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.