Indiana's Mortgage Foreclosure Redemption Laws

I attended the American Legal & Financial Network’s informative and productive “Foreclosure Intersect” Conference in Dallas this week. One of the many issues that struck me was how wide ranging the country’s redemption laws are. This is due, in part, to the fact that, unlike Indiana, twenty-six states have non-judicial foreclosures. Even judicial foreclosure states have different laws regarding when and how to redeem. Anyway, I thought a quick reminder about Indiana’s right of redemption was in order.

Pre-sale. If a borrower defaults, and if a secured lender exercises its rights under a mortgage to foreclose, the borrower still is able to avoid losing the real estate collateral. This is because, in Indiana, borrowers have a right of redemption. “Redeem” means “to buy back. To free property from mortgage . . . by paying the debt for which it stood as security.” Black’s Law Dictionary. Redemption (basically, a payoff) is the way for a borrower to keep the property, end the litigation and free itself of the lender’s mortgage interest.

Indiana Code § 32-29-7-7 “Redemption by owner before sheriff’s sale” outlines this right:

Before the [sheriff’s] sale under this chapter, any owner or part owner of the real estate may redeem the real estate from the judgment by payment to the:

(1) clerk before the issuance to the sheriff of the judgment and decree; or
(2) sheriff after the issuance to the sheriff of the judgment and decree;

of the amount of the judgment, interest, and costs for the payment or satisfaction of which the sale was ordered. If the owner or part owner redeems the real estate under this section, process for the sale of the real estate under judgment may not be issued or executed, and the officer receiving the redemption payment shall satisfy the judgment and vacate order of sale . . ..

Post-sale. There is, however, no post-sale right of redemption for a borrower/owner/mortgagor. I.C. § 32-29-7-13 states: "There may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter [Section 7 noted above and 32-9-8 noted below]." Well-settled Indiana case law provides that "a foreclosure sale cuts off a mortgagor's rights of redemption." Patterson v. Grace, 661 N.E.2d 580, 585 (Ind. Ct. App. 1996); Overmyer v. Meeker, 661 N.E.2d 1271, 1275 (Ind. Ct. App. 1996); Vanjani v. Federal Land Bank of Louisville, 451 N.E.2d 667, 672, n.1 (Ind. Ct. App. 1983).

Basically, a borrower must pay the debt amount (pre-judgment) or the judgment amount (post-judgment) before the sheriff’s sale. Otherwise, in Indiana. the right to redeem terminates with the sale. In Re Collins, 2005 Bankr. LEXIS 1800 (S.D. Bankr. 2005). “Once a sheriff’s sale takes place, a mortgage-debtor is no longer the title holder . . ..” Id. Judge Coachys concluded, in Collins, that a sheriff’s sale is complete when the hammer falls and that the actual delivery of the sheriff’s deed is purely ministerial. Id.  At the sale, when the sheriff's deputy or the auctioneer says "Sold!" the party's over.

Post-sale exception. There is narrow exception to the post-sale rule, but the exception does not apply to borrowers. As explained in detail in my April 12, 2012 post, certain lienholders mistakenly omitted from the foreclosure process have limited remedies under I.C. § 32-9-8. 

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I represent lenders, loan servicers, borrowers, and guarantors in foreclosure and real estate-related disputes. If you need assistance with a similar matter, 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 as noted on my home page.   

Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b).  Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure sale.  Unlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

As an aside.  Can The SBA's Right Of Redemption Be Purchased After A Sheriff's Sale?

Redemption From Tax Sale - Interest On Surplus Now 5%, Not 10%

In 2010, I posted Indiana Tax Sales, Part II: Redemption, which discussed how parties can redeem real estate from a tax sale.  Lenders who lose mortgaged property at a tax sale have the ability to redeem, and one of the issues always is amount of money needed to do so.  My prior post includes a discussion of the amounts needed to redeem.  One of the elements is interest on any surplus.  The purpose of today's post is advise that, as of July 1, 2014, the per annum interest redeemers must pay on the tax sale surplus is 5%.  Previously, the amount was 10%.  So, it's now less expensive to redeem.   

To review the entire Indiana statutory provision applicable to the amount of money required for redemption, click on Ind. Code 6-1.1-25-2. 

Enjoy the Patriots loss on Sunday....

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I often represent lenders, as well as their 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 [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 as noted to your left.

 

In Indiana, A Judicial Foreclosure State, There Is No Post-Sale Right Of Redemption

From time to time, out-of-state clients and lawyers wonder whether and to what extent a borrower (mortgagor) has a right of redemption in Indiana.  As I prepare to head out with the family for Fall Break next week, I thought I'd provide links to two prior posts discussing what redemption means and when the right ends in our state:  

• Indiana Foreclosure Sale Terminates The Right Of Redemption
• Do Borrowers Have A Right Of Redemption In Indiana?

I hope to post new material the week of October 23rd.  

John

2013 Legislation Ends Post-Sale Redemption Discussion

Last year, the Indiana General Assembly amended Ind. Code 32-29-8-3.  For more, please read my 3-29-12 post.  But the Court of Appeals' 2011 opinion in CitiMortgage v. Barabas and 2012 statutory amendment left open the question of whether Indiana had a limited post-sheriff's sale right of redemption.   

When the Indiana Supreme Court issued its 2012 opinion on transfer in the CitiMortgage v. Barabas case, the Justices answered some important questions about Indiana mortgage law, including the role of MERS, but as I wrote on 10-12-12 the post-sale redemption question was not one of them.  Some confusion remained.  (Note:  federal tax liens give the IRS a post-sale right of redemption, which is the only such right of which I'm aware in Indiana.)

In this year's session, the General Assembly in Senate Bill 279 finally axed the statutory language that purported to grant a one-year post-sale right of redemption to certain parties.  Ind. Code 32-29-8-3 has been amended, effective July 1, 2013, as follows:  

Sec. 3. A person who:
         (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
         (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of
             (A) an assignment that is not of record; or
             (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

For parties involved in Indiana foreclosure actions, the bottom line is this:  a foreclosure sale cuts off a the right of redemption.  Parties can redeem right up to the sheriff's sale, but the game ends there.  End of discussion.    

 

 

Discrimination Allegations Unavailing For Borrower In Post-Foreclosure Eviction

Today’s post follows-up on a theme from my February 15th post with respect to evictions following a sheriff’s sale.  That post dealt with eviction of tenants.  Today’s post, regarding United States of America v. Cotton, 2012 U.S. Dist. LEXIS 341 (N.D. Ind. 2012) (rtclick/save target as for .pdf), deals with mortgagors/owners. 

Backdrop.  Borrower owned real estate subject to a bank’s mortgage and a junior mortgage held by the United States Department of Agriculture (“USDA”).  Due to a failure to make payments, the bank filed a foreclosure action against the borrower and obtained a summary judgment that authorized a sheriff’s sale.  At the sale, third-party bidders purchased the real estate.  The USDA thereafter asserted its redemption rights under federal law (28 U.S.C. § 2410(c)).  In exchange for a deed, the USDA paid the purchasers an amount equal to what the purchaser’s paid at the sheriff’s sale, plus interest.  After recording the deed, the USDA sent the borrower a notice to vacate the premises within thirty days.  The borrower refused to comply. 

Procedural maneuvering.  To obtain possession of the real estate, the USDA, in a lawsuit separate from the state court foreclosure, filed a motion for judgment on the pleadings pursuant to F.R.C.P. 12(c).  The Court in Cotton noted that the USDA had to establish “that [bank’s] lien on the [subject real estate] stood in first priority, ahead of the USDA’s; that it timely exercised its redemption right in the [subject real estate]; and that it followed the proper procedures under Indiana law to perfect legal title in the [real estate].”  The Court concluded that the USDA had met its burden.

Right to possession.  The USDA’s right of redemption vested upon the sale of the real estate at the sheriff’s sale.  The USDA timely redeemed the real estate and properly recorded the subject deed.  This served to perfect the USDA’s legal title in the real estate.  In Indiana, property law grants to property owners the absolute and unconditional right “to exclude from their domain those entering without permission.”  The Court stated that:  “as the owner of an undivided fee simple interest in the [real estate], the United States is entitled to permit, or exclude, whomever it desires from the property; including [the borrower].”

Borrower’s contentions.  The borrower did not contest the action upon the legal formalities of the acquisition by the USDA, but rather upon notions of equity.  The borrower asserted that the USDA did not have “clean hands,” an equitable doctrine I discussed in a December, 2012 post.  Generally, “one who seeks relief in a court of equity must be free of wrongdoing in the matter before the court.” 

    First, the borrower argued that the USDA had an obligation to intervene on his behalf and to provide him with legal representation and advice in the state court foreclosure proceedings.  The Court noted that, while the USDA might have an obligation under federal law to assist minority and impoverished individuals in efforts to obtain affordable housing, such obligation does not extend to the requirement to provide free legal services to those persons. 

    Second, the borrower asserted that “because the USDA previously defended against allegations of race discrimination in a class action lawsuit, this alleged misconduct should either be imputed or presumed into the context of the instant case.”  The cases upon which the borrower relied involved alleged racial discrimination in applying for mortgage loans.  In Cotton, the borrower received a mortgage from the USDA without any complications.  The borrower invited the Court “to entertain a presumption that because the USDA discriminated against similarly situated persons in the past, it necessarily follows that he too was a victim of discrimination.  Because the evidence in the pleadings [did] not substantiate this allegation, the Court [was] not inclined to leap to such a conclusion.”

The Court in Cotton held that the actions of the USDA did not make it inequitable for the Court to order the requested relief.  The Court granted the USDA’s motion for judgment on the pleadings and found that the borrower was in wrongful possession of the subject real estate.  The Court ordered him to vacate the premises accordingly.  One point Cotton illustrates is that, in Indiana, a sheriff’s sale terminates the borrower’s (former owner’s) rights to the mortgaged real estate.

Post-Sale Redemption Mystery Unsolved

Last week, the Indiana Supreme Court said much about Mortgage Electronic Registrations Systems, Inc. (“MERS”) in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  The Court also said a lot about who should receive notice of a foreclosure proceeding.  I hope to discuss those matters next week. 

No comment.  Just as important was what Citimortgage didn’t say.  I’m referring to the issue of the enigmatic post-sheriff’s sale statutory right of redemption found at Ind. Code § 32-29-8-3 entitled “Good faith purchaser at judicial sale; right to redeem of assignee or transferee not made a party.”  For background, please click on my August 2 and November 1, 2011 posts regarding Citimortgage.  Subsequently, the Indiana General Assembly amended portions of Section 3, but as I wrote in March of this year the obscure one-year redemption language remained untouched by the legislature.  Here is the statute, and the key language is underlined: 

     Sec. 3. A person who:
        (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
        (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
            (A) an assignment that is not of record; or
            (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

When the Supreme Court accepted transfer in Citimortgage, many thought the Court would interpret the redemption language in Section 3.  No such luck.  The Court  expressed “no opinion as to whether Citimortgage had the right to redeem the property under [Section 3].”   This is because the Court decided the case on other grounds.  The opinion provided no help with the confusion and uncertainty created by the analysis of the Court of Appeals in Citimortgage, which precedent has now been vacated.

Status.  It’s my understanding Indiana’s legislature may consider clearing up I.C. § 32-29-8-3 in the 2013 session.  For now, while Indiana law is well settled that a sheriff’s sale terminates the right of redemption for borrowers/mortgagors, the law remains unclear as to whether there exists some kind of post-sheriff’s sale right of redemption for mortgage assignees whose assignments were not recorded before the filing of the foreclosure complaint.  As I often say, foreclosing lenders should invest in a foreclosure (title) commitment, and purchasers at sheriff’s sales should buy title insurance. 

NOTE:  In the 2013 session, Indiana's General Assembly deleted much of Section 3(2)(B) so as to resolve the matter once and for all.  My post. 

Indiana Supreme Court Reverses Trial Court In Landmark Case Involving MERS

Yesterday, the Indiana Supreme Court issued its opinion in Citimortgage v. Barabas.  Click here to read the case.  I plan on writing about the decision next week and following-up on my 2011 posts regarding the Indiana Court of Appeals' rulings in the dispute:  August 2/time bar, August 10/straw man and November 1/redemption. 

By rule, the two Court of Appeals' Citimortgage opinions have been vacated in their entirety.  In other words, they are no longer binding precedent in Indiana.  Thus yesterday's decision to a large extent mooted my 2011 posts, particularly because the Supreme Court did not adopt the Court of Appeals conclusions or rationale. 

By way of a preview, MERS appears to be alive and well in Indiana.  The Section 3 post-judgment redemption right, however, may not be.  The Court expressed "no opinion as to whether Citimortage had the right to redeem the property under that statute."  More to come....  

Will Mysterious Post-Sale Redemption Statute Be Clarified ... And What About The Treatment Of MERS?

I've learned that, on April 10th, the Indiana Supreme Court granted transfer in the CitiMortgage v. Barabas case about which I've written on four prior occasions, most recently on March 29th:  Indiana Legislation, 2012:  Part 2 of 3 - Obscure Redemption Language Remains.  In Indiana, a decision to grant transfer automatically vacates opinions of the Court of Appeals or, in other words, negates the prior case law.  So, perhaps later this year we'll hear from Indiana's highest court on some important foreclosure-related topics, including post-sale redemption rights and the treatment of MERS.  Interestingly, the opinion will be rendered after the 2012 legislation that amended the operative statute, Ind. Code Section 32-29-8.  It's unclear to me whether or to what extent the Court will take into account or otherwise touch upon the amended statute.  I'll be on the lookout for the Court's decision and will post about it accordingly.    

NOTE:  On 10-4-12, the Supreme Court reversed the trial court.

Indiana Legislation, 2012: Part 3 Of 3 – Sheriff’s Sale Buyers And Omitted Junior Lien Holders Impacted By Creation Of Strict Foreclosure Statute

Senate Bill 298, which amends Ind. Code § 32-29-8, creates a new section: 4. The legislation responds to the Indiana Supreme Court’s opinion in Citizens State Bank of New Castle v. Countrywide Home Loans, Inc. and the Court of Appeals’ holding in Deutche Bank v. Mark Dill Plumbing. The amendments hit on technical subjects related to Indiana’s strict foreclosure remedy and doctrine of merger. The practical effect is a solution to problems associated with junior liens missed during the foreclosure process.

Citizens and Deutche revised. These are dense topics tough to cover in a single post. For background, please read my 10-07-11 and 07-20-09 posts on Citizens and Deutche, respectively. In Citizens, the Supreme Court applied the doctrine of merger and permitted the omitted junior lien holder to leap frog into a senior priority position. In Deutche, the Court of Appeals concluded there was no merger (leap frog) and discussed remedies for the post-sale title defect. With the new Section 4, it appears that the Citizens merger (and leap frog) would not have occurred. The result in Deutche also would have been different because courts now have a statutory road map for dealing with the aftermath of a foreclosure suit that improperly excluded a junior lien holder.

Section 4. The new statute appears to be effective immediately and can be found at this link: Section 4. Here are the highlights as I read them:

A. Applicable parties: Section 4 applies to two groups, defined as “interested persons” and “omitted parties.” An “interested person,” which I’ll label a “Buyer,” basically includes (1) plaintiff mortgagees, (2) purchasers at a sheriff’s sale or (3) assignees of (1) or (2). An “omitted party,” which I’ll call a “Junior Lienor,” essentially is a junior lien holder improperly omitted from foreclosure proceedings .

B. New cause of action: “At any time” after the entry of a foreclosure judgment, either the Buyer or the Junior Lienor can file an action, the purposes of which are (1) to determine the extent of a Junior Lienor’s lien and (2) to terminate such lien on the mortgaged property sold at a sheriff’s sale. Generally, the action – a lawsuit – is a statutory strict foreclosure case, though the statute does not use that terminology.

C. Junior Lienor’s right to payment: If a Junior Lienor had a right to receive any proceeds from the sheriff’s sale, its lien cannot be terminated until the Junior Lienor is paid for such losses. (The statute does not spell out who must pay. For now, I’ll simply note that sheriff’s sale surpluses are incredibly rare due to the absence of equity in most foreclosed-upon real estate.)

D. Junior Lienor’s right to purchase: There are three key factors a court must consider when determining a Junior Lienor’s right of redemption in the strict foreclosure action. (The “redemption” language used in Section 4 refers to a Junior Lienor’s right to pay off the Buyer and thus acquire title to the property.) Here are the factors: (1) whether the Junior Lienor had actual knowledge of the foreclosure proceedings and an opportunity to intervene, (2) the value of any post-sale improvements made by the Buyer to the property and (3) the amount of the post-sale taxes and interest paid by the Buyer. Factor (1) seems to provide a basis for the right of redemption to be terminated outright, and factors (2) and (3) help make the Buyer whole for any ownership-related carrying costs incurred.

E. Junior lien terminated: If the court concludes the Junior Lienor was entitled to redeem, then the amount the Junior Lienor must pay for redemption cannot be less than the sheriff’s sale price plus statutory interest (8%). (The court also must consider the factors in (D) when determining the amount the Junior Lienor must pay.) The Junior Lienor has ninety days to submit the payoff. If the Junior Lienor does not submit such payment, then the Junior Lienor’s rights will be terminated without compensation, just as they would have been in the foreclosure process.

F. Anti-merger statute: Section 4 specifically provides that there is no merger of the senior lien and title to the property until a Junior Lienor’s interest is terminated. This new legislation appears to resolve many uncertainties surrounding Indiana’s common law doctrine of merger. Thus the Buyer, which presumes that it’s acquiring title free and clear, has protections it did not previously have.

G. Other Buyer safeguards: Section 4 also states that the Buyer’s senior interest in the property cannot be denied even if the Buyer had (1) had actual or constructive notice of the Junior Lienor’s interest, (2) been negligent in examining county title records, (3) been engaged in the business of lending or (4) obtained a title insurance policy commitment. This language constitutes a preemptive strike against any defenses to the strict foreclosure action, and without these carve outs Section 4 would be meaningless.

I’m planning a follow-up post to identify some holes in SB 298. For today, it’s important for secured lenders and other lien holders to know that Indiana now has a statutory method to clear up title when a buyer learns that a junior lien survived a sheriff’s sale. While Section 4 is not perfect, I agree with my partner Tom Dinwiddie that this was a necessary and fair bill that protects both buyers and junior lien holders.

Indiana Legislation, 2012: Part 2 Of 3 – Obscure Redemption Language Remains

The second noteworthy issue arising out of the General Assembly’s 2012 session surrounds Senate Bill 298, which amends Indiana Code § 32-29-8 “Parties to Foreclosure Suit; Redemption,” including Section 3. This post revisits CitiMortgage v. Barabas, including the mystery that is I.C. § 32-29-8-3, about which I wrote last year: Post 1, Post 2 and Post 3. Unfortunately, even though the legislature amended Section 3, the 2012 session didn’t directly tackle Section 3’s obscure redemption provision. Questions arising out of CitiMorgage linger.

New Section 3. Here is Section 3 of I.C. § 32-29-8, as amended by the italicized language, effective July 1, 2012:

A person who:

(1) purchases a mortgaged premises or any part of a mortgaged premises under the court’s judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and

(2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
(A) an assignment that is not of record; or
(B) the transfer of a note, the holder of which is not a party to the action;

holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court’s decree in the action.

Redemption/strict foreclosure tweak. The underlined portion above is the source of some uncertainty and was not modified by the General Assembly this year. The critical purpose of the amendment to I.C. § 32-29-8 surrounds section 4 and what amounts to a brand new statutory strict foreclosure action. I.C. § 32-29-7-13 has been amended to state “there may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter and in IC 32-29-8.” The new “and in IC 32-29-8” language refers to Section 4, which is momentous legislation related to Indiana mortgage foreclosure law that I will discuss in my next post.

Status. One interpretation of Section 3 and CitiMortgage, which dealt with a rare set of facts, is that a buyer at a sheriff’s sale could acquire the property, only to learn within a year after the sale that a senior mortgagee, by virtue of a previously-unrecorded assignment, could surface and assert an interest in the property. I do not believe that the 2012 statutory amendments directly impact, or help clarify, the CitiMortgage holding. Even with the new Section 4, I.C. § 32-29-8, Section 3, needs a little more attention from the General Assembly. I’m afraid Section 3 unwittingly opens the door to litigation concerning post-sale rights of redemption in Indiana.  (Note:  On 4-10-12, the Supreme Court granted transfer in CitiMortgage.)

Borrowers unaffected. The General Assembly’s amendments do not (should not) affect a mortgagor’s (owner’s) right of redemption. Such parties still need to redeem before the sheriff’s sale. If not, Indiana law provides that a mortgagor’s right to or interest in the subject real estate will be fully and finally terminated – even though, interestingly, there is no specific statute stating as much. The rule is inferred from the totality of I.C. § 32-29-7 and confirmed by case law.

Court Clarifies Its Reasoning In CitiMortgage/Redemption Case - Did It Help?

On August 2nd, I discussed how the Indiana Court of Appeals precluded MERS and its assignee from asserting an interest in the mortgaged property due to timeliness issues. Here's my post: Senior Mortgagee Time Barred. The outcome of the decision rested in part on Ind. Code 32-29-8-3 and a mysterious (to me) post-sheriff's sale right of redemption.

Correction. On rehearing, the Court, on October 20th, issued an opinion in the case that, in part, cleared up the statutory redemption issue:

We agree that the correct interpretation of the statute is that the one-year redemption period begins after the sale of the property [the sheriff's sale], not after Citi first acquired an interest in the property.

Nevertheless, the decision against the senior mortgagee remained the same. As noted in my August 2nd post, the concept of redemption as it might apply to the CitiMortgage case was admittedly confusing and surprising to me. And I'm not sure the opinion on rehearing helped too much, other than to clarify the date upon which the clock should start ticking.

Application. I conducted some limited research for case law on this statutory section and found very little decisional law interpreting it. All I can conclude is that there may be a limited, extraordinary post-sheriff's sale right of redemption for assignees of mortgages whose assignments were not recorded before the filing of the foreclosure complaint. The redemption right clearly does not apply to borrowers or mortgagors.

Know it's there. I welcome emails or comments about CitiMortgage or Ind. Code 32-29-8-3. The point for secured lenders - specifically, assignees of mortgages - is that an unknown foreclosure sale may not be immediately fatal to your mortgage interest if the assignment wasn't recorded. On the flip side, sheriff's sale purchasers - thinking they hold title free and clear of all liens - could under narrow circumstances be in for a surprise. My head starts to spin when I consider all the logistics that could come in to play. Lesson: always buy an owner's policy of title insurance....

NOTE: See my March 29, 2012 post re: new legislation amending Section 3 and my 4-21-12 post noting that transfer has been granted by the Supreme Court.  On 10-4-12, the Supreme Court reversed the trial court. 

 

For The First Time, Indiana Court Tackles MERS: Part I, Senior Mortgagee Time Barred

The confusing role of Mortgage Electronic Registration Systems, Inc. (“MERS”) in the holding of mortgages has been a hot topic across the country for the last few years.  The May 17, 2011 opinion by the Indiana Court of Appeals in CitiMortgage v. Barabas, 2011 Ind. App. LEXIS 892 (.pdf) is the first instance in which Indiana has spoken definitively about MERS – “little more than a ‘straw man’ for lenders,” according to the Court.  Here, in Part I about CitiMortgage, we look at the Indiana statute that dictates the parties, including assignees, to be named in a foreclosure suit. 

The history.  CitiMortgage arose out of a foreclosure case, which made its way to the Court of Appeals by virtue of the trial court’s refusal to set aside a default judgment that terminated the senior mortgage on the property.  The 2005 senior mortgage was given to MERS, “as nominee” of Irwin, the lender.  In June, 2008, junior mortgagee ReCasa initiated a foreclosure action and named only Irwin (not MERS), the purported senior mortgagee, as a defendant.  Irwin promptly filed a disclaimer of interest and was dismissed from the case.  The trial court entered a default judgment for ReCasa in September, 2008.  ReCasa acquired the property at the January, 2009 sheriff’s sale and sold the property to third-party Sanders two months later.

The rub.  A month after the March, 2009 Sanders sale, Citi recorded an assignment of the MERS/Irwin mortgage, even though the evidence showed that Citi acquired an interest in the mortgage as early as July, 2008.  In October, 2009, Citi moved to intervene in the ReCasa foreclosure action, requested relief from the default judgment and sought to set aside the sheriff’s sale.  Citi asserted that, as assignee of MERS, it held a first-priority mortgage on the property.  The fundamental question was whether ReCasa’s failure to name MERS as a defendant rendered ReCasa’s foreclosure judgment ineffective as to Citi.  (See, 12-21-06 post.)

The critical statutes.  Ind. Code § 32-29-8 “Parties to Foreclosure Suit; Redemption” controlled the Court’s analysis.  Here are all three sections of the statute:

Mortgagee or assignee; purchaser at judicial sale
 Sec. 1. If a suit is brought to foreclose a mortgage, the mortgagee or an assignee shown on the record to hold an interest in the mortgage shall be named as a defendant.

Failure to record or join foreclosure action
 Sec. 2. A person who fails to:
  (1) have an assignment of the mortgage made to the person properly placed on the mortgage record; or
  (2) be made a party to the foreclosure action;
is bound by the court's judgment or decree as if the person were a party to the suit.

Good faith purchaser at judicial sale
 Sec. 3. A person who purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree, buying without actual notice of an assignment that is not of record or of the transfer of a note, the holder of which is not a party to the action, holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale.

The ruling, and Section 3.  CitiMortgage relied heavily on Section 3.  The Court denied the relief requested by Citi and reasoned that:

over a year after ReCasa first foreclosed on the Property [filed suit] and nearly six months after the Property was sold and recorded, Citi sought to assert its interest in the first mortgage.  Based on this information, it is clear that the trial court did not abuse its discretion when it found that I.C. § 32-29-8-3 precluded Citi’s claim because it failed to intervene until more than a year after it first acquired interest in the Property. 

Citi’s intervention, in October, 2009, was indeed over a year after Citi first acquired an interest in the property –July, 2008 or earlier.  But interestingly those facts don’t track the language in Section 3, which speaks to redeeming – not intervening – within a year of the sheriff’s sale – not the assignment date. 

The redemption right.  Admittedly, I don’t fully grasp the Court’s suggestion that Citi somehow had a right of redemption but failed to exercise it within a year.  The CitiMortgage sheriff’s sale was in January of 2009, and Citi moved to intervene nine months later.  Perhaps I’m misinterpreting the Court’s rationale.  I further confess that I’m having trouble reconciling the last sentence in Section 3, particularly the “like any other creditor” phrase, with well-settled Indiana law providing that a sheriff’s sale terminates the right of redemption.  (See, 5-15-08 post.)  This assignee-related/redemption wrinkle will have to be a topic for another day…. 

The Section 2 impact.  It appears to me that Section 2, not Section 3, more clearly supports the Court’s conclusion because Citi failed to timely record the assignment of mortgage and intervene sooner.  There was evidence that Citi knew about ReCasa’s foreclosure action long before it intervened.  Reading between the lines, perhaps CitMortgage’s ultimate lesson is that assignees should record their assignments immediately and then promptly intervene in a known foreclosure action.  (See, 5-28-09 and 10-14-09 posts.)

In the second part of the CitiMortgage opinion, which I’ll discuss next week, the Court specifically hashes out the enigma that is MERS and rejects Citi’s argument around Section 3. 

Note:  The Court, on rehearing, clarified its reasoning related to Section 3.  Here's my 11-1-11 follow-up post.  Furthermore, on 4-10-12, the Supreme Court granted transfer, and on 10-4-12 reversed the trial court.

Indiana Tax Sales, Part II: Redemption

My November 16, 2010 post discussed how lenders can and should be proactive in monitoring their commercial real estate loan collateral for delinquent taxes and tax sale status.  Today’s post addresses what to do upon the “oh no!” moment when the lender learns, after the fact, that a tax sale occurred.  Assuming the lender wants to keep its collateral in tact, the lender should exercise the statutory option to redeem as quickly as possible. 

Time to redeem.  Buyers at Indiana tax sales acquire a super-priority lien on the property for the amount paid.  Ind. Code § 6-1.1-24-9.  Buyers do not immediately receive a deed.  They simply receive a certificate from the County Auditor.  The lien trumps any and all other liens, including a lender’s mortgage lien.  The lien converts to a deed (title/ownership) after a statutory redemption period.  Depending upon the nature of the property and whether the County or a third party was the purchaser, the period can be 120 days or up to a year.  Generally, improved commercial property can be redeemed, with a 10% penalty, for up to six months, or for up to a year with a 15% penalty.  (I recommend that mortgagees and their counsel study the applicable tax sale statutes, I.C. § 6-1.1-24 and 6-1.1-25, for any specific questions.  The statutes are intricate and can be challenging to interpret.  I could never address every issue or nuance in one or two blog posts.) 

Redemption amount.  The amount required for redemption is covered by I.C. § 6-1.1-25-2.  Property sold at a tax sale can be redeemed for:  the “minimum bid” (meaning the pre-sale delinquent taxes, interest, penalties and sale fees) + a 10% penalty based upon the “minimum bid” + 10% per annum interest on any surplus paid (any amount paid over the “minimum bid”).  The 10% penalty becomes a 15% penalty after six months.  Note there will be a per diem interest amount if there was a surplus payment, so you’ll need that number to ensure the redemption check is correct.  On the other hand, if there was no surplus (a/k/a overbid), then there will be no per diem.

Redemption payee.  Redemption checks must be made payable to the County Treasurer and should be certified funds.  Upon receipt of the redemption payment, the Treasurer will provide a payment receipt and another official-looking document, sometimes labeled a “Quietus,” that documents the tax sale redemption.

Marion County (Indianapolis) information/guidelines.  Marion County’s website, http:\\www.indy.gov, has the following information , written in "plain English," that help explain the statutory procedure with regard to tax sales in Indianapolis:   

• Treasurer’s introduction
• Information for current owners of property
• Information for purchasers of tax sale certificates

Again, Indiana statutes applicable to tax sales are clouded and complicated, and I understand that they have been subject to revision fairly regularly over the years.  Secured lenders are advised to consult with their Indiana foreclosure counsel in the event they learn that their real estate collateral was unexpectedly sold at a tax sale.  Even though there is a grace period to redeem, the clock begins ticking immediately.  Ultimately, the lien from the sale can and will result in the issuance of a tax deed (title/ownership), at which point any prior mortgage lien is terminated. 

Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b).  Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure sale.  Unlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

Thanks to our firm’s summer associate, Adam Wanee, for helping with this research.

Indiana Foreclosure Sale Terminates The Right Of Redemption

Recently, an out-of-state client asked whether the defendant borrower, in an Indiana commercial foreclosure case we're handling, will have the right to redeem the mortgage after the sheriff's sale.  The client was pleased to learn that, even though some states may permit redemption post-sale, Indiana is not one of them. 

Indiana redemption rights.  Indiana does provide a pre-sale right of redemption.  Please see my February 1, 2008 post for details.

Mortgages.  Ind. Code 32-29-7-13 states:  "There may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter."  Thus the general statutory rule is that there is no right of redemption.  (My 2-1-08 post addresses the "before the sale" statutory exception, Ind. Code 32-29-7-7.)  Well-settled Indiana case law provides that "a foreclosure sale cuts off a mortgagor's rights of redemption."  Patterson v. Grace, 661 N.E.2d 580, 585 (Ind. Ct. App. 1996); Overmyer v. Meeker, 661 N.E.2d 1271, 1275 (Ind. Ct. App. 1996); Vanjani v. Federal Land Bank of Louisville, 451 N.E.2d 667, 672, n.1 (Ind. Ct. App. 1983).

UCC Security Interests.  Similarly, Indiana's UCC, at Ind. Code 26-1-9.1-623, also covered in my prior post, calls for redemption rights to be terminated upon disposition of the collateral.  The "Official Comment" to the section states that "the debtor or another secured party may redeem collateral as long as the secured party has not collected, disposed of or contracted for the disposition of, or accepted the collateral."  The "Indiana Comment" states that Section 623 "recognizes the right of the debtor and other secured parties to redeem any time after default before disposal of the collateral or rescission under Section 502(2), unless otherwise agreed in writing after default."

When the fat lady sings.  Lenders enforcing mortgage liens or security interests in Indiana can rest assured that, once there is a sheriff's sale or a disposition of personal property collateral, the borrower's/debtor's right of redemption is terminated.  The borrower/debtor no longer owns the property, and no longer has any rights in or to the property.  If warranted, deficiency collection, among other things, can commence.

Do Borrowers Have A Right Of Redemption In Indiana?

If a borrower defaults, and if a secured lender exercises its rights under a mortgage or security agreement to foreclose, the borrower still is able to avoid losing the collateral.  This is because, in Indiana, borrowers have a right of redemption.  “Redeem” means “to buy back.  To free property from mortgage . . . by paying the debt for which it stood as security.”  Black’s Law Dictionary.  Redemption (basically, a payoff) is the way for a borrower to keep the property, end the lien enforcement litigation and free itself of the plaintiff/lender’s mortgage or security interest.  In Indiana, two main statutes cover redemption. 

Real estate.  I.C. § 32-29-7-7 “Redemption by owner before sheriff’s sale” states:

  Before the [sheriff’s] sale under this chapter, any owner or part owner of the real
  estate may redeem the real estate from the judgment by payment to the:

   (1)  clerk before the issuance to the sheriff of the judgment and decree; or
   (2)  sheriff after the issuance to the sheriff of the judgment and decree;

  of the amount of the judgment, interest, and costs for the payment or satisfaction
  of which the sale was ordered.  If the owner or part owner redeems the real estate
  under this section, process for the sale of the real estate under judgment may not
  be issued or executed, and the officer receiving the redemption payment shall
  satisfy the judgment and vacate order of sale . . ..

Personal property.  Indiana provides for the right to redeem non-real estate collateral in its UCC statute, I.C. § 26-1-9.1-623:

  (a)  A debtor, any secondary obligor, or any other secured party or lienholder may
  redeem collateral.
  (b)  To redeem collateral, a person shall tender:

   (1)  fulfillment of all obligations secured by the collateral; and
   (2)  the reasonable expenses and attorney’s fees described in IC 26-1-9.1-
   615(a)(1).

  (c)  A redemption may occur at any time before a secured party:

   (1)  has collected collateral under IC 26-1-9.1-607;
   (2)  has disposed of collateral or entered into a contract for its disposition
    under IC 26-1-9.1-610; or
   (3)  has accepted collateral in full or partial satisfaction of the obligation it
  secures under IC 26-1-9.1-622.

(Click here for I.C. § 26-1-9.1). The rights and time period parallel those associated with mortgages/real estate.  The full amount due must be submitted before repossession or disposition of the property.

Timing.  Under Indiana law, the right to redeem the property from the foreclosure judgment terminates with the sheriff’s sale.  In Re Collins, 2005 Bankr. LEXIS 1800 (S.D. Bankr. 2005).  “Once a sheriff’s sale takes place, a mortgage-debtor is no longer the title holder . . ..”  Id.  Judge Coachys concluded, in Collins, that a sheriff’s sale is complete when the hammer falls and that the actual delivery of the sheriff’s deed is purely ministerial.  Id.  Upon a sale, title is transferred, and the loan is terminated.  To avoid losing the property, the borrower/owner must pay the entire debt (usually, the accelerated amount) before the sale or disposition of the property.  Otherwise, the party’s over.