Note Sale Will Not Release Guarantor
Defective Notary Does Not Mean Defective Mortgage

Full Faith And Credit: Indiana Foreclosure’s Die Was Cast By Kentucky Judgment

Lesson.  If, as a lender, you have a promissory note (or notes) secured by mortgages in two (or more) states, you should only be required to litigate the note default and damages claims in one state.  Although you still must open a subsequent case in Indiana to obtain a decree of foreclosure, you should not have to incur the time and expense of a “do-over” to adjudicate the merits of the underlying promissory note (or guaranty) issues. 

Case Cite.  Setree vs. River City Bank, 10 N.E.3d 30 (Ind. Ct. App. 2014).

Legal Issue.  Whether principles of full faith and credit required the Indiana trial court to consider a Kentucky judgment res judicata.  A sub-issue was whether the Kentucky judgment had any influence in the Indiana foreclosure action, which involved a property separate from that which was the subject of the Kentucky action. 

Vital Facts.  In Setree, the borrowers executed promissory notes in favor of the lender, which notes were secured by mortgages on real estate in both Indiana and Kentucky.  The lenders claimed the borrowers defaulted under the notes.  In a foreclosure proceeding in the state of Kentucky, the judge found the borrowers to be in default under a note that was secured by the Indiana mortgage.  Following the Kentucky ruling, the lender, in the Indiana action, sought to foreclose on the Indiana property.  The Indiana trial court granted the lender’s summary judgment motion and concluded, in part, that, based upon full faith and credit principles, res judicata prevented the relitigation of the borrowers’ defaults, which the Kentucky court previously decided. 

Procedural History.  Setree arose out of the borrowers’ appeal of the trial court’s summary judgment in favor of the lender.

Key Rules.  The United States Constitute requires “full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state.”  Indiana codified this principle at Ind. Code § 34-39-4-3, which provides that records and judicial proceedings from courts in other states “shall have full faith and credit given to them in any court in Indiana as by law or usage they have in the courts in which they originated.” 

The one exception to this rule, is that a foreign judgment may be open to collateral attack “for want of jurisdiction.”  Before Indiana is bound by a foreign judgment, it may inquire as to the jurisdictional basis for the original judgment because, if the original court did not have jurisdiction over the subject matter or the parties, “full faith and credit need not be given.”  (Jurisdiction was a non-issue in Setree.)

The doctrine of res judicata is designed to prevent relitigation of the same issues in a subsequent case.  To apply, there must be (1) an identity of the parties between the two actions, (2) an identity of the two causes of action, and (3) the prior action must have been decided on the merits.

Holding.  The Indiana Court of Appeals resolved that it must grant full faith and credit to the Kentucky order.  The Court held that, although the Kentucky case concerned different mortgages and different property, the trial courts in both states litigated the same issues between the same parties, including specifically whether the borrowers were in default.  Therefore, “granting the Kentucky judgments full faith and credit, we are precluded from addressing the [borrowers’] claim [that there was no default].” 

Policy/Rationale.  The Setree opinion did not delve into policy.  My understanding has always been that these rules are rooted in principles of judicial economy or, in other words, are to save the court system and the parties time and money. 

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