to make a junior lienholder a party to a foreclosure action could not
institute a new and subsequent foreclosure action against the junior
lienholder, because the first mortgage lender's lien was extinguished by
the doctrine of merger.
A copy of the opinion is available at:
http://www.in.gov/judiciary/opinions/pdf/06291102rdr.pdf
Countrywide Home Loans, Inc. ("Countrywide") foreclosed on a property, bid
its judgment and took title to the property by way of a sheriff's deed.
In error, Countrywide did not make Citizens State Bank of New Castle
("Citizens") a party to the foreclosure action, although Citizens held a
judgment lien on the property. Countrywide then conveyed title to the
property to Federal National Mortgage Association ("FNMA").
When Countrywide discovered Citizens' judgment lien, Countrywide filed an
action titled "Complaint for Strict Foreclosure," seeking to foreclose
Citizens' interest in the subject property. Citizens filed a separate
action against FNMA attempting to foreclose on its judgment lien. The two
actions were consolidated, each side moved for summary judgment, and the
trial court granted the motion brought by Countrywide and FNMA.
Citizens appealed and the appellate court reversed, on the grounds that
through the doctrine of merger, Countrywide's lien was extinguished. The
Indiana Supreme Court granted transfer, vacating the opinion of the
appellate court.
As you may recall, the doctrine of merger provides that when one party
acquires both a lien on and legal title to a property, the two interests
merge, and the lien is extinguished. However, merger may produce an
arguably unfair result where it operates to give a junior lienholder
priority over a senior lienholder. Therefore, an exception to the
doctrine of merger provides that merger will not take place if it is
against the best interests of the party in whom the interests merge.
The Court began its analysis by nothing that, under Indiana law, a junior
lienholder not made a party to a foreclosure action is not bound by the
foreclosure. In such circumstances, a purchaser at a foreclosure sale
takes the property subject to the junior lienholder's interest.
Next, the Court scrutinized the merger and anti-merger doctrines. It
concluded that although courts must presume that the mortgagee intended
the result that it was in its best interest, that presumption can be
rebutted by evidence finding that a merger had been expressly agreed to.
The Court found such evidence here. When Countrywide conveyed its
interest in the property to FNMA, it used language which indicated that
the title conveyed was free from all encumbrances. The Court reasoned
that Countrywide could only make such a conveyance if Countrywide's lien
had been extinguished through merger.
Because "Countrywide demonstrated that it intended a merger of its
interests," the Court held that Countrywide was not entitled to the remedy
of strict foreclosure. Thus, the decision of the trial court was
reversed.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mtwllp.com
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