CitiMortgage, Inc. v. Barabas
| Decision Date | 04 October 2012 |
| Docket Number | No. 48S04–1204–CC–00213.,48S04–1204–CC–00213. |
| Citation | 975 N.E.2d 805 |
| Parties | CITIMORTGAGE, INC., Appellant (Intervenor/Cross–Claimant below), v. Shannon S. BARABAS a/k/a Shannon Sheets Barabas, Defendant below, ReCasa Financial Group, LLC, Appellee (Plaintiff below), and Rick A. Sanders, Appellee (Third–Party Defendant below). |
| Court | Indiana Supreme Court |
OPINION TEXT STARTS HERE
Archis A. Parasharami, Washington, DC, Harry W. Cappel, Nathan H. Blaske, Cincinnati, OH, Matthew S. Love, Indianapolis, IN, Attorneys for Appellant.
Theodore J. Nowacki, David J. Jurkiewicz, Indianapolis, IN, Attorneys for Amicus Curiae Indiana Bankers Association, Inc.
Christopher C. Hagenow, Sarah Stites Millspaugh, Indianapolis, IN, Attorneys for Appellee ReCasa Financial Group, LLC.
Donald L. Centers, Mary A. Slade, Carmel, IN, Attorneys for Appellee Rick A. Sanders.
On Petition to Transfer from the Indiana Court of Appeals, No. 48A04–1004–CC–00232
Shannon Barabas had two mortgages on her Madison County home. The second mortgagee foreclosed on the property without notice to the first. The first mortgagee sought to intervene and obtain relief from the foreclosure judgment, but the trial court denied its motion. We reverse.
Traditional mortgages were folies á deux; 2 the cast of characters consisted solely of Borrower and Lender. See Ellen Harnick, Crisis in Housing and Housing Finance: What Caused It? What Didn't? What's Next ?, 31 W. New Eng. L. Rev. 625, 626–27 (2009). Lender, a bank, raised funds through customer deposits and loaned those funds out to Borrower. See id. Lender retained both the mortgage and the promissory note until Borrower had paid his debt in full. Id. Today, a typical mortgage is better described as a mass delusion, in which Borrower and Lender are joined by Loan Servicer, Title Company, Mortgage Broker, Underwriter, Trustee, and various other characters that facilitate the negotiation of mortgages on the secondary market. See Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1367–68 (2009–2010).
The change began in the 1970s with the invention of the mortgage-backed security, a financial instrument that allowed investors to trade mortgages in the same way that they traded stocks and bonds. David Messerschmitt, Note, Overview of the Subprime Mortgage Market, 27 Rev. Banking & Fin. L. 3, 3 (2007). First, a borrower works with a broker to obtain a loan from a lender, who receives credit from an investment bank to fund the loan. Id. The lender then sells the loan back to the investment bank, which bundles it together with a few thousand others and divides the bundle into shares. Id. These shares are sold to investors, who receive a certain amount of the income that the bundle earns every month when borrowers make their mortgage payments.3Id.
This process, called “securitization,” used to require multiple successive assignments, each of which had to be recorded on the county level at considerable inconvenience and expense to the investment banks involved. Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L. Rev. 111, 116 (2011–2012). In the mid–1990s, seeking to ameliorate those evils, a consortium of investment banks created Mortgage Electronic Registration Systems, Inc. (MERS). Id. MERS maintains “a computer database designed to track servicing and ownership rights of mortgage loans anywhere in the United States.” Peterson, Foreclosure, supra, at 1361. MERS member banks list MERS as both “nominee” for Lender and as “mortgagee” on their mortgage documents. Kevin M. Hudspeth, Clarifying Murky MERS: Does Mortgage Electronic Registration Systems, Inc., Have Authority to Assign the Mortgage Note in a Standard Illinois Foreclosure Action ?, 31 N. Ill. U. L. Rev. 1, 9 (2010–2011). MERS member banks can then buy and sell the note among themselves without recording an assignment of the mortgage. Id. In the event of default, MERS simply assigns the mortgage to whichever member bank currently owns the note, and that bank forecloses on the borrower. Id.
Today, about 60 percent of the nation's residential mortgages are recorded in the name of MERS rather than in the name of the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.4 Peterson, Two Faces, supra, at 117. That figure includes the mortgage at issue in this case.
On August 8, 2005, Shannon S. Barabas took out a mortgage in the amount of $154,111 from Irwin Mortgage Corporation on property located at 8285 South Firefly Drive in Madison County, Indiana. The first page of the mortgage document includes the following provision:
This Security Instrument is given to Mortgage Electronic Registration Systems, Inc. (“MERS”), (solely as nominee for Lender, as hereinafter defined, and Lender's successors and assigns), as mortgagee. MERS is organized and existingunder the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501–2026, tel. (888) 679–MERS. Irwin Mortgage Corporation (“Lender”) is organized and existing under the laws of The State of Indiana, and has an address of 10500 Kincaid Drive, Fishers, IN 46038.
App. at 88. The mortgage continues on to describe Irwin's rights:
This Security Instrument secures to Lender: (a) the repayment of the debt evidenced by the Note, with interest, and all renewals, extensions and modifications of the Note; (b) the payment of all other sums, with interest, advanced under paragraph 7 to protect the security of this Security Instrument; and (c) the performance of Borrower's covenants and agreements under this Security Instrument and the Note.
App. at 88–89. And MERS's rights:
Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns to MERS, the following described property located in Madison County, Indiana ... Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument; but, if necessary to comply with law or custom, MERS, (as nominee for Lender and Lender's successors and assigns), has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing or canceling this Security Instrument.
App. at 89. On August 19, 2005, Barabas's mortgage was recorded in the office of the Madison County Recorder.
On February 26, 2007, Barabas took a second mortgage on the Madison County property in the amount of $100,000. In this transaction, ReCasa Financial Group, Inc. played the role of both Lender and Mortgagee. On May 11, 2007, the ReCasa mortgage was recorded in the office of the Madison County Recorder. On July 23, 2007, Barabas and ReCasa executed a Note Modification increasing the amount of the principal to $129,600.
Barabas apparently fell behind on her obligation to ReCasa. On June 13, 2008, ReCasa filed suit against Barabas and Irwin 5 in the Madison Circuit Court. ReCasa requested, among other relief, foreclosure of the mortgage and a sheriffs sale of the property. After receiving service of process, Irwin filed a “Disclaimer of Interest” in the Madison Circuit Court on June 23, 2008, stating that it “disclaim[ed] any interest in the real estate which is the subject of the Plaintiff's Complaint.” App. at 51.
Meanwhile, on July 15, 2008, Barabas filed a petition for bankruptcy in the United States Bankruptcy Court for the Southern District of Indiana. Perhaps unsurprisingly in light of her apparent financial situation, Barabas did not respond to ReCasa's foreclosure complaint, so on September 9, 2008, the trial court entered a default judgment against her. On September 16, after receiving notice that Barabas had been discharged of her debt in the federal bankruptcy proceeding, the Madison County trial court amended its default judgment and ordered that the Madison County property be sold in a sheriff's sale.
Back in federal court, on September 22, 2008, Citimortgage filed a motion for relief from automatic stay, alleging that it had “a security interest” in the Madison County property that predated Barabas's July 15 bankruptcy petition. App. at 155. As one of Barabas's creditors, ReCasa received service of Citimortgage's motion. On September 23, ReCasa's counsel sent a letter to the attorney who had filed the motion on Citimortgage's behalf to inform him that ReCasa had foreclosed on the property. ReCasa's counsel enclosed copies of the complaint, the foreclosure commitment, and the amended default judgment. On October 29, the bankruptcy court entered an order discharging Barabas from personal liability on her debts.
The sheriff's sale occurred on January 23, 2009, and ReCasa purchased the property for $65,000. On March 4, 2009, ReCasa recorded the sheriff's deed in the office of the Madison County Recorder. On March 17, 2009, ReCasa sold the property to Rick A. Sanders.
On April 1, 2009, MERS assigned the Irwin mortgage to Citimortgage, and that assignment was recorded in the office of Madison County Recorder on April 20. On October 23, 2009, Citimortgage filed a motion pursuant to Indiana Trial Rules 24(A) and 60(B) seeking to intervene in ReCasa's foreclosure lawsuit and requesting that the court modify its judgment “to provide that the judgment granted to ReCasa Financial is subject to the mortgage now held by Citimortgage, Inc.” App. at 83. Citimortgage alleged that it was entitled to intervene of right and argued that the default judgment was...
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