December 2011 Vol. 4, No. 11




Citizens State Bank of New Castle v Countrywide Home Loans, Inc, 949 NE2d 1195 (Ind, 2011).

Facts:Rita and Kenneth Cloud took out a $229,416.66 mortgage with Countrywide Home Loans, Inc. in 2005. The Clouds defaulted on the loan and Countrywide filed a foreclosure action in August 2006. The Clouds' property was sold at a sheriff's auction and Countrywide took title to the property. Prior to the foreclosure, however, the Clouds had also taken out a loan with Citizens State Bank of New Castle. They defaulted on this loan and Citizens Bank won a judgment against the Clouds for $109,859.38 in June 2006.

When Countrywide filed the action of foreclosure, it failed to name Citizens Bank as a party. Citizens Bank's judicial lien should have been recognized as a junior lien to Countrywide's mortgage. Countrywide claimed that because the judgment was filed so soon before the foreclosure action, the mistake was due to "technicalities and circumstances of time." When Countrywide discovered Citizens Bank's lien, it filed for a remedy called "strict foreclosure." Under Indiana Law, a strict foreclosure would "cut off the equity and right of junior encumbrancers to redeem." The trial court granted summary judgment in favor of Countrywide and Citizens Bank appealed. The Indiana Court of Appeals reversed the trial court and held that the doctrine of merger prevented Countrywide from obtaining a strict foreclosure. The Supreme Court of Indiana vacated the decision of the Court of Appeals and examined only the decision of the trial court.

Holding:Reversed and remanded. The Supreme Court of Indiana held that the trial court erred in granting summary judgment in favor of Countrywide and that summary judgment should instead be granted in favor of Citizens Bank. Like the decision of the Court of Appeals that was vacated, the Supreme Court also based its decision on the doctrine of merger. In the case of a mortgage, the merger doctrine applies when either a mortgagor or a mortgagee obtains both the lien and legal title to a property. As the Court explained, "the mortgage merges with the legal title, and the lien is thereby extinguished."

The merger doctrine only applies if it was the intent of the parties to merge the lien and the title. The court found that the facts sufficiently showed that Countrywide intended for there to be a merger. Just because it later turned out to be inconvenient for Countrywide, did not change the fact that their intent at the time was for there to be a merger. And because the mortgage and the legal title merged, the court held that the rights of Citizens Bank as the junior lien holder were unaffected by the foreclosure.

The court rejected Countrywide's argument that it should be entitled to a strict foreclosure. Strict foreclosure is an equitable remedy that Indiana courts have sometimes allowed in circumstances when a junior lienholder was omitted from a foreclosure. The court distinguished this case though, because the omission was not due to an indexing error or a spelling mistake. Instead, it was "inadvertence" on Countrywide's part and thus Countrywide was not entitled to a strict foreclosure.

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