Indiana’s Strict Foreclosure Statute Applied Retroactively: Senior Mortgage Interest Resurrected

Lesson.  If your foreclosure lawyer omits a junior lienholder in the foreclosure suit, Indiana’s statutory remedy of strict foreclosure should prevent the junior lienholder from leapfrogging into a senior lien position, even if the omission occurred before the enactment of the statute in 2012. 

Case cite.  U.S. Bank v. Miller, 44 N.E.3d 730 (Ind. Ct. App. 2015).

Legal issue.  Whether a junior lien slid into first position based upon the common law doctrine of merger.  Or, could the senior lender’s first priority mortgage be resurrected by Indiana’s strict foreclosure statute, Ind. Code 32-29-8-4?

Vital facts.  The complicated but thorough U.S. Bank opinion decided a lien priority dispute between a senior lender/mortgagee and a junior lender/mortgagee.  Senior lender obtained a foreclosure judgment against its borrower and a junior lender, which held a mortgage securing the borrower’s home equity line of credit.  The problem was that the senior lender’s default judgment against the junior lender was defective due to improper service of process.  In other words, the junior lender was not bound by the original decree of foreclosure.  Thinking that the junior mortgage had been terminated, the senior lender bought the property at the sheriff’s sale and then resold the property to a third party. 

Procedural history.  Once the junior lender became aware of the situation, it sought to set aside the default judgment and assert a senior position in the property.  At the same time, the senior lender pursued a strict foreclosure action to clear title.  The trial court consolidated the matters and ruled in favor of the junior lender based upon the doctrine of merger.  The senior lender appealed, essentially claiming that the case instead should be decided by I.C. 32-29-8-4.   

Key rules. 

U.S. Bank rubbed off the scab from the Citizens State Bank case dealing with the competing law of “merger” and “strict foreclosure” – issues I addressed in detail in 2011 and 2012 (see posts below).  For nerd lawyers, Judge Kirsch’s opinion in U.S. Bank summarizes all sorts of Indiana foreclosure-related principles in addition to the merger doctrine and strict foreclosure.  Because the case involved events both before and after the enactment of the 2012 legislation, one of the core questions was whether the strict foreclosure statute could be applied retroactively. 

Very generally, the doctrine of merger operates to extinguish a senior lender’s mortgage lien upon the purchase of the mortgaged property at the sheriff’s sale and re-sale to a third party.  In turn, neither the senior lender nor the third party would have priority in title over a junior lender omitted from the foreclosure proceeding.  On the other hand, common law strict foreclosure provides an avenue for the senior lender to clear title over an omitted junior lienholder by filing suit to demand redemption of the senior lien.  Failing such redemption, the court could decree the junior lien terminated. 

I.C. 32-29-8-4 resolved the conflict under Indiana law. 

Holding.  The Indiana Court of Appeals reversed the trial court’s summary judgment in favor of the junior lender.  The Court remanded the case to the trial court to decide the case based upon I.C. 32-29-8-4.  This basically meant that the senior lender won the case. 

Policy/rationale.  The Court’s reading of the 2012 legislation led to the conclusion that the statute should be applied retroactively.  The result was an equitable one.  The facts were undisputed that the junior lender funded the HELOC knowing that the senior lender’s far larger purchase money mortgage pre-existed it.  In addition, despite the changes to Indiana law during the course of events, the Court noted that “considerations of the doctrines of merger and strict foreclosure played no part in the expectations that [the junior lender] had when it granted [the borrowers] their loan.”  And, the application of Indiana’s new strict foreclosure statute would not impair the junior lender’s rights when it acted, or otherwise affect its duties or liabilities.  In short, “the application of [I.C. 32-29-8-4] will return [the junior lender] to the position that it knew it occupied – that of a junior lienholder.”   

Related posts. 

• Indiana Legislation, 2012: Part 3 Of 3 – Sheriff’s Sale Buyers And Omitted Junior Lien Holders Impacted By Creation Of Strict Foreclosure Statute
• Indiana’s New Strict Foreclosure Statute: Dangling Issues
• Indiana Supreme Court Speaks To The Doctrine Of Merger And The Remedy Of Strict Foreclosure

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I frequently represent lenders and their mortgage loan servicers in lien priority disputes, and we have successfully utilized I.C. 32-29-8-4 to protect a senior lender’s lien.  If you need assistance with a similar case, please call me at 317-639-6151 or email me at [email protected].  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email along the left side of this page.