Wednesday, May 25, 2011

FYI: Ind App Ct Says MERS Not Entitled to Notice of Second-Lien Mortgagee's Foreclosure

An Indiana Court of Appeals recently affirmed a lower court's ruling that
a second-lien mortgagee was not required to send notice of its foreclosure
to Mortgage Electronic Registration Systems, Inc. ("MERS"), but rather
only to the lender identified in the mortgage. The Court also held that
MERS did not have an enforceable right under a mortgage separate from the
interest held by the originating lender. A copy of the opinion is

The borrower, Shannon S. Barabas ("Barabas"), obtained a first mortgage
from Irwin Mortgage Corporation ("Irwin"), which designated MERS as
mortgagee, acting as nominee for Irwin. The mortgage provided that any
notice to Irwin was to be mailed to Irwin's address indicated in the
mortgage, and that any notice provided in accordance with the mortgage
"shall be deemed to have been given to . . . [the] Lender. . . ." Barabas
subsequently obtained additional loans from Appellee ReCasa Financial
Group, Inc. LLC ("ReCasa"), one of which was a second mortgage on the same
property that secured Barabas's loan with Irwin. After Barabas defaulted
on the loan owed to ReCasa, ReCasa foreclosed on the property, naming
Irwin as a defendant. Irwin, however, filed a disclaimer of interest in
the property. ReCasa purchased the property at the foreclosure sale and
later sold the property to another appellee in the case (the "Purchaser").

A month after the foreclosure sale, MERS assigned the mortgage to
appellant CitiMortgage, Inc. ("Citi"). Seeking to foreclose on the first
mortgage and to have the trial court's judgment in favor of ReCasa set
aside, Citi argued that as the assignee of MERS and owner of the first
mortgage, Citi could assert all rights of MERS, that the Purchaser took
the property subject to the first mortgage, and that the Purchaser's
interest was junior to Citi's. Citi also argued that, because MERS was
the designated mortgagee of record, MERS, rather than Irwin, should have
been given notice of ReCasa's foreclosure and should have been named as a
party defendant in the foreclosure action. According to Citi, ReCasa's
failure to do so rendered the foreclosure judgment ineffective as to MERS
and Citi.

The Court of Appeals examined Indiana Code section 32-29-8-3 ("section
32-29-8-3"), which provides in part that a purchaser of mortgaged premises
at a judicial sale, who buys without actual notice of an assignment, holds
the premises free and clear of the lien, but is subject to an assignee's
right to redeem the premises for one year following the sale. The Court
of Appeals agreed with the trial court that section 32-29-8-3 "precluded
Citi's claim because [Citi] failed to intervene until more than a year
after it first acquired interest in the Property," and in any event that
Citi failed to redeem the property within one year following the judicial

Moreover, the Court of Appeals rejected Citi's argument that section
32-29-8-3 did not apply because ReCasa failed to notify MERS of the
foreclosure lawsuit and that Citi's interest in the property was not
eliminated by the foreclosure. Following the reasoning in a factually
similar case, Landmark Nat'l Bank v. Kesler, 216 P.3d 158, 161 (Kan.
2009), the Court concluded that MERS acted as an agent or representative
and not on its own account. Further, because Irwin had disclaimed its
interest in the foreclosure, the Court agreed with the trial court that
MERS, as "mere nominee and holder of nothing more than bare legal title to
the mortgage, did not have an enforceable right under the mortgage
separate from the interest held by Irwin Mortgage." The Court of Appeals
also agreed that notice of the foreclosure was proper under the mortgage
where the notice was sent to Irwin's address indicated in the mortgage,
but not to MERS.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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