The Trusted Adviser November 2010 | Volume 3 • Number 10



Foreclosure; Mortgages

Citizens States Bank of New Castle v Countrywide Home Loans, Inc, 922 NE2d 655 (Ind Ct App, 2010).

Facts:The Clouds were co-owners of a property on which Countrywide Home Loans, Inc. (Countrywide) obtained a mortgage on April 27, 2005. On June 9, 2006, Citizens States Bank of New Castle (CSB) obtained a default judgment against the Clouds for $111,499 and properly recorded it. Subsequently, Countrywide sought foreclosure against the Clouds on August 28, 2006, and obtained a judgment on October 30, 2006. Countrywide did not make CSB a party to the foreclosure, nor did CSB have any notice of the foreclosure case. Countrywide received and recorded a deed to the property on February 22 and March 15, 2007, respectively. Later, on May 3, 2007, Countrywide transferred title to the Federal National Mortgage Association (FNMA).

In October 2, 2007, Countrywide filed for strict foreclosure against CSB, seeking to foreclose CSB's equity of redemption and interest in the property. CSB filed a complaint to foreclose its judgment lien against FNMA. Both sides filed cross-motions for summary judgment. The trial court held a hearing, then ruled in favor of Countrywide and denied CSB's motion. CSB appealed.

Holding:Reversed. The court first summarized the concept of strict foreclosure. Strict foreclosure is an action brought by a mortgagee or purchaser who has obtained legal title, through foreclosure or a deed in lieu of foreclosure, to property that is still subject to an equity interest or lien by a junior incumbrancer. The strict foreclosure action seeks to bar the interests of junior incumbrancers who were not parties to the original foreclosure.

Normally when a mortgagee forecloses and acquires title to a property, the mortgage is extinguished because the mortgage and title merge. However, where another lien holder remains after foreclosure, merger would harm the interests of the mortgagee. In such a situation, the mortgagee's lien remains, keeping its status as the first lien. This "anti-merger" rule only benefits the original mortgagee.

In this case, the original mortgagee, Countrywide, transferred its interest to FNMA. Because Countrywide already had its opportunity to assert its mortgage against the property, that lien position did not transfer to FNMA. Instead, FNMA merely obtained the property in fee simple subject to CSB's duly recorded lien. Allowing Countrywide and FNMA to now extinguish CSB's lien through strict foreclosure would be inequitable. Therefore, the court reversed the grant of summary judgment in favor of Countrywide and ordered summary judgment for CSB, which may now foreclose its lien against FNMA.






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[Last update: 11-15-10]