were at least two places for Indi to have discovered, pre-sale, that Waterfield held a mortgage on the property: the county recorder’s office and the trial court.
Technical arguments rejected. Should Credit Union 1 have disclosed in the notice of sale that the property was being sold subject to the Waterfield mortgage? No. Ind. Code § 32-29-7-3 governs notices of mortgage foreclosure sales and does not require the notice to contain information concerning senior mortgages. Did the judgment mandate that information related to Waterfield’s mortgage be included in the notice? No. The judgment only required the property to be sold subject to the mortgage and did not require any such language in the notice of sale. Should the sale have been set aside because Indi was unaware of the Waterfield mortgage? Not in this case. Generally, there is no warranty in judicial sales in Indiana. The doctrine of caveat emptor (buyer beware) applies “with all its force” to sales made by virtue of an execution.
Indi not a bona fide purchaser. Indiana has an exception to the caveat emptor rule, however. Indiana cases have held that buyers in good faith and without notice are protected as bona fide purchasers for valuable consideration against prior equities and unrecorded deeds. Indiana defines a “bona fide purchaser” as “one who is given value and acted in good faith without actual or constructive notice.” Constructive notice is provided when a mortgage is properly acknowledged and placed in the record as required by statute. Actual notice is when notice has been directly and personally given to the person to be notified, and actual notice may be implied or inferred “from the fact that the person charged had means of obtaining knowledge which he did not use.” The Court of Appeals concluded that Indi had the means of obtaining information regarding the Waterfield mortgage. First, it could have performed a title search. Second, it could have reviewed the trial court’s file. Indi evidently did neither. As such, “Indi Investments is charged with actual notice of the Waterfield mortgage and, consequently, is not a bona fide purchaser.”
Lender protected. While it may not be feasible or cost effective for a third party to order a title insurance policy commitment before bidding at a sheriff’s sale, a title search would have informed Indi of the Waterfield mortgage. An easier and cheaper method for Indi to protect itself would have been to visit the court and review the judgment. By doing neither, Indi assumed the risk of acquiring the property subject to any liens that were not wiped out in the foreclosure action. Junior mortgagees that struggle with the decision of whether to publicize, in the notice of sheriff’s sale, that the property is being sold subject to a senior mortgage can take comfort in the Indi decision. The Court of Appeals, based largely upon I.C. § 32-29-7-3, confirms that such notice need not be given. Lenders generally are protected by the procedures applicable to this scenario. Sheriff’s sale buyers are not.