November 12, 2012
How Should A Junior Lender/Mortgagee Respond To An Indiana Foreclosure Suit?

One of our bank clients, which has a home equity line of credit portfolio, recently asked me to give a presentation on how best to deal with foreclosure suits filed by senior lenders (first mortgagees).  Whether junior mortgages are residential or commercial, the basic plan of attack in Indiana is the same:

 1. Email Summons and Complaint filed by senior mortgagee, together with scan of the bank’s loan documents, to foreclosure counsel.  Advise foreclosure counsel of the manner of service of process (certified mail or hand delivery) and date of receipt.

 2. Foreclosure counsel will file an appearance and a motion for extension of time with the court.  Nothing else typically will be due with the court until 50 – 53 days after the date of service of process.

 3. During the 50 – 53 day window, the bank should do the following:

a. Order an appraisal or broker price opinion, and determine the fair market value of the mortgaged property.

b. Create an estimate of the senior mortgagee’s entire indebtedness, including unpaid principal balance, accrued interest, late fees, delinquent real estate taxes, per diem interest and attorney fees/litigation costs.  The complaint will list many of these figures.

c. Create an estimate of carrying costs associated with owning the real estate, including real estate taxes, hazard insurance premiums, maintenance/repair costs, utility expenses and attorney fees/litigation expenses for foreclosure. 

d. Create an estimate of liquidation expenses, including broker fees and closing costs.

e. Determine the bank’s own estimated indebtedness, including unpaid principal balance, accrued interest, per diem interest and late fees.

 4. Before the close of the 50 – 53 day window, the bank should determine whether it would ultimately net any money if it were to acquire the mortgaged property at the sheriff’s sale and then liquidate it.  The question is whether the value of the mortgaged property exceeds the senior mortgagee’s indebtedness, the carrying costs and the liquidation expenses.  Here is a basic formula:  Fair Market Value - (Senior Debt + Carrying Costs + Liquidation Expenses) = Equity.

 5. If the calculation in #4 shows insufficient equity, then the bank should consider instructing foreclosure counsel to file a disclaimer of interest and motion to dismiss.  (The exception to this would be if the bank desires to collect the debt from other assets of the borrower or a guarantor.)  The case might end here.

 6. If the calculation in #4 shows sufficient equity, then the bank should advise foreclosure counsel of its debt figures in #3(e) above and instruct counsel to file an answer to the complaint and a cross claim against the borrower (and guarantor, if applicable).

 7. The bank or foreclosure counsel next should order a title commitment to be effective through the date of the filing of the complaint, and ensure all lien holders are named in the case.

 8. Foreclosure counsel will monitor the lawsuit and obtain judgment/foreclosure decree for the bank.

 9. After the entry of judgment but before the sheriff’s sale, the bank should revisit the equity analysis in #4.  The bank – the junior lender - must decide if it is prepared  to pay off the senior mortgagee’s judgment so that the bank can credit bid its own judgment at the sale. 

 10. The junior lender should communicate its decision regarding #9 to foreclosure counsel, with bidding instructions, if any. 

 11. As applicable, foreclosure counsel will attend the sheriff’s sale, tender a cash deposit sufficient to pay the senior mortgagee’s judgment in full and submit a credit/judgment bid on behalf of the bank, which will acquire title to the property if it’s the winning bidder.  If the bank is outbid, then it will receive cash in the amount of its credit bid (and a refund of the deposit). 

Perhaps the most important thing to bear in mind is that the process requires junior mortgagees to bring enough cash to the sheriff’s sale to pay off the credit (judgment) bid of the senior mortgagee.  A junior lender cannot submit its own credit bid or obtain title to the real estate unless it first outbids the senior lender with cash.  Hence the significance of the analysis in #4. 

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Posted at 12:58 PM in Mortgages , Procedure/Trial Rules , Sheriff's Sales  |  Permalink

November 03, 2012
Is The Citimortgage Opinion Flawed For Not Requiring Proof Of Assignment Documents?

This is my final post about the Indiana Supreme Court’s opinion in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  Here are my other three:  10-26, 10-19, 10-12.  The Court’s decision to grant Citimortgage’s motion to intervene was understandable in that it preserved the senior lien.  Based upon the Court’s ruling, a logical outcome would have been to set aside the trial court’s judgment and resulting sheriff’s sale.  But that’s not what happened. 

Result.  The Court didn’t simply remand the case to the trial court - to the prejudgment stage - for further proceedings with Citimortgage as a party.  The Court dispensed with a “do over” and instructed the trial court to amend its judgment “to provide that ReCasa took the [real estate] subject to Citimortgage’s lien.”  What I believe this means is that the litigation (for now) is over but that Sanders, the third-party purchaser, owns the real estate subject to the Citimortgage lien (of an undetermined amount).  Junior mortgagee ReCasa didn’t lose – Sanders did

Absence of proof.  A more curious aspect of the Court’s analysis was the fact that there was no hard evidence of Citimortgage’s lien.  From what I can tell in reviewing all of the Citimortgage opinions, there was no proof of the date upon which Citimortgage acquired the lien or, in other words, when Citimortgage became Irwin’s assignee.  The Court appears to have assumed, based perhaps on the 2009 mortgage assignment, that Citimortgage was the mortgagee at the time ReCasa filed the suit in 2008.

Against the grain.  Setting aside the trial court’s judgment is one thing, but it’s an entirely different matter to effectively grant Citimortgage its own judgment.  This outcome seems to cut against law that has developed in this country over the last several years mandating that lenders/mortgagees actually prove that they hold the mortgage at the time of the filing of a foreclosure claim.  As I noted back in November of 2007, a famous opinion from a federal court in Ohio emphatically held that an institution filing a foreclosure suit must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint.  This means that the real party in interest must produce, and typically must include as exhibits in its pleadings, chain of assignment documents linking the original lender/mortgagee to the holder of the debt at that time.  Without such documentation, the party lacks standing to file a lawsuit or, in the case of a junior lien holder, to assert a claim in a lawsuit, which is what Citimortgage did.  In the Ohio case, District Judge Boyko lectured:  “unlike Ohio State law and procedure, as the Plaintiffs perceive it, the federal judicial system need not, and will not, be forgiving in this regard.”  In footnote 3, he flatly rejected plaintiff’s “judge, you just don’t understand how things work” argument. 

Seemingly, the Indiana Supreme Court bought the “judge, you just don’t understand how things work” argument in Citimortgage.  Or, to be fair, perhaps the Court knows how things work.  Either way, a compelling contrast exists between Judge Boyko’s uncompromising order dismissing plaintiffs’ cases and the Indiana Supreme Court’s pragmatic decision recognizing Citimortgage’s purported lien. 

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Posted at 08:37 AM in Mortgages , Procedure/Trial Rules  |  Permalink

October 26, 2012
In Indiana, Name MERS In Foreclosure Suit If Mortgage Does

This follows-up last week’s post regarding the Citimortgage opinion, which circumvented two foreclosure statutes that supported a conclusion opposite of the one the Court reached.  The result preserved the lien rights of the purported senior mortgagee, Citimortgage, even though Citimortgage did not record its assignment of mortgage until months after the subject real estate had been sold at a sheriff’s sale.  How?  Citimortgage had an “ace in the hole” – Mortgage Electronic Registration Systems, Inc. (“MERS”).

Section 1 problem.  The Court wrestled with the applicability of Ind. Code § 32-29-8-1 (“Section 1”), which governs who should be named when a plaintiff seeks to extinguish a mortgage.  That statute currently identifies two options as to whom to sue:

If a suit is brought to foreclose a mortgage, the [1] mortgagee or an [2] assignee shown on the record to hold an interest in the mortgage shall be named as a defendant.

Citimortgage argued that MERS was statutorily entitled to notice under that provision as a “mortgagee.”  The Court stated “that is a bridge too far.”  The Court found that MERS was neither the mortgagee itself nor the assignee of the mortgage.  Yet Citimortgage prevailed.   

Section 1 solution.  The Court plowed new ground by determining that the mortgage designated MERS as the agent of Citimortgage and that MERS as agent was entitled to notice:

Ultimately, we do not believe that the authors of the original version of [Indiana Code § 32-29-8-1], writing in 1877, would have understood the term “mortgagee” to include an entity like MERS that neither holds title to the note nor enjoys a right of repayment.  Thus, our decision here should not be taken to mean that MERS is a “mortgagee” as the term is used in Indiana Code § 32-29-8-1.  All we hold today is that because Citimortgage never received proper notice of the foreclosure proceeding, it lay beyond the jurisdiction of the trial court, and the default judgment is thus void as to Citimortgage’s interest in the Madison County property. 

One might interpret Citimortgage to say that Section 1 includes a third option as to whom to sue:  a nominee (agent) of the mortgagee.

Section 2 problem.  Citimortgage avoided the impact of I.C. § 32-29-8-2(1) (“Section 2”), which states that “a person who is assigned a mortgage and fails to have the assignment properly placed on the mortgage record . . . is bound by the court’s judgment or decree as if the person were a party to the suit.”  At some point, Citimortgage apparently became the assignee of Irwin but evidently did not record the assignment until after ReCasa obtained a judgment (and flipped the house to Sanders).  Yet Citimortgage prevailed. 

Section 2 solution.  The Citimortgage decision carves out an exception to the recording requirement in Section 2 when the mortgage identifies MERS.  The plaintiff must name MERS “as nominee” of the identified lender.  The Court’s rationale appears to be based upon the premise that MERS - identified in the mortgage - is shown on the record to hold an interest in the mortgage.

Statutory amendments coming?  In its opinion, the Court poked Indiana’s legislature about changing I.C. § 32-29-8:

We note in closing that it is both difficult and undesirable to apply such superannuated statues to the modern mortgage industry.  The drafters of the original 1877 version of Indiana Code § 32-29-8-1 envisioned a drama for two, or at most three, actors:  Borrower, Mortgagee, and possibly Assignee.  They could not have imagined our present-day multi-trillion-dollar international mortgage market.  The statute that they drafted, and under which Indiana mortgage transactions still take place, thus leaves unaddressed many issues important to contemporary practice.  We recognize that the General Assembly may soon find it necessary to modernize the statutory script to accommodate this new and larger cast of characters.

How the Indiana General Assembly will tweak Sections 1 or 2, if at all, is guesswork.  Perhaps MERS itself will be written into the statute, or maybe the statute will define “nominee” and add such a party as an option for whom to sue.  Something should be done, and Section 3 should be included in any amendment. 

Name MERS.  What we do know in the wake of Citimortgage is that, under Indiana law, MERS “as nominee” is the actual mortgagee’s agent for service of process.  When a mortgage identifies MERS “as nominee,” the plaintiff creditor must name MERS as a defendant in any foreclosure action and serve MERS with a summons and complaint.  To be safe, both the identified lender and MERS should be named in the suit. 

Next week I’ll address what some may feel to be a flaw with the Court’s ultimate finding.

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Posted at 05:20 PM in Mortgages , Procedure/Trial Rules  |  Permalink

October 19, 2012
Indiana Supreme Court Concludes That MERS Is Merely The Agent Of The Actual Mortgagee

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. 

Setting the table.  As noted in my prior posts about 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. 

Next week, I’ll explain how the Court in Citimortgage circumvented two foreclosure statutes that clearly supported ReCasa’s position. 

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Posted at 05:04 PM in Mortgages , Procedure/Trial Rules  |  Permalink