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Reminder Of Indiana's View Of MERS

I've been pressed for time of late but wanted to post some material today.  The article that follows is from my October, 2012 post prepared in the wake of the Indiana Supreme Court's landmark decision involving Mortgage Electronic Registration Systems, Inc. (aka MERS).  

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What is Mortgage Electronic Registration Systems, Inc. (“MERS”)?  More specifically, what does mortgage language identifying MERS “as nominee” mean?  The Indiana Supreme Court in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012) dealt with those and other questions surrounding the role of MERS in the foreclosure world about which I wrote following the Indiana Court of Appeals' opinion, which the Supreme Court ultimately reversed. 

Setting the table.  In Citimortgage, junior mortgagee ReCasa initiated a foreclosure action and named only Irwin, the purported senior mortgagee, as a defendant.  The language in the subject mortgage stated that Barabas, the mortgagor, granted the mortgage to MERS “as nominee” of Irwin, identified as the lender.  Upon being sued to answer as to its interests in the subject real estate, Irwin quickly filed a disclaimer of interest, and the court dismissed Irwin from the case.  The trial court later entered judgment for ReCasa, which acquired the real estate at the sheriff’s sale.  ReCasa then sold the real estate to a third party, Sanders.  A month later, Citimortgage filed a motion to intervene in the action and asked the trial court to set aside the judgment and sheriff’s sale. 

Defining MERS.  In its rationale, the Court came to terms with the reality that “about 60% of the country’s residential mortgages are recorded in the name of MERS rather than in the name of the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.”  The Court pronounced that “a MERS member bank appoints MERS as its agent for service of process in any foreclosure proceeding on a property for which MERS holds the mortgage.”  The Court found that:

the relationship between Citimortgage and MERS was one of principal and agent.  Clearly, one of the primary purposes of that agency relationship was to facilitate efficient service of process.  . . .  By designating MERS as an agent for service of process, as Irwin did in the Barabas mortgage, lenders can have their cake and eat it too; they free themselves from burdensome, expensive recording requirements but still receive notice when another lienholder seeks to foreclose on a property in which they have a security interest.

Senior mortgage survives.  The core question in Citimortgage was whether ReCasa’s failure to name MERS as a defendant impacted the rights, if any, of Citimortgage, which at some point appears to have acquired the senior mortgage.  Although the Court of Appeals affirmed the trial court’s decision in favor of ReCasa, the Supreme Court ruled for Citimortgage.  ReCasa’s failure to name MERS as a defendant or, more specifically, failure to serve MERS with a summons and complaint, prevented ReCasa from terminating the senior mortgage and leapfrogging into the first lien position.  In short, the judgment was void as to Citimortgage. 

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I represent lenders, as well as their mortgage loan servicers, entangled in lien priority disputes and contested foreclosures. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. 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 on my home page.


Indiana’s “Lender Exception” Applicable To Leasehold Mortgage In Priority Dispute With Mechanic’s Lien

Lesson. A leasehold mortgage constitutes a valid mortgage lien and can be senior to a mechanic’s lien, if the facts otherwise meet the so-called “Lender Exception.”

Case cite. Kellam Excavating v. Community State Bank, 82 N.E.3d 928 (Ind. Ct. App. 2017)

Legal issue. Whether a leasehold mortgage or mechanic’s lien had priority in title.

Vital facts. A lessee of real estate and a contractor entered into a construction contract on 7/30/13 to build a fertilizer plant. Construction began on 10/25/13. Lessee later needed additional financing for the construction. On 5/16/14, the lessee granted a bank a leasehold mortgage as collateral for some financing the bank offered through a series of master leases between the bank and the lessee. The bank recorded its mortgage on 6/24/14. Following the lessee’s failure to pay the contractor in full, the contractor recorded a mechanic’s lien on 3/6/15. Collection and foreclosure litigation subsequently commenced against the lessee that included a lien priority dispute between the bank and the contractor.

Procedural history. The bank filed a motion for summary judgment claiming that its mortgage should receive priority over the contractor’s mechanic’s lien. The trial court granted the motion, and the contractor appealed.

Key rules.

    Three statutes: There are three Indiana statutes that govern priority between a mortgage and a mechanic’s lien: Indiana Code Sections 32-21-4-1(b), 32-28-3-2 and 32-28-3-5(d).

    Lender Exception: The Court in Kellam incorporated its prior decision in Harold McComb v. JP Morgan Chase that “discussed the interplay between the three relevant statutes and the question of mortgage lien priority versus a later-recorded mechanic’s lien as to improvements provided on commercial property.” That holding “is commonly referred to as the Lender Exception,” and I wrote about the McComb opinion on 9/6/08. In short, the Lender Exception provides:

With regard to commercial property, where the funds from the loan secured by the mortgage are for the specific project that gave rise to the mechanic’s lien, the mortgage lien has priority over the mechanic’s lien recorded after the mortgage.

    Mortgage defined: The definition of a mortgage is a “conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms” and as a “lien against property that is granted to secure an obligation (such as a debt) and that is extinguished upon payment or performance according to stipulated terms.”

Holding. The Indiana Court of Appeals affirmed the trial court’s summary judgment in favor of the bank/mortgagee. The Indiana Supreme Court denied transfer.

Policy/rationale. The heart of the Kellam dispute surrounded the nature of the financing. The contractor argued, among other things, that the lessee did not execute a promissory note and that the security agreement was not a qualifying mortgage because the document’s title was a “leasehold” mortgage. The Court, however, found that the agreement operated like a typical mortgage by granting a lien on the lessee’s property rights and by obligating the lessee to repay the bank for funds the bank expended. Moreover, there was no authority for the proposition that a promissory note is required for a valid mortgage.

In the final analysis, despite the unconventional (my term) nature of the financing arrangement, the Court in Kellam was convinced that the lessee sought a loan from the bank for construction of the facility and that the bank’s funds were used for that purpose. Since the Lender Exception applied, the bank’s mortgage was superior to the contractor’s mechanic’s lien.

Related posts. The Mechanic's Liens category to your right contains all of my posts about these kinds of priority disputes.
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I represent lenders, as well as their mortgage loan servicers, entangled in lien priority disputes and contested foreclosures. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. 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 on my home page.


Indiana Sheriff's Sale Buyers Beware: Meth Labs

Yikes.  Did you know that Indiana has a set of regulations that deal with the cleanup of properties contaminated by the manufacture of illegal drugs?  Did you know that, for instance, an innocent buyer at a sheriff's sale arguably could be compelled by the State of Indiana to cleanup a house previously utilized as a meth lab?  

The Law.  Title 410 of the Indiana Administrative Code, Article 38, entitled Inspection and Cleanup of Property Contaminated with Chemicals Used in the Illegal Manufacture of Controlled Substance, governs this matter.  Even though the regulation never mentions mortgage foreclosures or sheriff's sales, a handful of key provisions point to the idea that even a totally innocent buyer at a sale, with no prior knowledge of any contamination, could be required to pay for a cleanup before either living in the house or, perhaps more on point here, liquidating the post-foreclosure.  410 IAC 39-2-18-1 defines "owner" as "a person having an ownership interest in the contaminated property."  410 IAC 38-3-2 goes on to require the owner to cleanup the property before occupying it or "transferring any interest in the property to another person." 

The Impact.  Other than a client once asking me to interpret the law, admittedly I've never had to litigate this issue, nor have I been involved in a dispute with the State surrounding the law's applicability.  Nevertheless, it seems to me that residential mortgage loan servicers should be aware of these rules in the event they learn, either pre or post-sheriff's sale, that they service a mortgage on a house contaminated by the manufacture of illegal drugs (i.e. a meth lab).  By foreclosing on a meth lab, the lender/mortgagee could end up with an expensive mess on its hands.     

The Rub.  The potential exposure to cleanup liability is similar to the environmental exposure discussed in my 9/24/09 post Always Consider An Environmental Liability Analysis, geared more toward commercial foreclosures.  (See also, Real Estate Appraisals Are Important, But Not Required, In Indiana Foreclosures.)  One difference between the environmental topic I previously discussed and today's subject is that it may be difficult if not impossible for a foreclosing lender or a sheriff's sale buyer to know about a meth lab before the sheriff's sale.  Ideally, a foreclosing mortgagee or potential buyer would inspect the interior of the house before any sale, but that's not always possible absent consent by the owner/mortgagor or perhaps a clear abandonment by the occupant. 

More Info.  I understand that the State agency that oversees these matters is the Indiana State Department of Health, Environmental Public Health Division.  For details about the State's program, the Division's website has a plethora of information.  Start by clicking here, but note the "Cleanup and Inspection of Illegal Drug Labs" button on the left side of the home page.