April 26, 2012
The "Indiana Lawyer" Writes Story on 2012 Foreclosure Legislation
I recently worked with reporter Jenny Montgomery in connection with her piece in the April 27th edition of the Indiana Lawyer. Here is a link to the story, which quotes me: 2 Cases Prompt New Real Estate Law. Ms. Montgomery tackled complicated topics in a relatively short space, and in my view she helped make the "big picture" understandable.
As a reminder, for a more in-depth assessment of the statutory amendments and how they might affect secured lenders and other parties involved in the foreclosure of commercial mortgage loans, please click on one or more of my four recent posts on the issues: Abandonment, Redemption, Strict Foreclosure, Citimortgage Transfer.
Posted at 09:33 AM in News
April 21, 2012
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.
Posted at 11:18 AM in Mortgages
, Procedure/Trial Rules
, Sheriff's Sales
April 12, 2012
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.
Posted at 10:52 AM in News
, Sheriff's Sales
, Strict Foreclosure
March 30, 2012
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.
Posted at 10:42 PM in News
, Sheriff's Sales