Lender Moves For Default Judgment Only To See Its Foreclosure Case Dismissed
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Perplexing Result In “Bona Fide Mortgagee” Case

Lesson. The bona fide mortgagee defense, where a lender claims priority in title over another lender or an owner, may be a difficult on which to win on summary judgment. These cases can be somewhat fact sensitive. If filing an MSJ, dot i’s and cross t’s for all the necessary undisputed facts.

Case cite. Chmiel v. US Bank, 109 N.E.3d 398 (Ind. Ct. App. 2018)

Legal issue. Whether the assignee of a mortgage was a “bone fide mortgagee,” such that the assignee’s lien was valid and enforceable.

Vital facts. The thirty-page Chmiel opinion arises out of a quiet title dispute and is chock full of facts and legal issues. For purposes of this post, there was a dispute between an individual, who I will call “Son,” and the assignee of a mortgage loan, which I will call “Mortgagee.” Another character in this story is the Son’s mother (“Mom”). Here’s what happened:

1991: Mom deeded her real estate to Son subject to her life estate, meaning that Mom basically owned the property until her death at which point title passed to Son.

2005: Son purportedly deeded his residual interest in the real estate back to Mom, and Mom then got a mortgage loan secured by the property.

2007: Son wrote a letter to Mom’s mortgage lender/servicer at the time and disputed the validity of the 2005 deed. Specifically, Son claimed that his signature on the deed was forged and that, to the extent the mortgage loan was valid, it was only secured by Mom’s life estate interest and not Son’s residual ownership interest. In other words, Son claimed that the mortgage was invalid or, at best, the mortgage was only valid as to Mom during Mom’s lifetime.

2009: Son wrote a second letter to the mortgage lender/servicer at the time.

2010: Son wrote a third letter to the mortgage lender/servicer at the time. (The servicer and holder of the mortgage loan changed over the years). This time, the mortgage servicer simply acknowledged receipt of the letter.

2011: Mom defaulted under the mortgage loan. MERS, as nominee of the mortgage lender, executed an assignment of mortgage to Mortgagee, which initiated foreclosure proceedings. Son intervened in the case and claimed that the 2005 deed was forged. Mom later filed bankruptcy, which stayed the foreclosure, and a Chapter 13 Plan was approved.

2015: Mom died, and the Plan payments stopped.

Procedural history. In 2016, Son filed the instant quiet title action to, among other things, terminate Mortgagee’s lien. Mortgagee counterclaimed to foreclose its mortgage. The trial court granted summary judgment for Mortgagee, and Son appealed.

Key rules. To qualify as a bona fide mortgagee, one must purchase in good faith, for valuable consideration, and without notice of outstanding rights of others. Indiana law recognizes both constructive and actual notice. Notice is actual when “it has been directly and personally given to the person to be notified.” Further, in Indiana, actual notice may be implied or inferred from “the fact that the person charged had means of obtaining knowledge that he did not use.”

Holding. The Indiana Court of Appeals reversed the trial court and found there to be genuine issues of material fact regarding whether Mortgagee was a bona fide mortgagee – in other words, whether its mortgage was valid and enforceable. The Court therefore sent the case back for a trial.

Policy/rationale. Son contested the “consideration” and “notice” elements of Mortgagee’s defense. Regarding consideration, the Court found that, although the original lender received money/consideration from Mom for the mortgage, “Mortgagee did not designate any evidence of the consideration it gave for the assignment” of the loan. Mortgagee, or rather its servicer, didn’t help its cause when it answered discovery actually denying, apparently on technical terms, that it gave consideration.

As to notice, Son asserted that Mortgagee received actual notice of his forgery claims before Mortgagee became the assignee of the loan. Specifically, Son pointed out that, in the bankruptcy case, the mortgage servicer (as an agent of the mortgagee/holder of the loan) received his 2010 letter - before MERS assigned the mortgage to Mortgagee. Thus, there was a question of fact as to whether Mortgagee, via its loan servicer, had actual notice of Son’s rights/interests before Mortgagee acquired the loan.

Honestly, I struggle with the Court’s analysis and, frankly, disagree with its conclusion on the bona fide mortgagee issue. The result (denial of summary judgment) may have been correct simply because of the factual density of the case. Nevertheless, to me, the Court’s stated rationale focused on the incorrect time frame. The Court examined the circumstances surrounding the loan assignment transaction, as opposed to the facts associated with the original loan closing. The opinion identified no evidence that, in 2005, the original lender/mortgagee had any reason to believe that the recorded 2005 deed was invalid. In other words, the original lender had to be a bone fide mortgagee. To me, the 2005 closing was the operative moment, not what the assignee paid or knew years later. My view is that the assignee should step into the shoes of the original assignor and possess all its rights and defenses. Case closed. The opinion did not address my theory one way or the other, however, so admittedly I may be missing something. Please email me or post a comment below if you have any insights.

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I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. 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.