Equitable subrogation law, as it relates to mortgage foreclosure actions, continues to evolve in Indiana. On April 28th, the Court of Appeals issued Neu v. Gibson, 2009 Ind. App. LEXIS 746 (Ind. Ct. App. 2009) (.pdf). The 2009 opinion follows the May 30, 2007 opinion from the same case, about which I posted on June 21, 2007. The latest decision educates secured lenders on the amount of, and ability to enforce, an equitable subrogation lien. The case specifically addresses whether interest/attorney’s fees can be recovered as a part of the lien and whether the lien holder is entitled to a sheriff’s sale.
Who was involved and when.
Irwin – In 2004, Irwin loaned $507k to Nowak, which loan was secured by a first mortgage on Nowak’s residence.
Nowak – Later in 2004, Nowak bought Gibson’s business with a $350k promissory note, secured by a second mortgage on Nowak’s residence.
Gibson – Second mortgagee on Nowak’s residence.
Neu – In 2005, Neu purchased Nowak’s residence, without Gibson’s knowledge, for $595k; Neu borrowed $200k from Wells Fargo, secured by a mortgage, and used $395K of Neu’s own money. The transaction resulted in the pay off of the Irwin mortgage.
Wells Fargo – Made a $200k mortgage loan to Neu used to buy Nowak’s residence and to pay off the Irwin mortgage.
The problem. In 2005, Nowak defaulted on the promissory note and mortgage granted to Gibson. A few months later, Nowak filed bankruptcy. So, Gibson’s only source of recovery was the Nowak real estate. But the title company, in connection with the 2005 Nowak/Neu closing, missed Gibson’s second mortgage. My June 21, 2007 post talks about the Court’s previous ruling that Gibson’s mortgage was subordinate to the equitable lien of Neu and Wells Fargo. While the 2007 Neu v. Gibson opinion dealt with priority, the 2009 appeal involved the remedies available to an equitable lien holder. Neu and Wells Fargo filed a motion to establish the amount of their equitable lien and to sell the real estate by sheriff’s sale to satisfy their lien.
Fees. Neu and Wells Fargo contended that they should be able to recover, as part of their equitable subrogation lien, interest and attorney’s fees. Remember the Irwin mortgage had been paid in full and discharged. “Thus, any default under the Irwin mortgage by Nowak was cured when Nowak repaid the loan from Irwin in full in connection with the sale to [Neu].” Wells Fargo, as the new lender, was subrogated to the lien of the Irwin mortgage “only as security for Wells Fargo’s debt owed by [Neu] and not as security for the debt owed by Nowak . . ..” Because neither Neu nor Wells Fargo succeeded to the contractual rights of the Irwin mortgage, they were not entitled to interest or attorney’s fees stemming from the Irwin mortgage. It stands to reason that late charges and other contractually-based damages also would not be recoverable.
Interest. The Court denied the attorney’s fees claim and the claim for mortgage interest. Nevertheless, the Court concluded that some interest can be recovered, which should be calculated on the post-judgment statutory rate (generally, 8%) “from the date of their payoff of the Irwin Mortgage.” See, 12/18/07 post.
Sheriff’s Sale. Neu and Wells Fargo asserted that they should be permitted to request a sheriff’s sale of the real estate, and they cited to Indiana’s quiet title statute, Ind. Code § 32-30-2-20. The Court concluded that Neu and Wells Fargo were indeed permitted to request a sheriff’s sale to enforce their equitable lien. A sheriff’s sale likely would extinguish Gibson’s mortgage lien and net no proceeds for Gibson. Rightly or wrongly, the two Neu v. Gibson opinions cut severely against the financial interests of junior mortgagees overlooked by title companies upon refinancing or a subsequent sale.
The Neu case helps teach us about the rights and remedies of a party holding an equitable subrogation lien. Although issues involving equitable subrogation are relatively rare in the commercial foreclosure context, secured lenders and their counsel practicing in Indiana certainly should be aware that the doctrine exists.