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Breaches Of Pooling And Servicing Agreements Are Not A Defense To Foreclosures

Lesson.  If you are a borrower or a guarantor in Indiana, or are defending such parties in a contested mortgage foreclosure, defeating a motion for summary judgment on the basis of an alleged breach of a pooling and servicing agreement isn’t going to happen. 

Case cite.  Wilmington v. Bowling, 39 N.E.3d 395 (Ind. Ct. App. 2015).

Legal issue.  Whether the plaintiff/lender was the holder of the promissory note and entitled to enforce it.  In other words, did the lender have standing to sue the borrower?

Vital facts.  The lender, an assignee of a securitized mortgage loan, possessed the original note, which had been endorsed in blank.  The lender also had a complete chain of recorded assignments establishing who held the note at various times.  Nevertheless, the borrower found on the internet what he believed to be the applicable pooling and servicing agreement (PSA), which “reflects that the assignees of the mortgage and note were required to transfer possession by a special endorsement that must be reflected on an allonge.”  There was an absence of evidence of such an allonge and, as such, arguably there had been a breach of the PSA.   

Procedural history.  The trial court granted summary judgment for the lender on the standing issue, and the borrower appealed.

Key rules.  Generally, “only the parties to a contract … have rights under the contract.”  The exception is “where it can be demonstrated that the parties clearly intended to protect a third party by imposing an obligation on one of the contracting parties….”  The law has developed in the country, which law the Indiana Court of Appeals adopted in Wilmington, is that borrowers lack standing to (a) challenge the validity of mortgage securitization or (b) request a judicial determination that a loan assignment is invalid due to noncompliance with a PSA.     

Holding.  The evidence did not establish that the borrower was a party to the PSA.  The evidence also failed to show that there was an intent to protect the borrower as a third party such that he could enforce any obligation under the PSA.  The trial court properly found that the lender was entitled to enforce the note under Ind. Code 26-1-3.1-301.

Policy/rationale.  Parties to PSA’s typically are the certificate holders, a trustee, and a servicer.  Borrowers have no contractual privity with these parties.  Any breach of a PSA, and any damages arising out of such breach, are relevant only as between the parties that signed the PSA.  Alleged breaches do not inure to the benefit of borrowers (or guarantors), who only are in privity of contract with the lenders/mortgagees under the notes and mortgages (or guaranties) – not the securitization documents. 

Related posts. 


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4 love is the color
This place imparts (Paisley Park)
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Place in your heart
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Her husband was naughty
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He died without knowing forgiveness
And now she is sad, so sad
Maybe she'll come 2 the park
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And life won't be so bad
In Paisley Park


The girl on the seesaw is laughing
4 love is the color
This place imparts (Paisley Park)
Admission is easy, just say U
Believe and come 2 this
Place in your heart
Paisley Park is in your heart


See the man cry as the city
Condemns where he lives
Memories die but taxes
He'll still have 2 give
(who) Whoever said that elephants
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There aren't any rules
In Paisley Park


The girl on the seesaw is laughing
4 love is the color
This place imparts (Paisley Park)
Admission is easy, just say U
Believe and come 2 this
Place in your heart
Paisley Park is in your heart


The girl on the seesaw is laughing
4 love is the color
This place imparts (Paisley Park)
Admission is easy, just say U
Believe and come 2 this
Place in your heart
Paisley Park is in your heart


Your heart, your heart
Paisley Park
Your heart, your heart, your heart (sing, sing it)
Paisley Park
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Paisley Park


Indiana’s Remedy For Mechanic’s Lienholder On Property Subject To Mortgage Foreclosure Action

Lesson.  In Indiana lien priority disputes, a purchase money mortgage fares better than a subsequent mechanic’s lien.  Contractors beware. 

Case cite.  Wells Fargo v. Rieth-Riley, 38 N.E.3d 666 (Ind. Ct. App. 2015) .

Legal issue.  As between a mortgagee and a mechanic’s lienholder, whose lien has priority?  And, how does Indiana view each party’s remedy vis a vi the real estate?  Note this case did not involve a construction mortgage (see posts below), which the law treats differently.

Vital facts.  Wells Fargo involved a shopping center.  Lender refinanced the purchase of the subject real estate and held a mortgage, which lender recorded on the real estate in January of 2008.  In 2011, the center’s owner hired contractor to pave the shopping center’s parking lot.  After failing to receive payment, contractor recorded a mechanic’s lien on the real estate.  Neither lender nor contractor got paid, so a foreclosure lawsuit ensued against the center’s owner. 

Procedural history.  The case mainly dealt with the dispute between lender and contractor as to which party’s lien had priority, together with their respective remedies.  The trial court entered a complicated summary judgment spelling out the treatment of the parties’ interests in the real estate.  Lender appealed.

Key rules.  A mortgage takes priority according to the time of its filing.  Ind. Code 32-21-4-1(b).  The effective date of a mechanic’s lien relates back to the date the contractor began work.  I.C. 32-28-3-5.  A mortgage generally takes priority over a mechanic’s lien if the mortgage was recorded before the contractor began its work. 

In instances of a purchase money mortgage, the exception to the general rule arose out of the Provident Bank v. Tri-County Southside Asphalt case decided by the Court of Appeals in 2004 (and discussed in a post below).  That case established that Indiana’s mechanic’s lien statute at I.C. 32-28-3-2 protects contractors by providing priority over a purchase money mortgage “as to the improvement for which he provided the labor and materials.”  Provident Bank went on to hold that the contractor “may sell the improvements to satisfy the lien and remove them” following the sale.  Provident Bank, not unlike Wells Fargo, surrounded paving work (a driveway).  The contractor had a senior lien over the driveway (only) and, as absurd as it seemed, the Court concluded that the contractor could sell and remove the driveway to satisfy its lien. 

Holding.  The Indiana Court of Appeals in Wells Fargo first held that, generally, lender’s mortgage had priority over the contractor’s lien for the simple reason that the lender recorded its mortgage earlier.  Contractor was not entitled to a pro-rata share of the proceeds from the sale of the real estate, as contractor had contended and as other states, such as Illinois, allow. 

The more complicated aspect of the case surrounded contractor’s right to remove and sell the parking lot to satisfy its lien.  Lender asserted that contractor should not be permitted to remove the parking lot because removal would impair the value of the land.  On that issue, the Court remanded the case back to the trial court to determine whether removal of the lot was “practical” and, if so, to allow contractor to exercise its option.  “Otherwise, [contractor’s] lien is junior to [lender’s] mortgage lien, and [contractor] is entitled to proceeds from the sale … only after [lender’s] mortgage has been satisfied.”

Policy/rationale.  Indiana public policy in these cases places the risk of loss on the party best able to avoid the loss.  “A mechanic performing work on property encumbered by a mortgage may easily determine whether the property upon which he will work is encumbered before deciding whether to perform the work.”  Someone has to lose, and Indiana favors lenders.  In my view, the absurdity of the “improvement removal” remedy for contractors serves to force the parties to settle the case. 

Further, I should note that Wells Fargo is a novel decision in that it extends the Provident Bank analysis to mandate a trial court determination of whether removal of the subject improvement is “practical,” which in Wells Fargo meant “that its removal will not substantially impair the value of the land beyond that which it would have been had the parking lot never have been paved.”  Absent a “practical” removal, the mechanic’s lien will be fully primed by the purchase money mortgage. 

Related posts. 


Indiana Leasehold Mortgages Governed By Real Estate Foreclosure Statutes, Not The UCC

Lesson.  In Indiana, the rights of the holder of the “leasehold” mortgage are the equivalent of a mortgagee’s, not a lessor’s, rights.  As such, upon a default, a lender does not have the ability to take immediate possession of the real estate.  Rather, the lender’s rights to the real estate must be asserted at a sheriff’s sale. 

Case cite.  Merrillville 2458 v. BMO Harris, 39 N.E.3d 382 (Ind. Ct. App. 2015).

Legal issue.  Whether UCC Article 9.1 secured transactions law, as opposed to the Ind. Code 32-30-10 mortgage foreclosure statutory law, applies to leasehold mortgages. 

Vital facts.  Borrower executed a promissory note and leasehold mortgage in favor of lender.  Black’s Law Dictionary defines a leasehold mortgage as a “mortgage secured by lessee’s interest in leased property.”  In Merrillville, borrower had entered into a lease for the subject real estate, on which it operated a Golden Corral.  The borrower was not an owner of the real estate but rather a tenant.  Borrower later defaulted under the loan, and the lender sued.      

Procedural history.  At the trial court level, the lender obtained an order of possession of the real estate.  The borrower appealed.

Key rules.  Indiana’s UCC, including I.C. 26-1-9.1, applies to security interests in “personal property or fixtures….”  Sec. 109(a).  Article 9.1 does not apply to leaseholds on real property.  In fact, Sec. 109(d) excludes liens on real property from UCC secured transactional law.  Thus leasehold mortgages are governed by Indiana statutory law regarding real estate mortgages – none of which provide for possession of the real estate before a sheriff’s sale.  

Holding.  If, in Merrillville, the provisions of the Indiana Code applicable to real estate mortgage foreclosures applied, the lender’s remedy would be a sheriff’s sale of the borrower’s interest in the real estate.  If, on the other hand, the provisions of the UCC applied, the lender would have the ability to immediately take possession of the real estate.  Since, in Indiana, a mortgagee has only a lien on, but no right to possession of, the mortgaged premises, the lender’s remedy in Merrillville was limited to purchasing the borrower’s rights of possession to the real estate at a sheriff’s sale.  The Court of Appeals therefore reversed the trial court.      

Policy/rationale.  Indiana law is well settled that mortgages merely are liens upon real estate.  Mortgagors retain legal title until foreclosure transfers title to the mortgagee “who must purchase the property at a [sheriff’s sale] if he wishes to acquire such title.”  Indiana’s policy, which is different than some other states, is that the “right to possession, use and enjoyment of the mortgaged property, as well as title, remains in the mortgagor … and the mortgage is a mere security for the debt.”  Leasehold mortgages, which are a slightly different spin on a standard mortgage, are not treated any differently.  Whatever rights a lessee has to the mortgaged property – possession, mainly – are not legally terminated until a sheriff’s sale.     

Related post.  Indiana Follows The Lien Theory of Mortgages