Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?
Indiana State Courts Cannot Modify (Cram Down) A Mortgage

Equitable Subrogation Not Limited To Lending Institutions

Indiana’s doctrine of equitable subrogation typically comes into play when secured lenders, during the foreclosure process, learn that a prior mortgage was not released as it should have been.  The title picture will unexpectedly show a lender’s mortgage to be subordinate to an older mortgage.  As such, a priority dispute may arise.  Equitable subrogation, if applicable, helps solve the title problem.  To learn more, please peruse my prior posts under the category of equitable subrogation to your right.

Scope.  Last year in Millikan v. Eifrid, 968 N.E.2d 243 (Ind. Ct. App. 2013), the Indiana Court of Appeals illustrated how the doctrine of equitable subrogation can prevent a windfall and protect senior lenders and BFPs.  As with many of these equitable subrogation cases, the facts of Millikan are very dense and, for purposes of this post, not terribly important.  The primary reason to discuss Millikan is because the Court held that the doctrine is not limited to banks or commercial lending institutions. 

Contention.  In Millikan, the prior lienholder contended that equitable subrogation applies only to lending institutions and should not have protected Mr. Eifrid, an individual.  The Court disagreed: 

We note that while Millikan suggests that the doctrine of equitable subrogation should not apply because Eifrid is not a lending institution, he directs us to no authority for that proposition, and we have found none.  Indeed, equitable subrogation is a highly favored doctrine that demands liberal application, and nothing in Nally commands that the doctrine should apply only to a lending institution.  Even more compelling, we must conclude that an innocent bona fide purchaser, such as Eifrid, should be afforded the same, if not greater, protection than is afforded to a lending institution such as Countrywide.

Statute.  The competing lienholder’s argument in Millikan may have stemmed from language in Indiana’s equitable subrogation statute, Ind. Code § 32-29-1-11(d), which states:

(d) Except for those instances involving liens defined in
IC 32-28-3-1, a mortgagee seeking equitable subrogation with respect to a lien may not be denied equitable subrogation solely because:
 (1) the mortgagee:
  (A) is engaged in the business of lending….

Perhaps one could argue that section (d)(1)(A) means that Indiana’s General Assembly intended for equitable subrogation to apply only to a party engaged in the business of lending (such as a bank), but Millikan definitively holds otherwise.  As such, private equity firms or other “average Joe” investors holding mortgages have the remedy available to them – as they should.