Bank of New York v. Nally, 29S02-0405-CV-214.
| Decision Date | 04 January 2005 |
| Docket Number | No. 29S02-0405-CV-214.,29S02-0405-CV-214. |
| Citation | 820 N.E.2d 644 |
| Parties | BANK OF NEW YORK, Trustee, Appellant (Plaintiff below), v. Stephen H. NALLY; Hiram Nally; Eileen Nally; State of Indiana; Marina Limited Partnership, Appellees (Defendants below). Tod D. Owens and Pamela E. Owens, Appellees (Third Party Plaintiffs below), v. Stephen N. Nally, Bank of New York, Trustee, Shae Wiles, Michael Mize, Internal Revenue Service, et al., Appellees (Third Party Defendants below). |
| Court | Indiana Supreme Court |
Craig D. Doyle, Joanne B. Friedmeyer, James L. Shoemaker, Indianapolis, IN, Attorneys for Appellant.
Patrick R. Ragains, Anderson, IN, Michael E. Farrer, Christopher D. Cody, Elwood, IN, Attorneys for Appellees.
ON PETITION TO TRANSFER FROM THE INDIANA COURT OF APPEALS, NO. 29A02-0212-CV-1057.
We hold that a mortgage recorded before a deed to the mortgagor is recorded but after the deed is dated and delivered is within the mortgagor's chain of title as of the time of recording. We also hold that equitable subrogation is an appropriate remedy and available to a subsequent mortgagee who pays off the senior mortgage in total.
This is a dispute between the Bank of New York and Tod D. and Pamela E. Owens, husband and wife, over the priority of their mortgages on a residence in Hamilton County. In capsule form, Mr. and Mrs. Owens sold the property and took back a second mortgage to finance part of the purchase price. The Bank's assignor later refinanced the first mortgage. The issue is whether the mortgage held by the Bank is superior to the Owens mortgage. The material facts are not in dispute.
On December 16, 1996, the Owenses conveyed the real estate by warranty deed to Stephen H. and Jennifer R. Nally, husband and wife. On the same day, the Nallys also executed a mortgage in favor of Amtrust Financial Services, Inc. in the amount of $204,000, with a variable initial interest rate beginning at 7.250% and not to exceed 13.250%. The Nallys also executed a promissory note and mortgage to the Owenses in the principal amount of $22,490.91 plus 21% annual interest to maturity and 24% interest thereafter. The Owens mortgage states, "This mortgage is subordinate to the mortgage lien of Amtrust Financial Services, Inc. dated December 16, 1996 in the amount of $204,000.00."
Tod Owens is a licensed title insurance agent and runs an escrow company. Mr. Owens prepared the Owens mortgage himself. He attended the closing but chose not to have the closing agent record his mortgage with the other documents. Ten days after closing, on December 26, 1996, Mr. Owens recorded the Owens mortgage and a record of the Owens mortgage was noted in the mortgagor-mortgagee index. On January 21, 1997, thirty-six days after the closing, and twenty-six days after the Owens mortgage was recorded, the warranty deed from the Owenses to the Nallys was recorded and noted in the grantor-grantee index. Immediately after the deed was recorded the Amtrust mortgage was recorded. Eighteen months later the Amtrust mortgage was released and Stephen H. Nally, unmarried, executed a mortgage on the real estate in favor of EquiVantage, Inc. in the amount of $265,500.00. The record does not disclose the applicable interest rate on the EquiVantage mortgage. The EquiVantage mortgage was recorded on June 12, 1998. Proceeds from the EquiVantage mortgage were used to pay off the Amtrust mortgage and a number of Nallys' creditors, but none of the EquiVantage mortgage proceeds went to pay off the Owens mortgage.1 In November 1999, the EquiVantage mortgage was assigned to the Bank in the normal course of business for value and four months later the assignment was recorded. The Bank relied on EquiVantage's title insurance and did not conduct its own title search. EquiVantage's search did not reveal the Owens mortgage. At the time the Bank acquired the EquiVantage mortgage, it did not have actual knowledge of the Owens mortgage. The record is silent as to EquiVantage's actual knowledge of the Owens mortgage at the time EquiVantage refinanced and paid off the Amtrust mortgage.
In April 2000, the Bank sued to foreclose its mortgage. Four months later Mr. and Mrs. Owens sought and received permission to intervene as third-party plaintiffs. The Owenses then filed a counterclaim and cross-claim seeking to foreclose their mortgage, which they contended was superior to the Bank's. The Bank responded that it was a bona fide purchaser for value without notice of the Owens mortgage. Alternatively, it argued it was entitled by equitable subrogation to assert Amtrust's priority because it was an assignee of EquiVantage and EquiVantage had paid off the Nallys' debt to Amtrust. After the parties filed cross motions for summary judgment, the trial court denied the Bank's motion and granted summary judgment in favor of the Owenses. The Court of Appeals affirmed. The Court of Appeals concluded, "a purchaser is required to search the mortgagor-mortgagee index and is held to constructive notice of those documents recorded in [that index]." Bank of New York v. Nally, 790 N.E.2d 1071, 1073 (Ind.Ct.App.2003). Additionally, the Court of Appeals held that the Bank was "`culpably negligent' by not locating the mortgage to Owens" and thus not entitled to equitable subrogation necessary to assert Amtrust's priority over Owens. Id. On rehearing, the Court of Appeals explained that "[b]ecause Indiana Code § 36-2-11-12(b) requires mortgages to be kept in a separate index from the grantor-grantee index, ... [the Bank] is held to constructive notice of documents contained in both indexes." Bank of New York v. Nally, 801 N.E.2d 688, 689 (Ind.Ct.App.2004). We granted transfer. Bank of New York v. Nally, 812 N.E.2d 806 (Ind.2004).
Motions for summary judgment are properly granted only when the pleadings and designated evidence reveal that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Worman Enters., Inc. v. Boone County Solid Waste Mgmt. Dist., 805 N.E.2d 369, 373 (Ind.2004). This is the same standard used by the trial court in deciding to grant or deny summary judgment. Id. In determining whether issues of material fact exist, the court must accept as true those facts established by evidence favoring the nonmoving party and resolve all doubts against the moving party. Id.
The Bank contends it is a bona fide purchaser for value and without notice of the Owens mortgage. In order to qualify as a bona fide purchaser, one must purchase in good faith, for valuable consideration, and without notice of the outstanding rights of others. John v. Hatfield, 84 Ind. 75, 81-82 (1882); Keybank Nat'l Ass'n v. NBD Bank, 699 N.E.2d 322, 327 (Ind.Ct.App.1998). Good faith and consideration are not at issue here, but the Owenses contend, and the Court of Appeals agreed, that the Bank was charged with notice of the Owens mortgage as a matter of law.
The law recognizes both constructive and actual notice. Altman v. Circle City Glass Corp., 484 N.E.2d 1296, 1298 (Ind.Ct.App.1985). A "purchaser of real estate is presumed to have examined the records of such deeds as constitute the chain of title thereto under which he claims, and is charged with notice, actual or constructive, of all facts recited in such records showing encumbrances, or the non-payment of purchase-money." Smith v. Lowry, 113 Ind. 37, 44, 15 N.E. 17, 20 (1888). Accord Mettart v. Allen, 139 Ind. 644, 39 N.E. 239 (1894); Wagner v. Winter, 122 Ind. 57, 63 23 N.E. 754, 755 (1889); State ex rel. Lowry v. Davis, 96 Ind. 539, 544 (1884). A mortgage provides constructive notice to subsequent purchasers when it is properly acknowledged and recorded. Sinclair v. Gunzenhauser, 179 Ind. 78, 133, 135-36, 100 N.E. 376, 378 (1913); Keybank, 699 N.E.2d at 327. However, "[a] record outside the chain of title does not provide notice to bona fide purchasers for value." Szakaly v. Smith, 544 N.E.2d 490, 492 (Ind.1989). These rules apply to both purchasers and mortgagees. See id. (purchasers); Sinclair, 179 Ind. at 133, 100 N.E. 376 (mortgagees); Keybank, 699 N.E.2d 322.
Owens argues that the Bank had constructive notice of the Owens mortgage because it was properly recorded in the mortgagor-mortgagee index and the Bank had a duty to search that index along with the grantor-grantee index. The General Assembly has provided that recorders are to create separate indices for deeds and mortgages on real estate.2 The Court of Appeals concluded that "[b]ecause Ind.Code § 36-2-11-12(b) requires the maintenance of separate indexes for mortgages and deeds, we find that in addition to searching the grantor-grantee index, a purchaser is required to search the mortgagor-mortgagee index and is held to constructive notice of those documents recorded in both indexes." Bank of New York, 790 N.E.2d at 1073. We agree that a purchaser must search both indices, but the issue is what period of time the search must cover. The Bank argues that the search is only from the date of recording the deed to the mortgagor and the Court of Appeals appears to conclude that the search must be back to the origin of title, in this State typically a grant from the United States. We disagree with both.
The mortgage to the Owenses was recorded before the deed to the Nallys was recorded, but after the Nallys had obtained title. The Indiana recording statute provides that:
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