What is the responsibility of an Indiana mortgagee (lender) vis-à-vis the condition of the mortgaged real estate? Is there a duty to keep the premises safe? The Indiana Court of Appeals in Erwin v. HSBC, 2013 Ind. App. LEXIS 11 (Ind. Ct. App. 2013) addressed those questions in a challenging case resolved through summary judgment.
Tragedy. Erwin is a very sad story. Lender held a mortgage on a home with an in-ground pool. In 2007, the owner (the mortgagor) filed a Chapter 7 bankruptcy case, and the lender began paying the real estate taxes and had the property inspected. In early 2008, during the pendency of the bankruptcy, the owner abandoned the real estate and notified the lender that it could have the home. Later in 2008, the pool and its cover became “openly dangerous” and in need of repair. One of the neighbors contacted the owner to complain. The owner, in turn, contacted the lender to inform it of the situation. On May 31, 2008, a five-year-old girl, who was spending the day at a nearby home, wandered away and drowned in the pool.
Mother’s contentions. The mother of the child filed suit against a number of parties, including the lender, for wrongful death (negligence). She asserted that the lender was a “mortgagee in possession” at the time of the drowning. She argued that the lender was in the best position to prevent the tragedy “and that public policy supports imposing a duty on [the lender] to protect the child from a danger of which [the lender] had actual knowledge.”
Premises liability law. Space does not permit a summary of Indiana premises liability law. For purposes of this post, the important point is that “only a party who possesses the premises owes a duty to persons coming onto the premises.” The outcome in Erwin hinged on whether the lender possessed the real estate. Although the owner in Erwin had abandoned the real estate and informed the lender of this, the lender did not act upon the owner’s unilateral actions by later occupying the real estate with the intent to control it. Further, knowledge of a danger alone is insufficient to impute liability. The Court said: “Mother must first establish that [the lender] had control of the property.”
“Mortgagee in possession.” Generally, in Indiana a mortgagee may be in possession of the mortgaged property and, under certain circumstances, may assume certain responsibilities concerning the real estate. But, as written here previously, the lender could not acquire legal ownership of the real estate until it was foreclosed upon. In Erwin, the lender had not filed a foreclosure suit. Importantly, a mortgagor cannot unilaterally transform a lender into a mortgagee in possession so as to transfer the mortgagor’s duties as possessor. In Erwin, the lender took no affirmative action to step in and take possession of the real estate after default and before the drowning. Although the mortgagor (owner) gave the lender the right to take possession of the abandoned property and secure the pool, that provision did “not equate to a duty to do so.”
Policy. The Court of Appeals affirmed the trial court’s summary judgment in favor of the lender. Here is part of the Court’s rationale:
While we understand Mother’s displeasure with the limbo in which untold numbers of vacant properties find themselves, the legislature is the place to assert her public policy arguments. On the current state of the law, a phone call such as [the owner’s] does not automatically transform the mortgagee into the possessor of the property. Rather, the alleged subsequent possessor must take some action to occupy the land with intent to control it. . . . Further, actions taken by a vendor/mortgagee to protect its financial investment, such as paying taxes and securing insurance, generally do not establish control over the property rising to the level of a possessor of the property.
Although the Court left open the possibility of mortgagee liability under a different set of facts, in Erwin the circumstances were clear.