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Factual Questions Remain In Indiana Fraudulent Transfer Case

No Answer To Complaint = No Lien On Property

My June 18 post theorized that summary judgment may be preferable to a default judgment in commercial foreclosure proceedings.  The May 23 decision by the Court of Appeals in Irmscher Suppliers v. Capital Crossing, 887 N.E.2d 97 (Ind. Ct. App. 2008) (Irmscher.pdf) supports the notion that an Ind. Trial Rule 56 motion for summary judgment is appropriate against a party eligible to be defaulted.  Specifically, Irmscher illustrates how a competing lien holder’s failure to answer another lien holder’s complaint can result in a summary judgment that negates the competing lien. 

Capital Crossing’s complaint.  Irmscher, a contractor, recorded a mechanic’s lien on the subject property on September 25, 2006.  Capital Crossing, a mortgage lender, recorded a mortgage lien on the subject property on March 6, 2006.  Part of the Court’s opinion deals with the fact that Irmscher and Capital Crossing had each filed their own foreclosure lawsuits within a few weeks of one another.  That procedural wrangling is not particularly relevant to this blog, however.  What is relevant is that, in the suit filed by Capital Crossing, Capital Crossing named Irmscher as a defendant to answer as to its interest in the real estate.  Because Capital Crossing recorded its mortgage before Irmscher recorded its mechanic’s lien, Capital Crossing alleged that the mechanic’s lien was subject and subordinate to the mortgage.  (That may or may not be true – see my July 3, 2007 post “Construction Mortgage vs. Mechanic’s Lien:  Win, Lose or Draw?” and my follow-up post “Lien Priority Follow-up:  The Operative Statutes.”  As you’ll see, we’ll never know who was right in Irmscher.) 

Irmscher’s response, or lack thereof.  Counsel for Irmscher appeared in Capital Crossing’s foreclosure case, but Irmscher never filed an answer to the complaint.  Capital Crossing filed a motion for summary judgment seeking, among other things, a determination that its mortgage lien was a first lien on the subject real estate.  (This is the tactic discussed in my June 18 post.)  Although Irmscher filed a brief in opposition to the motion and a designation of evidence, the Court did not address any evidence in the opinion.  The Court merely mentioned Irmscher’s statement in its brief that the case should be decided in the separate foreclosure action filed by Irmscher.  In any event, counsel for Irmscher did not appear at the hearing on Capital Crossing’s summary judgment motion.  The trial court entered a judgment of foreclosure and decree of sale, finding that Irmscher had no interest in the subject property.  Irmscher appealed. 

Silence equals admission.  On appeal, Irmscher contended that the trial court erred when it found Irmscher had no interest in the real estate.  No so fast, said the Court of Appeals:  “Irmscher did not file an answer to Capital Crossing’s amended complaint and therefore admitted, at the very least, to the superiority of Capital Crossing’s mortgage.”  The Court cited an Indiana Supreme Court decision from 1886:

As applicable however, to a suit to foreclose a mortgage, and other kindred suits in the nature of a proceeding in rem, where a party is made a defendant to answer as to his supposed or possible, but unknown or undefined, interest in the property, we think that, as against him, a default ought to be construed as an admission that, at the time he failed to appear as required, he had no interest in the property in question, and hence as conclusive of any prior claim of interest or title adverse to the plaintiff. 

Ouch.  When a plaintiff lien holder files an action and asserts facts placing the validity, priority and amount of a mortgage lien in issue, a named defendant must file an answer to assert whatever interest it has in the property.  If it fails to do so, the lien of the defendant will be extinguished as a matter of law.  In Irmscher, the Court of Appeals held “in this case, although Irmscher’s counsel entered an appearance, Irmscher failed to file an answer asserting whatever interest it had in the property.  As such, we conclude that the trial court did not err in finding that Irmscher had no interest in the property.” 

Today’s lesson.  The Irmscher opinion is useful to both junior and senior lenders.  If you have a junior lien and are named as a defendant in a senior lien holder’s lawsuit, you need to appear in the action and answer the complaint to assert your interest in the subject real estate.  If you don’t, you can kiss your lien goodbye.  On the flip side, in instances where a defendant has not answered the complaint, senior lien holders involved in Indiana enforcement actions can cite to Irmscher in their summary judgment briefs to persuade the trial court that the defendant’s lien should be extinguished as a matter of law.