Daily Development for Thursday, August 28, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; FINALITY: Purchaser of property at sheriff’s sale may not have the sale set aside by  alleging that it had been unaware that the property was subject to a first mortgage, even where the notice of sale does not reveal the existence of the prior mortgage.

Indi Investments, LLC v. Credit Union, 1, 884 N.E.2d 896 (Ind.App. 2008).

Credit Union, filed an action to foreclose its second mortgage on a piece of residential real estate located in Indianapolis, Indiana. It named Waterfield Mortgage as a party to the foreclosure action, but apparently the parties entered into a stipulation just prior to the judgment that Waterfield held a a first mortgage on the property. The trial court entered a default judgment and decree of foreclosure that foreclosed Credit Union's mortgage and ordered that the property be sold by sheriff's sale subject to Waterfield's first mortgage.

Indi purchased the property for $40,500 following publication of a Notice of Sherriff’s Sale, which described the property but did not mention the Waterfield mortgage. Shortly thereafter, Indi Investments received a sheriff's deed—providing that the property was subject to the first mortgage rights of Waterfield—and subsequently recorded the deed.

After Citimortgage, the successor and assignee of Waterfield, filed a foreclosure action, Indi petitioned the court to set aside the sheriff’s sale, alleging that it did not become aware of the Waterfield mortgage until sometime after it recorded the deed.

In deciding whether to set aside a sheriff’s sale, Indiana courts take into consideration all circumstances, such as the inadequacy of the price, the effect of procedural irregularities, inequitable conduct, evidence of mistake or misapprehension, and problems with title. Finucane v. Union Planters Bank, N.A., 732 N.E.2d 175, 177 (Ind.Ct.App. 2000). The trial court evaluated these factors and denied Indi’s petition. Indi appealed.  

On appeal, the Appeals Court examined the three main arguments advanced by Indi to determine whether the trial court did in fact abuse its discretion in denying Indi Investments’ motion. Firstly, Indi argued that Indiana law requires that the notice of sale include information on the existence of any senior mortgage. Indiana Code Section 32-29-7-3 governs the notice of sale and provides in § 32-29-7-3(g) that such notice need only contain the address of the property “for informational purposes only.” Therefore, the Appeals Court found no statutory authority to support Indi’s claim that the existence of a first mortgage was required to be in the notice of sale.

Secondly, Indi argued that the foreclosure Judgment mandated that the information related to Waterfield's mortgage be included in the notice of sale. The Appeals Court found that the Judgment did not require that the notice of sale mention the Waterfield mortgage, only that the property be sold subject to the mortgage.

Lastly, Indi argued that the sheriff’s sale should be set aside because it lacked knowledge of the Waterfield mortgage and Indiana Code Section 32-29-8-3 protects persons as bona fide purchasers who act in good faith without actual or constructive notice. The Appeals Court found that Indi had the means of obtaining information regarding the Waterfield mortgage by performing a title search or reviewing the trial court’s file and the Judgment to discover that the property was being sold subject to the Waterfield mortgage; thus, Indi is charged with actual notice and therefore is not protected as a bona fide purchaser under the statute. The Appeals Court held that the trial court's denial of Indi’s motion to set aside the sheriff's sale was correct and affirmed the judgment of the trial court.

Comment: What the editor finds interesting about this case is that the court never states that the senior Waterfield mortgage was in fact recorded.  The on line appellant’s brief (2008 Westlaw 466040) doesn’t say that either.  The brief says that Indi could have discovered the existence of the senior mortgage by ordering a title search - apparently arguing that such a search would have compelled a professional title examiner or title company to review the court file, which would have indicated the existence of the Wakefield mortgage.

Each jurisdiction has its own peculiarities about what constitutes “constructive notice” and usually the search expectation goes far beyond the simple searching of a grantor grantee index.  But, if we assume that the senior mortgagee did not record, then it certainly got a nice break here when the court record was made part of the foreclosure purchaser’s search burden. 

Note that the Waterfield mortgage was named as a party defendant in the original foreclosure.  There apparently was some negotiation among the parties before they stipulated to the court that the Waterfield mortgage was senior.  Again, all in the court file, but do foreclosure purchasers routinely check such files?  Note that Indi argued that it had already made significant improvements to the premises.  There is no suggestion of “good faith improver” payments or other equitable relief, perhaps because Indi elected to go for all or nothing. 

Note further that the same rule of constructive notice would apparently apply to subsequent purchasers from Indi. 

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