Neu v. Gibson

ATTORNEYS FOR APPELLANTS ATTORNEY FOR APPELLEE
Craig D. Doyle Sean M. Clapp
Mark R. Galliher Fishers, Indiana
Kurt V. Laker
Indianapolis, Indiana

In the FILED
Indiana Supreme Court Jun 01 2010, 1:40 pm

CLERK
of the supreme court,
court of appeals and
No. 49S02-0910-CV-442 tax court

THOMAS A. NEU, ELIZABETH A. NEU, AND
WELLS FARGO BANK, N.A.,
Appellants (Defendants and Cross-
claimants below),

v.

BRETT GIBSON,
Appellee (Plaintiff below).

Appeal from the Marion Superior Court, No. 49D10-0506-MF-21457
The Honorable David Dreyer, Judge

On Petition to Transfer from the Indiana Court of Appeals, No. 49A02-0811-CV-1031

June 1, 2010

Shepard, Chief Justice.

Brett Gibson sold his business to John Nowak. Nowak financed his purchase in part with
a note secured by a second mortgage on Nowak‟s residence. Nowak subsequently sold his
residence to Thomas and Elizabeth Neu, who did not know of Gibson‟s mortgage. When Nowak
defaulted, Gibson foreclosed. During an earlier appeal, the Court of Appeals determined that the
Neus and their lender were entitled to priority ahead of Gibson, the same position held by
Nowak‟s first mortgagee.

Now, the Neus claim this entitles them to interest, attorney fees, and costs. They also
assert that they may foreclose on their own home under terms of the Nowak mortgage or, in the
alternative, that they have a right to force a sheriff‟s sale of the property based on Gibson‟s
foreclosure. The trial court found they were not entitled to any of these. Because we conclude
that the trial court reached the equitable resolution of the case and that the applicable statute does
not require the court to grant the Neus a sale, we affirm.

Facts and Procedural History

Brett Gibson sold his company, Cellular Telephone Centers, T.H., Inc., to John Nowak.
To finance the purchase, Nowak executed a promissory note to Gibson for $350,000 secured by
a mortgage on Nowak‟s home. The pertinent documents provided for a 6.5% interest rate, for
foreclosure in case of default, and for attorney fees and costs in case Gibson needed to sue to
enforce his rights. Gibson also agreed to release the mortgage when Nowak sold the house
“provided that [Nowak] has not defaulted in his obligations to the mortgagor and is current in his
payments.” (App. at 41.)

At the time Nowak purchased the business, Irwin Mortgage Corporation held a prior
mortgage on his home securing a loan of $506,900. The Irwin mortgage provided for a 6.25%
interest rate. It also stated that Irwin would be “entitled to collect all expenses incurred in
pursuing [acceleration], including, but not limited to, reasonable attorneys‟ fees and costs of title
evidence.” (App. at 235.) It defined default as follows:

Borrower shall be in default if any action or proceeding,
whether civil or criminal, is begun that, in Lender‟s judgment,

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 could result in forfeiture of the Property or other material
impairment of Lender‟s interest in the Property or rights under this
Security Instrument. . . . The proceeds of any award or claim for
damages that are attributable to the impairment of Lender‟s interest
in the Property are hereby assigned and shall be paid to Lender.

(App. at 231–32.)

On March 11, 2005, Nowak sold his home to Thomas and Elizabeth Neu for $600,000.
He did not inform Gibson of the sale, and as part of his closing with the Neus he signed a
Vendor‟s Affidavit stating the real estate was free and clear of “every kind or description of lien,
lease or encumbrance except” a “mortgage from John L. Nowak, a single man[,] to Irwin
Mortgage Corporation . . . .” (App. at 66, 89, 96.)

Investors Titlecorp acted as the closing agent for the transaction and performed a title
search on the real estate. The search revealed the Irwin mortgage but not the Gibson mortgage.

The Neus brought $395,391.06 to closing and borrowed $200,000.00 from Washington
Mutual Bank. Of the purchase price, $506,016.34 went to satisfy the Irwin mortgage. Nowak
received $54,679.82 at closing.

At the time he sold the property, Nowak was $500 short of being current on his $7,000
monthly obligation to Gibson. In May and June 2005 he made only half payments.

On June 3, 2005, Gibson sued Nowak, the Neus, and Washington Mutual on Nowak‟s
promissory note and sought to foreclose on the real estate. He asked for $366,148.93 plus 6.5%
interest as well as attorney fees and costs. The Neus cross-claimed against Nowak for breach of
the warranty deed he executed in their favor. On October 14, 2005, Nowak filed for bankruptcy.

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 Gibson and the Neus filed competing motions for summary judgment. The court granted
the Neus‟ motion for summary judgment and required Gibson to release his mortgage, finding
Nowak had substantially complied with its conditions. The court also found that “though other
findings dispose of this litigation between Gibson and the Neus and Washington Mutual,” the
Neus and Washington Mutual “would be entitled to assume the first lien position of Irwin
Mortgage Corporation, in the amount of $506,016.34, under the doctrine of equitable
subrogation.” (App. at 184.) Similarly, the court denied Gibson‟s motion for summary
judgment seeking foreclosure.

Gibson appealed, arguing the trial court erred by ordering him to release his mortgage
and by finding that equitable subrogation applied to the Neus‟ mortgage. Gibson v. Neu, 867
N.E.2d 188 (Ind. Ct. App. 2007). The Court of Appeals reversed the trial court‟s determination
that the Gibson mortgage required Gibson to release the mortgage because Nowak had defaulted
by being behind in his payments. Id. at 194–96. It also reversed the denial of Gibson‟s summary
judgment motion requesting foreclosure. Id. at 197. The Court of Appeals affirmed the
determination on equitable subrogation. Id. at 201.

Following the Court of Appeals decision, Washington Mutual assigned its interest to
Wells Fargo Bank, N.A., and the trial court substituted the parties. The Neus and Wells Fargo
(“the Neus”) moved the court to determine the amount of their lien as including the $506,000
payoff of the Irwin mortgage plus interest at the 6.25% rate for which it provided. Because
Gibson has not exercised his right to a sheriff‟s sale in the presently depressed real estate market,
they also moved to foreclose on the real estate under color of the Irwin mortgage and for a
sheriff‟s sale at which they would receive a credit in the amount of their lien.

On November 21, 2007, the court first entered a judgment of foreclosure against the
property in favor of Gibson in the amount of $380,438.57 plus interest at the statutory rate,
attorney fees, and costs. It then found the Neus‟ lien totaled $506,016.34 and had priority over

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Gibson‟s. Finally, it denied the Neus‟ request for a sheriff‟s sale because “there is no authority
for the court to allow a foreclosure sale when there is no foreclosure.” App. at 14. It did not
otherwise address the Neus‟ request that their lien be foreclosed as an in rem judgment or their
request for interest, fees, and costs.

On December 20, 2007, the Neus moved alternatively to amend the order or to correct
errors. In particular, they requested the court to allow them to force a sheriff‟s sale or to clarify
that the order was not a final, appealable order and that they were permitted to file a foreclosure
claim. On March 24, 2008, the court confirmed that its previous order was not final and that
they were not precluded from filing for foreclosure.

The Neus sought and received leave to file a counterclaim and cross-claim for
foreclosure. They claimed that Nowak had defaulted under the Irwin mortgage, to which they
were the subrogees. They asked the court to declare their lien as first, enter judgment against
Nowak, foreclose their mortgage, and direct a sale.

The Nues subsequently moved for summary judgment on these claims. Gibson filed a
cross-motion for summary judgment arguing the court could not order foreclosure because the
Neus were not in default. The court denied the Nues‟ motion and granted Gibson‟s on October
22, 2008.

Upon the Neus‟ request, the court declared to be final its orders on the two summary
judgment motions as well as the motion to determine lien amount and sell real estate.

The Neus appealed. The Court of Appeals affirmed the trial court‟s denial of attorney
fees and interest but reversed its denial of a sheriff‟s sale. Neu v. Gibson, 905 N.E.2d 465 (Ind.
Ct. App. 2009). We granted transfer. Neu v. Gibson, 919 N.E.2d 555 (Ind. 2009) (table).

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 Standard of Review

We review a summary judgment order de novo. Kovach v. Caligor Midwest, 913 N.E.2d
193 (Ind. 2009). That is, we will affirm where no genuine issue of material fact exists and the
moving party is entitled to judgment as a matter of law based only on the facts supported by
designated evidence. Ind. Trial Rule 56 (C).1

I. The Scope of Equitable Subrogation—Foreclosure, Interest, and Attorney Fees

The nature of equitable subrogation is, as its name indicates, equity. The doctrine
substitutes one who fully performs the obligation of another, secured by a mortgage, for “the
owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.”
Restatement (Third) of Property § 7.6(a) (1997); see Bank of New York v. Nally, 820 N.E.2d
644, 653 (Ind. 2005). This avoids an inequitable application of the general principle that priority
in time gives a lien priority in right. See Jones v. Rhoads, 74 Ind. 510, 513 (1881). In
considering whether to order subrogation and thus bypass the general principle of priority, courts
base their decisions on the equities, particularly the avoidance of windfalls and the absence of
any prejudice to the interests of junior lienholders. Nally, 820 N.E.2d at 653.

As noted above, during the earlier stages of this litigation, the trial court ordered that the
Neus and their lender be subrogated to the extent of the Irwin mortgage, and the Court of

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As a matter preliminary to the merits, Gibson contends that the Neus‟ claims on the amount of their lien
and their right to seek a sheriff‟s sale are barred by untimeliness, preclusion under law of the case, and
waiver. (Appellee‟s Br. at 10–17.) The Court of Appeals held that the Neus‟ contentions were available
on appeal. We summarily affirm this determination. Ind. Appellate Rule 58(A).

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Appeals affirmed. There is no request to reconsider that determination, so we proceed by
accepting it as the law of the case.

Moving forward from that earlier determination about priority, the Neus assert that their
status as equitable subrogees to the Irwin mortgage necessarily entitles them to foreclosure,
interest, and attorney fees. Generally, they maintain that Irwin would be entitled to these
remedies and that they are entitled to all of Irwin‟s rights under the previous mortgage.
(Appellants‟ Br. at 6.)

The Neus point to Nally for the proposition that “a party entitled to equitable subrogation
obtains all rights and remedies available to the prior lender.” (Appellants‟ Br. at 7–8.) Nally
involved a couple who purchased a home financed with two mortgages, one of these with a bank
and the other with the sellers. 820 N.E.2d at 647. Although the sellers‟ mortgage expressly
stated it was subordinate to the bank‟s, it was recorded before the bank‟s mortgage and the deed.
Id. The husband, now single, subsequently refinanced with a second bank, which assigned the
mortgage to Bank of New York. Id. Bank of New York did not have actual knowledge of the
sellers‟ mortgage, relying on its assignor‟s title insurance instead of conducting a title search. Id.
When the bank sought to foreclose its mortgage, the sellers intervened and asserted priority. Id.

After concluding that the bank had at least constructive notice, we held that it stood in the
shoes of the original bank‟s mortgage and therefore had priority over the sellers, but only to the
extent the refinancing proceeds were used to pay off the first lien. Id. at 651–52, 654. This
avoided prejudice to the sellers as junior lienholders. Id. at 654.

The lending bank in Nally paid off the original lender, and then some (adding enough so
the homeowner could pay off a few other debts). We declared that permitting the new lender
subrogation to the position of the original lender (at least to the extent the new loan paid off the
old one) was equitable because that lender “expects to receive the same security as the loan being

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paid off.” Id. at 653. Moreover, the junior lienholder is not typically disadvantaged by a
transaction like the one in Nally, where the first position was essentially swapped between one
lender and another.

Nowhere in Nally did we state that equitable subrogation always entitles every subrogee
to all of the rights its subrogor possessed. On the contrary, we emphasized that “[t]he key to
subrogation is an equitable result.” Id. at 655. Nor did we maintain that every party entitled to
equitable subrogation is entitled to all of the rights the bank held. As the maxim goes, equity
supplies what equity demands. We thus consider each right the Neus assert in turn.

A. Foreclosure. As noted above, the Irwin mortgage included terms stating that Nowak
would be in default if any action begins that might result in a material impairment of Irwin‟s
interest. The Neus assert that Gibson‟s action endangers their interest in the property. They
have also declared Nowak in default and given him notice, and thus claim that they have the
right to foreclose on their home under the terms of the Irwin mortgage.

The Neus seek to obtain foreclosure on their own home in order to force a sheriff‟s sale.
At that sale, they hope to bid successfully for the property, using their lien amount as credit, or at
least to recover the lien amount. They argue that by denying foreclosure the court denied them
“the right, universally enjoyed by mortgage holders, to „credit bid‟ up to the amount of their
judgment,” without which they are “at the mercy of third party bidders” who could successfully
bid a minimal amount the Neus would have to accept. (Appellants‟ Br. at 9–10.)

Equitable subrogation does not resurrect every clause for the Neus to enforce. Nowak‟s
obligations under the Irwin mortgage ended when the Neus satisfied the Irwin debt and the
mortgage was discharged. Therefore, the “Borrower” to whom the mortgage refers no longer has
any responsibility under that document. No party can possibly foreclose under the terms of the

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Irwin mortgage any longer. On the other hand, Nowak still has obligations under the Gibson
mortgage and under the representations he made to the Neus at closing.

It is not clear why the Neus‟ position would be so disadvantageous should Gibson request
a sheriff‟s sale. Their lien would still have the first priority, and a sheriff‟s sale would not
change that. Nothing precludes them from bidding the amount of that lien against other bidders.

B. Interest. The Neus next argue they are entitled to interest at the rate provided for in
the Irwin mortgage because “a party obtaining a lien through equitable subrogation is
unquestionably entitled to interest.” (Appellants‟ Br. at 11.) They argue that Nally supports this
because in that case we held that the bank was entitled to interest up to the maximum rate
provided for in the subrogated mortgage. (Id. (citing 820 N.E.2d at 654).) They also cite a
handful of cases from other states in which the subrogee was entitled to interest, such as Harper
v. Ely, 70 Ill. 581 (1873). (Appellants‟ Br. at 11–12.) Additionally, we note that in Braden v.
Graves, 85 Ind. 92 (1882), we held that the subrogee was entitled to interest at the rate of the
liens he purchased.

Braden involved determining the rights of the landowner and a lienholder. Id. at 92.
Braden, the landowner, had acquired the deed by paying off two judgment liens against the
sellers. Id. at 92–93. Prior to his purchase but after the judgments were entered, the sellers had
executed a mortgage to Graves. Id. at 92. When one of the sellers died, Graves sued to
foreclose. Id. at 93. Braden maintained that he did not have actual or constructive knowledge of
the Graves mortgage because it was not properly recorded. Id. at 96. After determining that
Braden was subrogated to the two liens he purchased, this Court reversed the trial court‟s ruling
and held that Braden was entitled to interest based on the rates provided by each respective lien.
Id. Interest at these rates was therefore added to Braden‟s prior lien at the sale of the land at
stake. Id. at 98.

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 In Harper the current owner, Ely, had bought the property and the mortgage after the
original owner‟s mortgagee and caretaker had allowed the property to lose rental income to force
the mortgagor into default. Harper v. Ely, 56 Ill. 179, 185 (1870). The mortgagee foreclosed
and sent his nephew to the foreclosure sale to buy the property and the debt. Id. at 191–92. The
court determined the sale was a “sham.” Id. 56 Ill. at 191–93, 196. In the meantime, the owner
had sold the property to Harper. Id. at 184. After concluding that Ely was the subrogee to the
original mortgagee but should have known the questionable nature of his title, the court required
him to surrender the land. Harper, 70 Ill. at 582–83. Harper could not take the property,
however, until he paid off a lien in Ely‟s favor that included rents earned, liens discharged, taxes,
insurance costs, and, notably, interest at the rate provided by the subrogated liens. Id. at 582–83,
585–86.

Both these cases and Nally appear to be representative. See Annotation, Scope and
extent of subrogation in favor of one entitled to be subrogated to mortgage lien, 107 A.L.R. 785,
787–90 (1937).

As seems apparent from these recitations, however, there are multiple factual differences
between each of the three foregoing cases and the one before us now. And in a court of equity,
differences in fact do matter in deciding the outcome. To take the most recent of the three,
Nally, it mattered that the new mortgagee had more or less swapped places with the original
lender during what we characterized as a “conventional refinancing” in which it was appropriate
that the new lender “receive the same security as the loan being paid off.” Nally, 820 N.E.2d at
653. In the present case, the Neus and their lender have shaped a rather different set of
relationships. The new lender, whose loan reflected only a fraction of the loan paid off at
closure, stands in a wholly satisfactory position as a result of the trial court‟s earlier decision that
it and the Neus stand ahead of Gibson in order of priority. Wells Fargo will presumably receive
the interest its predecessor bargained for, and it stands fairly secure from market risks relating to
real estate value. The Neus positioned themselves to be rather different from the lender they

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helped pay off at closing. They were not simply swappers of debt; they were people who
anticipated exposing themselves to both market risk and market reward. Their present dilemma
flows from their reliance on the services and insurance arranged by Investors Titlecorp. The trial
court‟s earlier ruling giving them priority ahead of Gibson seems like a substantial step of equity
that largely rescued them from the calamity that might have otherwise befallen them (namely,
ending up in line behind Gibson).

All in all, the question is whether the trial court worked an inequitable result when it
declined to go beyond its earlier order on priority by awarding interest to Wells Fargo and the
Neus (to the further disadvantage of the now-junior, innocent lienholder Gibson). We conclude
that the court acted equitably.

C. Attorney Fees. The Neus also argue that they are entitled to attorney fees and costs.
(Appellants‟ Br. at 13.) The Irwin mortgage calls for Nowak to pay for the expenses Irwin
would have incurred had Nowak defaulted. The Irwin mortgage cannot be said to be in default,
so it cannot be the reason they are entitled to fees and costs. Furthermore, the equities weigh
against the Neus recovering fees for the same reasons they weigh against them recovering
interest. For these reasons, the Neus are not entitled to attorney fees.

II. Neus Cannot Force a Sheriff’s Sale.

As an alternative to their arguments based on equity, the Neus assert that the code section
authorizing a party to force a sheriff‟s sale of a foreclosed mortgage gives them the power to do
so as a party with an interest in the foreclosed property on which Gibson has acted to foreclose.
(Appellants‟ Br. at 14–16.) To their thinking, such a construction would prevent junior
lienholders from sitting on their rights to the detriment of the landowners and senior lienholders.
The statutory provision they cite is Indiana Code § 32-29-7-3(b) (2008), which states

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 A judgment and decree in a proceeding to foreclose a mortgage
that is entered by a court having jurisdiction may be filed with the
clerk in any county as provided in IC 33-32-3-2. After the period
set forth in subsection (a) expires, a person who may enforce the
judgment and decree may file a praecipe with the clerk in any
county where the judgment and decree is filed, and the clerk shall
promptly issue and certify to the sheriff of that county a copy of
the judgment and decree under the seal of the court.

(Emphasis added.)

While the trial court granted enforceable rights to both the Neus and Gibson, it granted
only Gibson the ability to force a sale. (App. at 14.) It ordered, “Gibson may, based on his
judgment of foreclosure, praecipe for sale of the property to the Sheriff of Marion County, in the
manner as provided by law, without relief from valuation and appraisement laws.” (App. at 14.)
The court‟s order therefore clearly excludes the Neus from the statute‟s category of “a person
who may enforce the judgment.” The Neus claim this renders the order contrary to law.
(Appellants‟ Br. at 15.)

The Neus argue that the General Assembly used the language “a person who may enforce
the judgment” to allow all parties with an interest in foreclosed property to force a sheriff‟s sale.
(Appellants‟ Br. at 14–15.) They point out that this section does not use terms like “the holder of
the lien foreclosed” or “the prevailing party,” while the section governing recording a
satisfaction of a mortgage uses the term “prevailing party.” (Id. (citing Ind. Code § 32-30-10-
6).) While these observations seem pertinent, the fact remains that the subsection does not
define who may enforce the judgment. The statute allows a court to grant the right to enforce the
judgment by forcing a sheriff‟s sale to more than the foreclosure claimant, but it also does not
require a court to do so. In this case the trial court‟s order states how Gibson may enforce the
judgment and clearly denies the Neus any ability to do so. (App. at 14.)

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 As for the Neus‟ comparison with Ind. Code § 32-30-10-6, we recognize that Ind. Code
§ 32-30-7-3 uses broader language than “prevailing party.” This does not mean, however, the
Neus are included in its meaning. The subsection‟s plain language indicates that the General
Assembly intended to limit who may record the satisfaction of a foreclosure and to allow courts
discretion as to who may force a sheriff‟s sale, which seems a reasonable approach.

The Neus characterize foreclosure or forcing a sheriff‟s sale as their only viable options
to protect their interests. In fact, they have at least two other remedies. As the homeowners,
they could sell their home immediately without a court‟s action. Out of the proceeds, Wells
Fargo would be paid first, then they would receive the remainder of the Irwin mortgage lien,
followed by Gibson, if sufficient proceeds remain. (See App. at 14.) There are settings in which
this would be an attractive alternative, perhaps not here. Alternatively, they can take the matter
up with their title insurance company, which is also the party who failed to find Gibson‟s lien.2

The purchase of real estate inherently includes some risk of an unknown lienholder later
asserting its interests. The Neus, like most homebuyers, sought assistance and protection against
this risk. Drawing the equitable subrogation line at priority in these circumstances does not
unfairly prejudice the Neus and preserves Gibson‟s rights as an inferior lienholder.

Conclusion

We affirm the judgment of the trial court.

2
At oral argument, counsel stated that the Neus have filed a claim with their title insurance company and
that the result of that claim depends upon this litigation.

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Dickson, Sullivan, and Boehm, JJ., concur.
Rucker, J., concurs in result.

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