Secured Lender Loses Mortgage Due to Indiana Tax Sale

I previously addressed the pitfalls facing mortgage lenders when their borrowers fail to pay real estate taxes:  see, 11/16/10 and 12/30/11.  Iemma v. JPMorgan, 992 N.E.2d 732 (Ind. Ct. App. 2013) is a recent Court of Appeals decision that upheld a tax sale and thus terminated a lender’s mortgage. 

The dispute.  The fundamental question in Iemma was whether the tax deed issued to the tax sale purchaser (“LRB”) should have been set aside due to LRB’s failure to properly notify the senior mortgagee, Chase, who was the successor-by-merger to Bank One-Merrillville (“BO-M”), the mortgagee identified on the recorded mortgage.  Chase filed an action to set aside the tax deed.  LRB’s defense to Chase’s case was two-fold:  (1) Chase was not entitled to statutory notice because its status as a mortgagee was not of record and (2) LRB’s mailing of notice to BO-M complied with the relevant notice statutes. 

Notice statutes.  The Court first examined whether LRB complied with the tax sale notice statutes.  In connection with LRB’s proceedings for a tax deed, its title search found an unreleased mortgage for the subject real estate in favor of BO-M at an address in Merrillville.  By law, BO-M was entitled to notice of the sale.  But LRB’s notices sent to BO-M at that address were returned as undeliverable.  LRB’s title search also disclosed Chase’s interests in the real estate by virtue of a separate foreclosure suit it had filed.  LRB sent the tax sale notices to Chase’s counsel in the foreclosure action, and the notices were delivered and received by Chase’s counsel, who in turn communicated the notices to their client, Chase.  The Court basically held that this method of notice complied with the Indiana statutes.  Candidly, and respectfully, I do not fully understand the bases of the Court’s conclusion on this particular point because LRB did not, in my view, comply with the technical requirements of the notice statutes.  Neither BO-M (non-existent) nor Chase received any direct notice.  The real rationale behind the Court’s decision, in my opinion, follows.

Due process.  The Court next examined whether LRB complied with constitutional due process, and the opinion turned upon an interpretation of Sawmill, about which I wrote on 12/14/12.  Again, LRB sent tax sale notices to Chase through its counsel actively engaged in an existing foreclosure suit that dealt with the subject real estate.  The Court felt this was enough:  “LRB gave notice to Chase Bank’s counsel, counsel received the notice and passed it along to Chase Bank, and Chase Bank thereafter sat on its rights until after the tax deeds were issued.”  The Court went on to state that notice, in tax sale matters, is required by statute, not Indiana’s trial rules, meaning that service of process/summons rules are not applicable:

Such notice can be achieved by yard signs, newspaper notices, and notices on doors; certainly, notice through counsel representing Chase’s property rights on the property is sufficient.  More importantly, the issue is not Chase’s actual knowledge; rather, the issue is whether LRB gave notice under the circumstances of this case in a manner reasonably calculated to inform Chase of the pending loss of its interest in the two lots . . ..  Under the particularities and peculiarities of this case, LRB has done so.

This was a tough decision for the lender and seemingly a close call.  The compelling factor was that Chase, through its lawyers, received actual notice of the tax sale.  If, as a mortgagee or foreclosure counsel, you receive tax sale notices, you need to take action.  If you don’t, your mortgage could be extinguished.