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In Indiana, Name MERS In Foreclosure Suit If Mortgage Does

This follows-up last week’s post regarding the Citimortgage opinion, which circumvented two foreclosure statutes that supported a conclusion opposite of the one the Court reached.  The result preserved the lien rights of the purported senior mortgagee, Citimortgage, even though Citimortgage did not record its assignment of mortgage until months after the subject real estate had been sold at a sheriff’s sale.  How?  Citimortgage had an “ace in the hole” – Mortgage Electronic Registration Systems, Inc. (“MERS”).

Section 1 problem.  The Court wrestled with the applicability of Ind. Code § 32-29-8-1 (“Section 1”), which governs who should be named when a plaintiff seeks to extinguish a mortgage.  That statute currently identifies two options as to whom to sue:

If a suit is brought to foreclose a mortgage, the [1] mortgagee or an [2] assignee shown on the record to hold an interest in the mortgage shall be named as a defendant.

Citimortgage argued that MERS was statutorily entitled to notice under that provision as a “mortgagee.”  The Court stated “that is a bridge too far.”  The Court found that MERS was neither the mortgagee itself nor the assignee of the mortgage.  Yet Citimortgage prevailed.   

Section 1 solution.  The Court plowed new ground by determining that the mortgage designated MERS as the agent of Citimortgage and that MERS as agent was entitled to notice:

Ultimately, we do not believe that the authors of the original version of [Indiana Code § 32-29-8-1], writing in 1877, would have understood the term “mortgagee” to include an entity like MERS that neither holds title to the note nor enjoys a right of repayment.  Thus, our decision here should not be taken to mean that MERS is a “mortgagee” as the term is used in Indiana Code § 32-29-8-1.  All we hold today is that because Citimortgage never received proper notice of the foreclosure proceeding, it lay beyond the jurisdiction of the trial court, and the default judgment is thus void as to Citimortgage’s interest in the Madison County property. 

One might interpret Citimortgage to say that Section 1 includes a third option as to whom to sue:  a nominee (agent) of the mortgagee.

Section 2 problem.  Citimortgage avoided the impact of I.C. § 32-29-8-2(1) (“Section 2”), which states that “a person who is assigned a mortgage and fails to have the assignment properly placed on the mortgage record . . . is bound by the court’s judgment or decree as if the person were a party to the suit.”  At some point, Citimortgage apparently became the assignee of Irwin but evidently did not record the assignment until after ReCasa obtained a judgment (and flipped the house to Sanders).  Yet Citimortgage prevailed. 

Section 2 solution.  The Citimortgage decision carves out an exception to the recording requirement in Section 2 when the mortgage identifies MERS.  The plaintiff must name MERS “as nominee” of the identified lender.  The Court’s rationale appears to be based upon the premise that MERS - identified in the mortgage - is shown on the record to hold an interest in the mortgage.

Statutory amendments coming?  In its opinion, the Court poked Indiana’s legislature about changing I.C. § 32-29-8:

We note in closing that it is both difficult and undesirable to apply such superannuated statues to the modern mortgage industry.  The drafters of the original 1877 version of Indiana Code § 32-29-8-1 envisioned a drama for two, or at most three, actors:  Borrower, Mortgagee, and possibly Assignee.  They could not have imagined our present-day multi-trillion-dollar international mortgage market.  The statute that they drafted, and under which Indiana mortgage transactions still take place, thus leaves unaddressed many issues important to contemporary practice.  We recognize that the General Assembly may soon find it necessary to modernize the statutory script to accommodate this new and larger cast of characters.

How the Indiana General Assembly will tweak Sections 1 or 2, if at all, is guesswork.  Perhaps MERS itself will be written into the statute, or maybe the statute will define “nominee” and add such a party as an option for whom to sue.  Something should be done, and Section 3 should be included in any amendment. 

Name MERS.  What we do know in the wake of Citimortgage is that, under Indiana law, MERS “as nominee” is the actual mortgagee’s agent for service of process.  When a mortgage identifies MERS “as nominee,” the plaintiff creditor must name MERS as a defendant in any foreclosure action and serve MERS with a summons and complaint.  To be safe, both the identified lender and MERS should be named in the suit. 

Next week I’ll address what some may feel to be a flaw with the Court’s ultimate finding.

Indiana Supreme Court Concludes That MERS Is Merely The Agent Of The Actual Mortgagee

What is Mortgage Electronic Registration Systems, Inc. (“MERS”)?  More specifically, what does mortgage language identifying MERS “as nominee” mean?  The Indiana Supreme Court in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012) dealt with those and other questions surrounding the role of MERS in the foreclosure world. 

Setting the table.  As noted in my prior posts about Citimortgage, junior mortgagee ReCasa initiated a foreclosure action and named only Irwin, the purported senior mortgagee, as a defendant.  The language in the subject mortgage stated that Barabas, the mortgagor, granted the mortgage to MERS “as nominee” of Irwin, identified as the lender.  Upon being sued to answer as to its interests in the subject real estate, Irwin quickly filed a disclaimer of interest, and the court dismissed Irwin from the case.  The trial court later entered judgment for ReCasa, which acquired the real estate at the sheriff’s sale.  ReCasa then sold the real estate to a third party, Sanders.  A month later, Citimortgage filed a motion to intervene in the action and asked the trial court to set aside the judgment and sheriff’s sale. 

Defining MERS.  In its rationale, the Court came to terms with the reality that “about 60% of the country’s residential mortgages are recorded in the name of MERS rather than in the name of the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.”  The Court pronounced that “a MERS member bank appoints MERS as its agent for service of process in any foreclosure proceeding on a property for which MERS holds the mortgage.”  The Court found that:

the relationship between Citimortgage and MERS was one of principal and agent.  Clearly, one of the primary purposes of that agency relationship was to facilitate efficient service of process.  . . .  By designating MERS as an agent for service of process, as Irwin did in the Barabas mortgage, lenders can have their cake and eat it too; they free themselves from burdensome, expensive recording requirements but still receive notice when another lienholder seeks to foreclose on a property in which they have a security interest.

Senior mortgage survives.  The core question in Citimortgage was whether ReCasa’s failure to name MERS as a defendant impacted the rights, if any, of Citimortgage, which at some point appears to have acquired the senior mortgage.  Although the Court of Appeals affirmed the trial court’s decision in favor of ReCasa, the Supreme Court ruled for Citimortgage.  ReCasa’s failure to name MERS as a defendant or, more specifically, failure to serve MERS with a summons and complaint, prevented ReCasa from terminating the senior mortgage and leapfrogging into the first lien position.  In short, the judgment was void as to Citimortgage. 

Next week, I’ll explain how the Court in Citimortgage circumvented two foreclosure statutes that clearly supported ReCasa’s position. 

Post-Sale Redemption Mystery Unsolved

Last week, the Indiana Supreme Court said much about Mortgage Electronic Registrations Systems, Inc. (“MERS”) in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  The Court also said a lot about who should receive notice of a foreclosure proceeding.  I hope to discuss those matters next week. 

No comment.  Just as important was what Citimortgage didn’t say.  I’m referring to the issue of the enigmatic post-sheriff’s sale statutory right of redemption found at Ind. Code § 32-29-8-3 entitled “Good faith purchaser at judicial sale; right to redeem of assignee or transferee not made a party.”  For background, please click on my August 2 and November 1, 2011 posts regarding Citimortgage.  Subsequently, the Indiana General Assembly amended portions of Section 3, but as I wrote in March of this year the obscure one-year redemption language remained untouched by the legislature.  Here is the statute, and the key language is underlined: 

     Sec. 3. A person who:
        (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
        (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
            (A) an assignment that is not of record; or
            (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

When the Supreme Court accepted transfer in Citimortgage, many thought the Court would interpret the redemption language in Section 3.  No such luck.  The Court  expressed “no opinion as to whether Citimortgage had the right to redeem the property under [Section 3].”   This is because the Court decided the case on other grounds.  The opinion provided no help with the confusion and uncertainty created by the analysis of the Court of Appeals in Citimortgage, which precedent has now been vacated.

Status.  It’s my understanding Indiana’s legislature may consider clearing up I.C. § 32-29-8-3 in the 2013 session.  For now, while Indiana law is well settled that a sheriff’s sale terminates the right of redemption for borrowers/mortgagors, the law remains unclear as to whether there exists some kind of post-sheriff’s sale right of redemption for mortgage assignees whose assignments were not recorded before the filing of the foreclosure complaint.  As I often say, foreclosing lenders should invest in a foreclosure (title) commitment, and purchasers at sheriff’s sales should buy title insurance. 

NOTE:  In the 2013 session, Indiana's General Assembly deleted much of Section 3(2)(B) so as to resolve the matter once and for all.  My post

Indiana Supreme Court Reverses Trial Court In Landmark Case Involving MERS

Yesterday, the Indiana Supreme Court issued its opinion in Citimortgage v. BarabasClick here to read the case.  I plan on writing about the decision next week and following-up on my 2011 posts regarding the Indiana Court of Appeals' rulings in the dispute:  August 2/time bar, August 10/straw man and November 1/redemption

By rule, the two Court of Appeals' Citimortgage opinions have been vacated in their entirety.  In other words, they are no longer binding precedent in Indiana.  Thus yesterday's decision to a large extent mooted my 2011 posts, particularly because the Supreme Court did not adopt the Court of Appeals conclusions or rationale. 

By way of a preview, MERS appears to be alive and well in Indiana.  The Section 3 post-judgment redemption right, however, may not be.  The Court expressed "no opinion as to whether Citimortage had the right to redeem the property under that statute."  More to come....