Indiana Joins the Debate: Does MERS Have A Valid Mortgage Interest?

By: William E. Kelley, Jr.

In a prior blog entry here, we addressed the mortgage foreclosure crisis, which included discussion of the role of Mortgage Electronic Registration Systems (MERS) in some ongoing disputes.  Specifically, we noted that “[s]ome states saw litigation that challenged whether foreclosure actions filed by lenders without the proper documentation were valid, or whether foreclosure actions initiated by MERS were even valid, given the fact that MERS did not actually own the mortgage loans or promissory notes at issue.”

At the time of that prior blog entry, several states had weighed in on the role of MERS in the mortgage foreclosure process and specifically whether MERS had an ownership interest in the mortgage instruments sufficient to give it rights in the foreclosure proceedings.  Now Indiana has joined the debate with an opinion released today.  In CitiMortgage, Inc. v. Barabas, (Ind. Ct. App. 2011), the Indiana Court of Appeals addressed the question of whether MERS was entitled to notice of a mortgage foreclosure proceeding initiated by a second mortgage holder, and whether the failure to provide such notice could be grounds for overturning a default judgment in favor of that second mortgage holder.

The dispute arose when a second mortgage holder initiated foreclosure proceedings due to a default under its mortgage instrument.  In its lawsuit, the second mortgage holder named Irwin Mortgage, which was identified as the lender on the first mortgage pursuant to the documents in the county recorder’s office.  MERS was not named in the lawsuit.  Even though MERS was also identified as the “mortgagee” in those same recorded documents, the mortgage specifically stated that any notice to the lender should be provided to Irwin Mortgage.  After the lawsuit was filed, Irwin Mortgage filed a disclaimer of interest in the mortgage, and the trial court entered a default judgment in favor of the second mortgage holder.  The second mortgage holder proceeded to purchase the real estate at a subsequent sheriff’s sale.

After the sheriff’s sale, MERS assigned the first mortgage to CitiMortgage, and CitiMortgage sought to intervene in the lawsuit in order to set aside the default judgment and vacate the sheriff’s deed.  The trial court ruled that CitiMortgage was bound by the default judgment, and that the second mortgage holder had validly purchased the real estate at sheriff’s sale free and discharged of the first mortgage interest.

In a split opinion, the majority panel of the Indiana Court of Appeals acknowledged that the relationship between MERS and the actual owner of the mortgage instruments was one of first impression in Indiana.  Consequently, the Court of Appeals analyzed the prior decision by the Kansas Supreme Court in Landmark Nat’l Bank v. Kesler, 216 P.3d 158 (Kan. 2009), where that court found that MERS was little more than a “straw man” for the lender.  The Indiana Court of Appeals ultimately concluded 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.”  Consequently, the Court of Appeals declined to set aside the default judgment based on the fact that MERS was not named as a part to the original foreclosure lawsuit.  Further, the Court of Appeals declined to address whether MERS was denied its due process rights when it was not provided notice of the foreclosure lawsuit, finding that the notice to Irwin Mortgage, as lender, was sufficient.

There was a dissenting opinion, which, in part, argued that MERS was more than a “straw man” and that MERS had a real interest in the real estate.

This case has obvious and important consequences for anyone involved in real estate financing, mortgage foreclosure and mechanic’s lien proceedings in Indiana, and we will continue to monitor this case for further developments and application.

Buyers Beware: The Indiana Residential Real Estate Sales Disclosure Form

By: Russell M. Webb III

Case Law Update
Since the mid-1990’s, the State of Indiana has required sellers of single-family residential real estate to complete and deliver to buyers a disclosure form entitled “Seller’s Residential Real Estate Sales Disclosure”, pursuant to the requirements of Indiana Code § 32-21-5.  Over the past twenty four months, the Indiana Court of Appeals has decided four cases dealing with the effect of the representations made by sellers of real estate in the Sales Disclosure Forms and, in the process, has reversed the common law interpretation and enforcement of these forms.

OVERVIEW OF THE DISCLOSURE FORM
The body of the Sales Disclosure Form contains checklists where a seller is required to disclose the status of various systems and improvements to the real estate, including appliances and the electrical, water, sewer and heating and cooling systems.  In addition, the seller is required to make disclosures addressing the condition and history of other parts of the home, including, for example, the roof, the foundation, the occurrence of water intrusion and the presence of wood destroying insects.  However, special attention should also be paid to the notices and disclaimers that are included in the fine print of the Seller’s Disclosure Form, including:

• “This information is for disclosure only and is not intended to be a part of any contract between the buyer and the owner.”
• “The information contained in this Disclosure has been furnished by the Seller, who certifies to the truth thereof, based on the Seller’s CURRENT ACTUAL KNOWLEDGE.”
• “A disclosure form is not a warranty by the owner or the owner’s agent, if any, and the disclosure form may not be used as a substitute for any inspections or warranties that the prospective buyer or owner may later obtain.”

In Indiana, the traditional rule regarding the purchase of real estate has always been one of “caveat emptor” or “buyer beware”.  While it would appear that the Indiana Legislature attempted to make inroads on this rule with the requirement for the Seller’s Disclosure Form and the language of Indiana Code § 32-21-5, the Indiana Court of Appeals has traditionally used the disclaimers recited above to override this attempt at buyer protection.

The Effect of the Mortgage Foreclosure Crisis on Mechanic’s Liens

By: William E. Kelley, Jr.

A lot has been written about the mortgage foreclosure crisis in this country.  There are multiple aspects to the “crisis” itself, ranging from the origins (e.g., the subprime lending market and relaxed lending standards that allowed for approval of large mortgage loans to individuals with limited income) to the end result (e.g., the downturn in the financial market caused by problems with mortgage loans, as tradable commodities, being packaged and sold in bond portfolios).  We are currently entrenched in the “aftereffect” phase.

From a legal standpoint, the mortgage foreclosure crisis brought to light a growing problem with the way that some lenders were handling foreclosure lawsuits in court.  The basic problem presented itself as follows:

• Mortgage holders are typically required to record their mortgage interests in order to secure their interest in the real estate and to put other lienholders and potential buyers on notice of that mortgage interest;
• During the height of the real estate boom, promissory notes and mortgages were frequently sold and assigned multiple times after the original issuance to the homeowner;
• Each transfer of ownership interest in the mortgage and promissory notes required the new owners to record their mortgage interest;
• In order to provide some relief to mortgage holders from this recording requirement, a new business concept emerged in the form of the Mortgage Electronic Registration Systems (MERS);
• MERS serves as an electronic registry of the ownership and servicing rights of individual mortgage loans;
• MERS does not actually own the mortgage loans, but it nonetheless records an assignment in its name with the county recorder’s office;
• With the MERS mortgage interest recorded, the “true” owners of the promissory note and mortgage continued to sell and assign those loan documents multiple times, without having to record each transfer in ownership interest with the county recorder;
• Given the large volume of mortgage loan transfers and sales, the trading entities sometimes neglected to physically transfer the promissory note and mortgage documents, or, in some cases, those loan documents were lost or destroyed;
• When a homeowner defaulted on a mortgage loan, the entity that owned the promissory note and mortgage sometimes found itself without the actual loan documents necessary to initiate the foreclosure proceedings;
• When the real estate market crashed, the number of foreclosure lawsuits increased dramatically;
• Through the course of several lawsuits that challenged the foreclosure actions, it was revealed that some large lenders used “robo-signers”, who purportedly rubberstamped documents necessary to support the foreclosure actions, despite the fact that the “robo-signer” did not necessarily have personal knowledge of all of the facts underlying the loan default or the foreclosure action;
• With a sharp increase in the number of foreclosure lawsuits, courts found themselves overwhelmed by the number of pending foreclosure actions, allowing some lawsuits to proceed through the foreclosure process without all of the necessary affirmations, or in some cases, the actual loan documents; and
• Some states saw litigation that challenged whether foreclosure actions filed by lenders without the proper documentation were valid, or whether foreclosure actions initiated by MERS were even valid, given the fact that MERS did not actually own the mortgage loans or promissory notes at issue.

This complicated scenario has had a serious effect on lenders, mortgage holders, and homeowners involved in mortgage foreclosure lawsuits.  But what about the construction industry?  A mechanic’s lien is a powerful payment remedy above and beyond the normal contract remedies, as it serves as a lien on the real estate (thus securing the interest in case of transfer of ownership or even a refinancing of a mortgage loan) and gives the contractor the power to initiate a foreclosure action against that real estate to collect payment.  Contractors that file mechanic’s liens are held to strict and exacting standards in order to secure their lien rights in the real estate.  Defects in the mechanic’s lien can be fatal.  A lien claimant can lose an otherwise valid lien claim merely by including incorrect references to the record owner of the property, incorrect addresses or legal descriptions, incorrect representations as to first and last dates of work, or even inaccurate amounts or sums for the work at issue.

The problem for contractors, from a collection standpoint, is that they often times find themselves behind mortgage holders in terms of lien position and priority.  Even if the contractors successfully foreclose upon their mechanic’s lien, there may be other lienholders that have higher priority (e.g., mortgage loan owners) and thus a better chance of being paid in full on their mortgage lien interests.  In those situations, the mortgage foreclosure crisis can have serious effects on mechanic’s lien holders who—on the one hand—are held to strict and exacting standards applicable to securing their lien interests in the property, but who are also—on the other hand—lower in lien priority position than a mortgage holder that has potential defects in its loan documents, assignment interests, recording requirements, or affirmations contained in the necessary foreclosure pleadings.  There is an inherent sense of imbalance in those two lien scenarios.

In response to these types of problems, in general, and to the issues outlined above, in specific, a task force organized by the Indiana Division of State Court Administration issued its “Mortgage Foreclosure Best Practices”, which serve as a guide to trial courts, lenders, homeowners, and attorneys for the “best practices” for residential mortgage foreclosure lawsuits.  For example, the “best practice” in foreclosure pleadings is for the party initiating the mortgage foreclosure action to specifically allege that it is a “person entitled to enforce” the mortgage instrument, either as the original holder of the instrument or as a subsequent assignee or transferee of that instrument.  In the event that the person seeking to foreclose upon the mortgage instrument is not the original holder of the instrument, the “best practice” is to include with the Complaint copies of the documents transferring or assigning title to the mortgage instrument to the plaintiff.  Alternatively, if the loan documents have been lost or destroyed, the “best practice” is to include an affidavit with the pleadings.  Parties who fail to abide by court directives in a mortgage foreclosure action—including the failure to provide documents requested by a court—could be subject to sanctions ranging from $150 to $2,500, which sanctions would be payable to a Mortgage Foreclosure Fund maintained through the Indiana Housing & Community Development Authority.

On January 3, 2011, the Indiana Attorney General’s Office submitted a petition to the Indiana Supreme Court to adopt these “best practices” as requirements in all mortgage foreclosure actions; the Supreme Court has not yet responded to that petition.  So, while not mandatory at this time, the “Mortgage Foreclosure Best Practices” does provide guidance for courts and parties involved with mortgage foreclosure actions on how “best” to address the issues and problems experienced by trial courts during the mortgage foreclosure crisis.  Consequently, these “best practices” also provide some additional assurance to contractors and mechanic’s lien claimants that their lien claims will be subject to the same level of review as lenders seeking foreclosure of a mortgage loan.  In any event, prudent contractors and mechanic’s lien claimants should take due care to review the asserted lien and mortgage loan claims by other parties involved in a mechanic’s lien lawsuit in order to confirm that the problems outlined above do not compromise otherwise valid lien claims.

Commercial Real Estate Market Improving?

By: Daniel M. Drewry

Cory Schouten with the IBJ recently interviewed Jeff Henry, the managing partner of Cassidy Turley, in conjunction with IBJ’s October 8, 2010 Commercial Real Estate & Construction Power Breakfast.  Mr. Henry reported that after several down years, we can finally see the light at the end of the tunnel and all sectors of the commercial real estate market are improving.  However, he notes that the market is barely off the bottom and that we should expect a gradual, rather than a straight line, increase at both the local and national levels.  The industrial and medical sectors have been leading other sectors in terms of occupancy and growth rate, with medical expected to see the most growth in the next three to four years.  Mr. Henry also discussed issues concerning the valuation of distressed properties and the current status of the auction market, the latter of which was featured in this week’s print edition of the IBJ.  http://www.ibj.com/article?articleId=22750.  For the full interview with Jeff Henry, go to: http://www.ibj.com/industry-vet-expects-sectors-to-rebound-auctions-to-boom/PARAMS/article/22788.

This is a much needed nugget of good news for an industry that has obviously been suffering.  It also coincides with recent indicators in the construction industry suggesting a gradual uptick in activity and outlook for 2010.  The question for contractors is will the relief come quickly enough? In our next entry we will look at the recent ENR Top 600 Specialty Contractors Survey results and discuss some of the issues (and contrasting bleak predictions for the next year) facing many subcontractors.

New Major Development Planned for Downtown Indy

By: Daniel M. Drewry

Inside Indiana Business and IBJ have reported this morning that a $150 million mixed-use development has been planned for 10 acres of land owned by Eli Lilly and Co. near its downtown campus.

http://www.insideindianabusiness.com/newsitem.asp?id=43848&ts=true;
http://www.ibj.com/north-of-south-project-details-to-be-unveiled/PARAMS/article/22504

The development will include a hotel, 320 apartments, 40,000 square feet of retail and restaurant space, and potentially a 75,000 square foot YMCA. The Project, called ‘North of South’ stemming from its location north of South Street and between Delaware Street and Virginia Avenue, will be a private-public partnership involving the State of Indiana, the City of Indianapolis, Eli Lilly and Co. and developer Buckingham Companies. Early reports are that the Project will be funded from a TIF (Tax Increment Financing) district if approved by the City-County Council. According to Inside Indiana, a study by London Witte & Co. expects the Project to have an overall economic impact of $350 million in consumer spending and income generation, as well as more than 2,400 temporary and permanent jobs.

From an industry standpoint, this development will provide Indy-area contractors with another major construction project to help fill the void left by the economic downturn and recession, not to mention that created once the JW Marriott and Convention Center come online. In addition to the size and scope of the development (and attendant volume of work opportunities that size provides), this project is also significant in that it falls outside the health care and government sectors, which have been the two sectors that have stayed relatively active throughout the downturn (the operative term being “relatively”). We have heard rumblings that banks have recently begun to circle back to developers for the first time in the past two years – could this development be an indication of better times ahead? Also, this marks yet another $100 million plus mixed-use public-private partnership development in Central Indiana, with Carmel City Center and the near-east side redevelopment and earlier Fall Creek Place revitalization being other examples. As the industry emerges from the downturn, will we continue to see more and more public-private partnerships? If so, these partnerships could alter the way many contractors pursue and obtain future work opportunities, but will it be for the better?

Mixed Outlook for Real Estate in 2010

By:  Russell M. Webb III

The outlook for the commercial and residential real estate markets in Central Indiana is mixed heading into 2010.

The overall residential market appears to be heading in a positive direction; however, when this market is broken down into the sale of new houses versus existing houses, one sees two different stories.  On the bright side, the market for existing homes continues to improve due in large part to low mortgage rates, the extension of the first time homebuyer tax credit and the continued availability of foreclosure properties.  However, new home starts are slowing due to the overall difficulty in obtaining financing, the competition from relatively inexpensive foreclosure properties, and the difficulty of move-up homebuyers to sell their current home.

A positive sign regarding the new home market is the entry of two new homebuilders to the Indianapolis market.  Fischer Homes, a mid-west builder headquartered in Ohio, and Ryan Homes, a regional builder headquartered in Virginia, both moved into the Indianapolis market late in 2009.  Ryan Homes acquired the lots originally owned by Indianapolis-based builder C.P. Morgan.  The entry into the market of these builders demonstrates the potential for growth and opportunity that can still be found in Central Indiana.

The commercial office market will continue to favor tenants through 2010.  Economic pressures such as tight credit markets, asset depreciation and business consolidation and downsizing have combined to increase office vacancy rates in Central Indiana.  Due to these conditions, viable tenants looking for new office space should benefit from much greater flexibility in leasing terms such as rental rate, length of term and more aggressive build-out options.  In addition, current tenants will seek to restructure their lease terms to their benefit and while landlords will consider near-term concessions but require more long-term security.

Across both the residential and commercial markets, there should be little to no new development while both markets work through existing available inventory.  As credit markets and unemployment numbers improve, both the commercial and residential markets should firm up through 2010 and into 2011.

EnerDel Announces $237 Million Investment in Indiana Plant

By: Joseph M. Leone, LEED AP

At a news conference this afternoon, Indiana based EnerDel, a leading Lithium-ion manufacturer, announced plans to invest $237 Million in a new manufacturing plant outside of Indianapolis.  Governor Mitch Daniels accompanied EnerDel executives in announcing the investment and creation of 500 more jobs to staff the plant.  The investment includes State and local economic development incentives of approximately $70 million.

The news came during an event to commemorate the collaboration between EnerDel and Volvo in development of Volvo’s C30 electric vehicle.  This news comes on the heels of the announcement by electric vehicle manufacturer, Th!nk, that its manufacturing facility will also be located in Indiana, farther north in Elkhart.  EnerDel will supply batteries for the Th!nk City, an urban electric vehicle, as well.   In addition to the automotive industry, EnerDel supplies advanced battery systems for smart grid upgrades.

With the demand of hybrids, plug-ins, pure electric vehicles, and smart grid battery systems expected to continue rising, Indiana has positioned itself as a leader in green transportation.    Hopefully, these new developments help push along the economic recovery in Indiana and lead to additional construction investments throughout the state.  Ultimately, the expansion of green industries will likely lead to other related green investments in the state for which all of the people of Indiana will be the beneficiaries.