Manee Edler v. Regions Bank, and Jenner Properties, LLC

FILED
Jul 21 2016, 9:51 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEY FOR APPELLANT ATTORNEYS FOR APPELLEE,
Rudolph Wm. Savich REGIONS BANK
Bloomington, Indiana Libby Y. Goodnight
Kay Dee Baird
Lauren C. Sorrell
Kreig DeVault, LLP
Indianapolis, Indiana
ATTORNEY FOR APPELLEE,
JENNER PROPERTIES, LLC
Edward McCrea
McCrea & McCrea
Bloomington, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Manee Edler, July 21, 2016
Appellant-Defendant, Court of Appeals Cause No.
53A01-1512-MF-2264
v. Appeal from the Monroe Circuit
Court
Regions Bank, The Honorable E. Michael Hoff,
Appellee-Plaintiff, and Judge
Trial Court Cause No.
Jenner Properties, LLC, 53C01-1306-MF-1096
Appellee-Intervenor.
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Barnes, Judge.
Case Summary
[1] Manee Edler appeals the denial of her motion to correct error, which sought to
set aside the payment of mortgage foreclosure surplus proceeds to Regions
Bank (“Regions”). We reverse and remand.
Issue
[2] The sole issue we address is whether the trial court’s disbursement of the
foreclosure sheriffs’ sale surplus proceeds complied with applicable statutes.
Facts
[3] Edler and her now-deceased husband, John,1 owned a house in Bloomington.
Regions held both a first mortgage on the property, securing the Edlers’
promissory note executed in 2003 for a principal amount of $95,250.00, and a
second mortgage, related to a home equity line of credit with a limit of
$30,000.00. After John developed cancer, the Edlers fell behind on both
mortgage payments. On June 7, 2013, Regions filed a complaint to foreclose
the second mortgage only, alleging the Edlers were in default on it and had an
outstanding balance of $22,933.56. The foreclosure complaint mentioned the
1
John passed away on September 9, 2015.
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first mortgage but did not allege the Edlers were in default or list any
outstanding balance thereon.
[4] On December 20, 2013, the trial court entered a judgment and decree of
foreclosure. The total judgment amount was $27,160.32. The decree also
stated “that the second mortgagee lien of the plaintiff is superior to all other
liens and claims of the defendants, except the first mortgage lien of Regions
Bank . . . .” App. p. 40. The decree further directed that the property be sold
by the sheriff and that after the sale, “a proper deed or deeds be issued
according to law to the purchaser or purchasers at such sale or sales; subject to
the first mortgage lien of Regions Bank . . . .” Id. at 41. The foreclosure decree
did not state that the Edlers were in default on the first mortgage or mention
any amount due under that instrument or accompanying promissory note. The
decree concluded in part:
That the proceeds of such sale shall be applied first to the costs of
this action, next to the payment of real estate taxes due and
owing at the time of sale and the amount of redemption in the
event the parcel has been sold at tax sale, before deed to the tax
sale purchaser, next to the payment of the amount due plaintiff
on the judgment rendered herein in its favor, and the balance, if
any, to be paid to the Clerk of the Court, subject to further Order
of the Court.
Id.
[5] John filed for bankruptcy in April 2014, which automatically stayed the
foreclosure proceedings, but the bankruptcy court lifted the stay with respect to
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selling the property. On November 21, 2014, Jenner Properties, LLC
(“Jenner”) purchased the property at a sheriff’s sale for $82,600.00. Jenner’s
owner, David Jenner, later claimed he was unaware of the outstanding first
mortgage held by Regions when he purchased the property. The sheriff’s deed
issued to Jenner reflected that the property was subject to the first mortgage.
After purchasing the property, Jenner invested approximately $100,000.00 in
renovating the property and reached an agreement to sell it to a third party for
$199,000.00.
[6] On March 12, 2015, Regions filed a petition for disbursement of the foreclosure
sale proceeds. First, Regions sought $31,539.50 to satisfy the foreclosure
judgment on the second mortgage. Second, Regions also requested “that the
Court disburse the excess sale proceeds in the amount of $51,060.50 as payment
toward the amount due and owing Regions Bank pursuant to the first mortgage
dated April 21, 2003.” Id. at 44. With this petition, Regions submitted
documentation related to the first mortgage showing that it had a current payoff
amount of $60,327.93. On March 17, 2015, the trial court ordered the full
$82,600.00 from the sheriff’s sale disbursed to Regions. On March 31, 2015,
Jenner agreed to pay $3,457.82 to Regions in exchange for its release of the first
mortgage from the property.
[7] On April 16, 2015, the Edlers filed a motion to correct error. In it, the Edlers
argued it was erroneous for the trial court to disburse the $51,060.50 foreclosure
surplus to Regions because the second mortgage foreclosure judgment and
sheriff’s sale were specifically made subject to the first mortgage. The Edlers
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argued that the surplus should have been released to them instead. After
conducting a hearing on the matter, the trial court denied the Edlers’ motion.
Manee now appeals; both Regions and Jenner have filed appellee’s briefs.
Analysis
[8] When reviewing denial of a motion to correct error, we review the trial court’s
ruling for an abuse of discretion. Old Utica Sch. Pres., Inc. v. Utica Twp., 7
N.E.3d 327, 330 (Ind. Ct. App. 2014), trans. denied. “An abuse of discretion
occurs when the trial court’s decision is contrary to the logic and effect of the
facts and circumstances before it or the reasonable inferences therefrom.” Id. A
trial court also abuses its discretion in making a ruling if it has misinterpreted
the law. Kosarko v. Padula, 979 N.E.2d 144, 146 (Ind. 2012).
[9] Manee argues that because the foreclosure decree and subsequent sheriff’s sale
of the property were clear that the property was being sold “subject to”
Regions’s first mortgage, the surplus proceeds from that sale could not be used
to partially pay off the first mortgage. Manee relies in part upon Cook v.
American States Insurance Co., 150 Ind. App. 88, 95, 275 N.E.2d 832, 836 (1971),
which held that, “whether the purchaser assumes the payment of a prior
mortgage or the purchaser buys merely subject to such mortgage, that in each
case the purchaser takes the land charged with the payment of the debt.”
Moreover, the general rule is that, if a purchaser merely buys land subject to a
mortgage and does not assume the mortgage, the buyer is not subject to
personal liability for payment of the debt secured by the mortgage; rather, the
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land itself “is the primary fund out of which the debt is payable.” Springer v.
Foster, 27 Ind. App. 15, 20, 60 N.E. 720, 722 (1901); see also First Fed. Sav. &
Loan Ass’n of Gary v. Arena, 406 N.E.2d 1279, 1284 (Ind. Ct. App. 1980).
Regions and Jenner respond that cases such as Cook, Springer, and Arena are not
controlling or are distinguishable and that the trial court had the equitable
discretion to order disbursement of the surplus foreclosure funds to Regions to
go towards payment of the first mortgage.
[10] None of the parties has discussed the relevant statutes and case law governing
mortgage foreclosures. Although not cited by Manee, we cannot ignore the
statutes governing mortgage foreclosure sales and surplus sales proceeds. First,
Indiana Code Section 32-29-7-9(b) provides that if property is sold at a sheriff’s
foreclosure sale, “the sheriff shall pay the proceeds as provided in IC 32-30-10-
14.” Indiana Code Section 32-30-10-14 in turn provides:
The proceeds of a sale described in IC 32-29-7 or section 8 or
12(b) of this chapter must be applied in the following order:
(1) Expenses of the offer and sale, including expenses incurred
under IC 32-29-7-4 or section 9 of this chapter (or IC 34-1-53-6.5
or IC 32-15-6-6.5 before their repeal).
(2) The payment of the principal due, interest, and costs not
described in subdivision (1).
(3) The residue secured by the mortgage and not due.
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(4) If the residue referred to in subdivision (3) does not bear
interest, a deduction must be made by discounting the legal
interest.
In all cases in which the proceeds of sale exceed the amounts
described in subdivisions (1) through (4), the surplus must be
paid to the clerk of the court to be transferred, as the court
directs, to the mortgage debtor, mortgage debtor’s heirs, or other persons
assigned by the mortgage debtor.
(Emphases added).2 Foreclosures must follow statutory procedures, including
those related to the payment of sheriff’s sale surpluses. Patterson v. Grace, 661
N.E.2d 580, 586 (Ind. Ct. App. 1996). Although equity greatly influences
foreclosure proceedings, trial courts are not free to deviate from clear statutory
procedures, including those set forth in Indiana Code Section 32-30-10-14. First
Fed. Sav. Bank v. Hartley, 799 N.E.2d 36, 40 (Ind. Ct. App. 2003).
[11] In addition to these statutes, we note that generally, when a property lienholder
is not made a party to a foreclosure suit and is not bound by the foreclosure, a
foreclosure sale purchaser “simply step[s] into the shoes of the original holder of
the real estate and [takes] such owners’ interest subject to all existing liens and
claims against it.” Watson v. Strohl, 220 Ind. 672, 687, 46 N.E.2d 204, 210
(1943). More to the point for purposes of this case, it is long-settled Indiana law
that, “[l]ienholders whose rights have not been adjudged or foreclosed in the
2
Prior to July 1, 2010, this statute required payment of outstanding property taxes and of any amount of
redemption where a certificate of sale is outstanding, before payment of the foreclosed mortgage principal
and interest. Those provisions are now repealed. See P.L. 73-2010 § 9 (eff. July 1, 2010).
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foreclosure action have no right to share in the proceeds of the sale.” 20 IND. LAW
ENCYC. Mortgages § 175 (citing McKernan v. Neff, 43 Ind. 503 (1873)) (emphasis
added). In McKernan, there were three mortgages on a property. The most-
senior mortgagee filed a foreclosure suit, in which the most-junior mortgagee
was joined; the middle mortgagee was not. After sheriff’s sale of the property,
the most-senior and most-junior mortgages were paid. The middle mortgagee
filed suit, seeking entitlement to some of the sheriff’s sale proceeds. Our
supreme court, noting that the foreclosure sale did not cut off the middle
mortgagee’s own right of foreclosure, held that the middle mortgagee was not
entitled to any of the sheriff’s sale proceeds. McKernan, 43 Ind. at 506-07.
[12] Also instructive here is Firestone v. State ex rel. Liggett, 100 Ind. 226 (1884). In
that case, Liggett sold property to Firestone, and Firestone assumed a mortgage
Liggett had previously taken out. Firestone also executed a second mortgage
on the property in favor of Liggett, junior to the mortgage originally executed
by Liggett and assumed by Firestone. The senior mortgagee filed a foreclosure
action against both Firestone and Liggett after Firestone failed to pay on it;
Liggett made a partial payment on the senior mortgage and obtained dismissal
of that foreclosure action. Liggett then filed his own foreclosure action against
Firestone for default on the junior mortgage. A decree of foreclosure was
entered, the property was sold by the sheriff, and the junior mortgage was paid
off. A surplus remained after that payment was made. Liggett sought recovery
of the surplus based on his partial payment towards the senior mortgage; there
did not seem to be any dispute that Liggett made this payment. Our supreme
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court held Liggett was not entitled to the surplus, based on the plain language of
the statute, then as now, providing for payment of any sheriff’s sale surplus to
the mortgage debtor, or the debtor’s heirs or assigns. Firestone, 100 Ind. at 229.
The court disapproved of Liggett’s attempt to effectively seek foreclosure of the
senior mortgage upon the surplus fund, as opposed to foreclosure upon the land
itself. Id.
[13] This case is slightly unusual in that Regions obviously had notice of the
foreclosure action on the second mortgage but chose to make no effort to
foreclose on the first mortgage or otherwise have its rights adjudicated with
respect to the first mortgage.3 Having chosen this course of action, Regions
could not essentially reverse course by seeking the surplus sales proceeds, in
clear contravention of the foreclosure statutes and relevant case law. In
essence, Regions attempted to foreclose on the first mortgage without following
the procedures for such a foreclosure. Under the plain language of the statute
and long-standing case law, the Edlers as mortgage debtors clearly were entitled
to the sheriff’s sale surplus after satisfaction of the foreclosure judgment on the
second mortgage only.4 The trial court did not have discretion to rule
3
Why Regions did not attempt to seek final adjudication of its rights under the first mortgage during the
foreclosure proceedings, we do not know. It may have been a strategic decision or a case of the left hand not
knowing what the right hand was doing; argument by counsel at the motion to correct error hearing suggests
it was the latter. Also, because Regions was not “omitted” from the original foreclosure action, it would not
seem to fit the definition of an “omitted party” under the strict foreclosure statute enacted by our legislature
in 2012. See I.C. § 32-29-8-4(b).
4
There is no evidence the Edlers assigned their interest in the surplus to anyone.
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otherwise, in contravention of law and in the name of “equity.” See Hartley,
799 N.E.2d at 40.
[14] How Regions now decides to collect the debt associated with that mortgage is
beyond the scope of this opinion, although its rights with respect to the first
mortgage did not seem to be terminated by foreclosure of the second mortgage,
given that the sheriff’s sale and subsequent deed were made “subject to” the first
mortgage.5 See Watson, 220 Ind. at 687, 46 N.E.2d at 210; see also English v.
Aldrich, 132 Ind. 500, 506, 31 N.E. 456, 458 (1892). Regions and Jenner also
suggest it would be “inefficient” not to allow Regions to retain the sheriff’s sale
surplus to put towards the first mortgage and instead to force it to seek other
collection avenues for that debt, including a possible second foreclosure
proceeding. We would respond that indeed, it would have been more efficient
for both the first and second mortgages to be resolved in one proceeding, but
Regions elected not to seek such resolution. Our supreme court observed long
ago:
One of the leading purposes of a suit to foreclose a mortgage is to
secure such a decree as will enable the plaintiff to sell all the right
and title that his mortgage covers, and enable a purchaser at the
sale to ascertain what title it is that he buys. To attain this end it
is necessary that all the claims held against the mortgaged
premises should be adjusted in one suit. This the spirit of our
Code requires, for it makes ample provision for bringing all the
interested parties into court, and for adjusting all conflicting
5
Additionally, we offer no opinion as to the effect of our holding today on Regions’s agreement with Jenner
to release the first mortgage, or the pending sale of the property by Jenner to a third party.
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claims and equities. The rule is a salutary one. It tends to
repress litigation, gives confidence in public records, secures
respect for judgments and decrees, and invests sheriff’s sales with
strength and certainty that does much to promote the interests of
both debtor and creditor.
Craighead v. Dalton, 105 Ind. 72, 73, 4 N.E. 425, 426 (1886).
Conclusion
[15] The trial court misinterpreted or misapplied the law regarding disbursement of
surplus sale proceeds following a sheriff’s foreclosure sale. As such, it abused
its discretion in denying the Edlers’ motion to correct error. We reverse the
denial of that motion and remand with instructions that the surplus sale
proceeds be disbursed to Manee.
[16] Reversed and remanded.
Vaidik, C.J., and Mathias, J., concur.
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