One of the common themes on this blog has been the importance of obtaining title work in connection with an Indiana commercial mortgage foreclosure case. If you’re wondering why your foreclosure counsel recommends that you incur the expense of a title commitment and later premiums for a title insurance policy, keep reading.
Procedural context. Before the filing of the foreclosure complaint, certain steps should be undertaken to analyze the loan collateral, in this case the real estate. One such step is to determine priority in title. We strongly recommend that lenders order a foreclosure (title insurance policy) commitment. (Tip: If the lender has a prior title insurance policy related to the property, such as a lender’s policy, then you can save some expense simply by placing the order from the same company. Or, a separate title insurance company may provide a cheaper commitment faster based upon a prior policy.)
ID parties/priority. The commitment should be reviewed for purposes of determining all parties with an interest in the real estate and their relative priorities. I.C. § 32-29-9-1 articulates the necessary parties to be named in the suit. The provision essentially requires that the plaintiff name such necessary parties to the suit in the same manner in which the person or entity’s lien or claim appears on the public records of the county where the suit is brought. Service of summons upon such necessary parties is sufficient to make the court’s judgment binding as to those parties. In order for there to be clear title secured at the sheriff’s sale, all parties with a recorded interest in the real estate need to be named in the lawsuit to answer as to their interests. (Tip: Also review the commitment to ensure that the legal description of the collateral in the commitment matches the legal description in the mortgage.) An early priority determination will guide decisions as to settlement or workout negotiations, or whether to proceed with the foreclosure action in the first place.
Update title work. Normally, there will be a time gap between the date of the foreclosure commitment and the date of the filing of the complaint. Conceivably, interests in the subject real estate could arise in this gap period. For example, a mechanic’s lien could be filed, or the borrower could obtain a loan secured by a junior mortgage on the property. It is thus critical to update or “date down” the title insurance policy commitment after the complaint is filed. For more on this issue, see my December 21, 2006 post and House v. First American Title Company, 858 N.E.2d 640 (Ind. Ct. App. 2006), which held that a foreclosure action’s filing date is the “only relevant date used to determine the proper parties to a mortgage foreclosure.”
Amend complaint. Again, clear title cannot be obtained upon a sheriff’s sale unless all lien holders are named as defendants in the suit so that their interests can be foreclosed. Should the updated title work disclose new lien holders, then such parties need to be added to the case by filing an amended complaint. If no new interests are uncovered, then lenders can be comfortable proceeding with the original defendants named in the suit.
No bona fide purchaser. Third-parties who secure an interest in the mortgaged property after the filing of the foreclosure complaint do not need to be named as defendants in the action. Lenders need not continuously search title during the course of litigation and worry about adding new parties to their foreclosure complaint. “The only relevant date” is the foreclosure action’s commencement date – the day the lender filed the complaint. Here’s what I wrote on December 21, 2006, which is particularly relevant in the wake of my October 4, September 25 and May 28, 2009 posts that touch upon Indiana’s bona fide purchaser doctrine:
Any party obtaining an interest in the property after the filing of the action will not be considered a bona fide purchaser without notice and thus will be bound by the foreclosure as if named as a party defendant to the foreclosure action. (Such parties, upon learning of the suit, should intervene in the action to assert their rights to the property.)
Finish the job. Arguably, the secured lender’s ultimate goal in its mortgage foreclosure action is to acquire title to (repossess) the real estate collateral free and clear of all liens. This is why the commitment is important, as is the date down. Lenders and their counsel should not forget the final step, however. Once the lender obtains the sheriff’s deed (title) to the property, lenders are advised to purchase a title insurance (owner’s) policy. Certainly the premium can be expensive, but in most commercial foreclosure cases the benefits of being insured (as free and clear title holder) far outweigh the costs. For more insight into the wisdom of ordering an owner’s policy, please see my July 20, 2009 post.