Following Rule 41(E) Dismissal For Failure To Prosecute, Can A Second Suit Be Filed?
Indiana’s Remedy For Mechanic’s Lienholder On Property Subject To Mortgage Foreclosure Action

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