Lesson. If a mortgagee acquires title to the mortgaged property via tax deed, the mortgage lien will be extinguished. For lenders and their servicers, be careful when making deals with tax sale purchasers while also negotiating loan modifications with borrowers. Best to include everyone in a global negotiation.
Legal issues. Whether the lender’s mortgage merged with a tax deed, which the lender acquired from the tax sale purchaser. Also, whether the lender committed conversion of the mortgaged property.
Vital facts. The Bayview facts and procedural history are quite involved and unique. The borrower and the lender had a commercial mortgage loan secured by the borrower’s restaurant property. The borrower became delinquent in the real estate taxes, and the property later was sold at a tax sale. The lender sought to capitalize the delinquent taxes and enter into a loan modification with the borrower. Under the terms of the deal with the borrower, the lender agreed to redeem the property from the tax sale. However, the lender failed to do so and never told the borrower. When the tax sale purchaser petitioned for the issuance for a tax deed, the lender contested the proceeding on the basis that the purchaser failed to give certain required notices. The lender and the tax sale purchaser then entered their own settlement negotiations, without involving the borrower, that ultimately resulted in an agreed order. The Bayview opinion is a little unclear as to whether the lender got the tax deed directly from the auditor or from the tax sale purchaser through a quitclaim deed. Either way, the lender settled with the purchaser and got title. The lender then filed an action to quiet title to the property, which included a count to foreclose the mortgage, alleging that its interest in and title to the property was “superior to all persons who have an interest therein.” Adding to the confusion was the fact that the borrower made a series of loan mod payments to the lender after the lender became the owner of the property. Whew.
Procedural history. The trial court held a bench trial that included the lender’s mortgage foreclosure claim and the borrower’s counterclaim for conversion. The court ruled in favor of the borrower.
• A mortgage involves two entities: (1) the mortgagee, which holds the mortgage that serves as a lien on the property and (2) the mortgagor, who holds title to the property with the right of redemption.
• When one of the parties to a mortgage acquires both the mortgage lien and the legal title to the property, “the two interests are said to merge.” This means that the mortgage lien is extinguished.
• The key factor in deciding whether a merger has occurred is “determining what the parties, primarily the mortgagee, intended.” For more on Indiana’s anti-merger rule, click on the posts below, which discuss the key cases in detail.
• Ind. Code 35-43-4-3 states that a “person who knowingly or intentionally exerts unauthorized control over the property of another commits criminal conversion.”
Holding. The Indiana Court of Appeals held that the evidence supported the trial court’s conclusions. As such, the Court affirmed the trial court’s ruling that the mortgage had been extinguished and that the lender committed conversion.
The lender in Bayview asserted that it did not intend to merge its mortgage with the tax deed. The borrower responded that the lender “clearly intended to take title and extinguish the underlying mortgage and note when it surreptitiously acquired title.” The Court of Appeals pointed to evidence at the trial showing that the lender viewed the transaction similar to a deed in lieu of foreclosure “with no residual obligation for the borrower.”
The Bayview opinion also addressed in detail the borrower’s conversion claims against the lender. In a nutshell, the trial court found that the lender converted (stole) the subject real estate from the borrower. The court awarded the borrower treble damages for criminal conversion based on the amount of equity in the property, plus reimbursement for the loan mod payments made by the borrower.
Although not expressly spelled out in the opinion, the practical outcome of the case seemed to be that, on the one hand, the lender (holding a tax deed) remained the owner of the property while, on the other hand, the borrower’s debt was extinguished. On top of that, the lender had to pay the borrower substantial damages.
- Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?
- Secured Lender Loses Mortgage Due to Indiana Tax Sale
- Indiana Tax Sales, Part II: Redemption
- Indiana Supreme Court Speaks To The Doctrine Of Merger And The Remedy Of Strict Foreclosure
I frequently represent lenders, as well as their mortgage loan servicers, entangled in loan-related litigation, including disputes arising out of tax sales. If you need assistance with such a matter, please call me at 317-639-6151 or email me at firstname.lastname@example.org. 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 as noted to your left.