Lesson. Technical inconsistencies between the promissory note and the mortgage may not doom the enforcement of the loan.
Legal issue. Whether a mortgage still can be valid despite the document’s lack of clarity as to the names of the borrowers and the mortgagors.
Vital facts. Plaintiff Lender filed a mortgage foreclosure action seeking an in rem judgment against a Trust. Mr. Forrest Spurgeon, individually, executed the promissory note. He and Delphine Spurgeon, as trustees of the Trust, executed the mortgage to secure the note. The Trust owned the mortgaged real estate but did not sign the note. Only Forrest executed the note.
Procedural history. The Lender filed a motion for default judgment after the Trust failed to appear in the case. Remarkably, the trial judge not only denied the Lender’s motion but dismissed the Lender’s case altogether. The court had a problem with the fact that the mortgage defined the “borrower” as being the Trust, whereas the note defined the borrower as being Forrest. Since the Lender failed to file a note executed by the trustees on behalf of the Trust, but instead relied only on the note executed by Forrest, the trial court on its own volition found that the Lender failed to state a claim upon which relief could be granted. The Lender appealed to the Indiana Court of Appeals.
Key rules. The Spurgeon opinion has a nice summary of Indiana’s rules of contract construction and interpretation. (Notes and mortgages are both contracts.) The outcome of Spurgeon was driven by the Court of Appeals’ application of those rules, which largely are designed to harmonize the language and ascertain the intention of the parties – even in the face of inconsistencies in the wording.
One other important rule is that “one person may furnish collateral or grant a mortgage on the person’s real property to secure the loan of another.” This person is known as a surety. Thus, the name of the borrower in the note and the name of the mortgagor in the mortgage do not necessarily need to be the same for the mortgage to be valid.
Holding. The Indiana Court of Appeals reversed the trial court’s dismissal of the Lender’s case and instructed the trial court to grant the Lender’s motion for default judgment.
Policy/rationale. The Court concluded that the misuse of the word “borrower” in the mortgage did not render the mortgage invalid or unenforceable. There were a number of factors in the Court’s decision, principal among them being: (1) the dates of the note and mortgage were the same, (2) the mortgage referred to a loan amount that mirrored that in the note, (3) the maturity dates in the contracts were identical, (4) the lender was the same in both documents, and (5) the Trust owned the subject real estate at the time of the loan. The Court said that it “is clear from the language of the Mortgage that the Trust, as mortgagor, has granted a security interest in the property held in its name to secure the payment of the debt owed by Forrest Spurgeon pursuant to the Note.” Also significant was that, despite being served with a summons and complaint, the Trust did not appear in the action to contest the Lender’s claims.
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My practice includes representing lenders and their loan servicers in contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.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.