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To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions

Secured lenders struggling with the question of whether tenants must be parties to Indiana commercial mortgage foreclosure suits have been given a fairly definitive answer by the Indiana Supreme Court in Myers v. Leedy, 2009 Ind. LEXIS 1370 (Ind. 2009) (.pdf).  Myers actually involved the enforcement of a land contract, not a mortgage, but to the chagrin of Chief Justice Shephard, who concurred in the result, the Myers opinion applies with equal vigor to mortgage foreclosures.  In most instances, if a business decision is made to end a post-mortgage leasing relationship, the tenant in possession should be included in the litigation.

Myers particulars.  In August of 2002, two individuals entered into a land contract for the purchase of farmland and had a memorandum of that contract recorded.  In 2004, the land contract vendee (“buyer”) entered into a written lease with a third party to rent the tillable soil.  That third party (“tenant”) farmed the land in 2004, and the owner/land contract vendor (“seller”) had actual knowledge of this.  Leases between the same parties for the same purpose were entered into in 2005 and in 2006, again with the actual knowledge of the seller.  (The leases were not recorded, however.)

Proceedings.  In December of 2004, the seller sued the buyer for breach of the land contract but did not name the tenant as a defendant.  On May 17, 2006, the trial court ruled that the buyer had defaulted under the land contract and ordered the forfeiture of the buyer’s interest in the real estate.  On May 20, 2006, pursuant to the previously-existing lease, the tenant began farming the property.  The next day, the seller ordered the tenant off the property, and the tenant never returned.  Later, the tenant sued the seller because the seller prohibited the tenant from farming the property in 2006. 

The question.  The Myers case presented a matter of first impression: 

Whether a tenant’s leasehold interest in property survives a land contract vendee’s forfeiture when the tenant was not made a party to the forfeiture action and where the vendor had actual knowledge that the tenant was in possession of the property.

To answer that question, the Court examined whether a tenancy survives a foreclosure action.  The Court explained that, for purposes of its holding, there was no reason for treating forfeiture and foreclosure cases differently. 

Test for inclusion.  The Court in Myers set out the following test for inclusion of a tenant in a foreclosure action:

Where at the time a mortgagee files suit for foreclosure it knows, or upon reasonable diligence should have known, that a tenant is in possession of the property, the tenant’s leasehold interest survives the foreclosure action unless the tenant is made a party to that action.

The Court noted that the “weight of authority” provides that “a lease is terminated by the foreclosure of a prior mortgage if, and only if, the tenants are made parties to the foreclosure proceedings.” 

An aside.  Please note that the subject lease came into existence after the subject land contract.  Thus the Myers case speaks to post-mortgage leases, not leases executed before the recordation of the mortgage.  It is my understanding that, in Indiana, a foreclosing mortgagee generally will acquire the real estate collateral subject to any preexisting, recorded leases, regardless of whether the tenants are defendants in the action.  Whether a foreclosing mortgagee would acquire the property subject to any preexisting unrecorded leases is a post topic for another day . . ..)

Read all docs.  Footnote 2 on pp. 5-6 of the Court’s opinion acknowledges that the rights of the parties may otherwise be defined or governed by contract or subordinated without the need for joinder of the tenant.

Actual knowledge.  In Myers, the evidence was not in dispute that the seller had actual knowledge that the tenant was farming the subject property at the time he filed the breach of contract action against the buyer.  Because the seller failed to join the tenant in the action, the subsequent forfeiture of the buyer’s interest in the property did not extinguish the tenant’s leasehold interest.

I’m not finished with Myers … and will be posting one or two more articles based upon this significant opinion rendered by the Indiana Supreme Court….

Sheriff's Deeds In Marion County (Indianapolis): One-Page Rule

On March 7, 2010, I provided a Sheriff's Sale Checklist - Marion County Illustration.  As noted, one of a foreclosing lender's tasks is to tender a sheriff's deed (click for local form) to the sheriff's office to perfect the sale bid.  Last August, the Marion County Sheriff's Office revised some of its sale rules and requirements.  Here is a link to the office's site on that issue:  Real Estate Rules for Attorneys.

Rules.  With respect to the sheriff's deed form, the Marion County Sheriff's website says:  

Notices, deeds clerk returns and bid forms must be on 8 ½” by 11” paper.  All forms must have the Sheriff’s file number in the upper right corner.  Documents without the file number in the upper right corner will NOT be processed.  All forms MUST be completely filled out with accurate information.  Deeds must be one (1) page.  If second page is needed, the legal description may be an attachment, BUT the street address and parcel number must be spelled out in the area where deed indicates legal description is attached.  Deeds without the signature/notary page on front will NOT BE SIGNED!

As noted, deeds should be one page.

Rejection.  In the past, absent a very short legal description of the property, our firm routinely tendered sheriff's deeds with the legal description attached as an exhibit.  At a sale last month, for the first time the sheriff's office rejected our deed and required us to provide another deed with the legal description contained on its face.  The one-page rule was enforced.  (Lesson learned.) 

Rationale.  In speaking with the sheriff's office, I was told that the primary reason for the one-page requirement is to ensure that legal descriptions don't get misplaced or lost.  The goal is to protect the integrity of the deed.  Since Marion County processes 400-600 deeds for each month's sale, the one-page guideline is understandable.

Exception?  In order to squeeze our legal on last month's deed, my secretary had to work some magic with fonts, margins, etc.  She got it done, and the sheriff evidently has accepted our revised deed.  But what if the legal simply is too long to insert into a one-page deed?  I'm informed by the sheriff's office that the incorporation of an exhibit will be acceptable in those instances.  The rules above support this, but note that the street address and parcel number must still be typed on the face of the deed. 

Plan and discuss.  In the end, common sense should and likely will prevail, but clearly the "default" (preferred) approach by the Marion County Sheriff is to limit the deed to one page, without any attached exhibits.  Because local rules, customs and practices prevail in each county, I recommend that you or your lawyer contact the county sheriff's offices in advance of your sales to ensure you are complying with sale details, such as the form of deed.  In the meantime, please email me or post a comment with regard to your experiences with attaching legal descriptions to sheriff's deeds in counties other than Marion, thanks.    

The Pesky Sales Disclosure Form - Marion County (Indianapolis) Update

I posted a sheriff's sale checklist on March 7, 2010, and I've written about the sales disclosure form (SDF) component to the sheriff's sale process previously.  The involvement and handling of SDF's in connection with the sheriff's sale of your real estate loan collateral continues to evolve.  Please remain mindful that local rules, customs and practices control.  To fully prepare for the sale, contact your county civil sheriff's office in advance.  

The Marion County Civil Sheriff's Office now requires that, before they will accept the SDF, it must first be submitted and completed on line.  Here is a link to the site for submission:  SDF Link.  I'm also providing a .pdf of a cheat sheet, with contact information, regarding this process:  SDF .pdf.  The plaintiff/mortgagee/bidder at the sheriff's sale must complete the SDF on line and then submit the printed form (with the auditor's fee check) to the sheriff's office at the time one submits the sale bid.  (This has something to do with the fact that the on line form, once printed, contains data in the upper right corner that shows the appropriate on line submission.)  Please note that the form itself will not be fully completed since the sheriff will need to execute it post-sale.  

Please email or post a comment if you or your foreclosure counsel have had a different experience.  I have not yet seen this on line requirement in other counties, but perhaps this is changing across the state.  As I've posted before, in other counties, including Marion County, a hard copy of the blank form could be completed and submitted to the sheriff.

Enough about SDF's -- I'm now going on a family vacation and will post something again during the week of June 14th, if not before....