Attorneys for Appellant Attorneys for Appellees
Craig D. Doyle Patrick R. Ragains
Joanne B. Friedmeyer Anderson, Indiana
James L. Shoemaker
Indianapolis, Indiana Michael E. Farrer
Christopher D. Cody
Elwood, Indiana
____________________________________________________________________________
__
In the
Indiana Supreme Court
_________________________________
No. 29S02-0405-CV-214
Bank of New York, Trustee,
Appellant (Plaintiff below),
v.
Stephen H. Nally; Hiram Nally;
Eileen Nally; State of Indiana;
Marina Limited Partnership,
Appellees (Defendants below).
____________________
Tod D. Owens and Pamela E. Owens,
Appellees (Third Party
Plaintiffs
below),
v.
Stephen N. Nally, Bank of New York,
Trustee, Shae Wiles, Michael Mize,
Internal Revenue Service, et al.,
Appellees (Third Party
Defendants
below).
_________________________________
Appeal from the Hamilton Superior Court, No. 29D02-0004-CP-0265
The Honorable Jerry M. Barr, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 29A02-0212-
CV-1057
_________________________________
January 4, 2005
Boehm, Justice.
We hold that a mortgage recorded before a deed to the mortgagor is
recorded but after the deed is dated and delivered is within the
mortgagor’s chain of title as of the time of recording. We also hold that
equitable subrogation is an appropriate remedy and available to a
subsequent mortgagee who pays off the senior mortgage in total.
Factual and Procedural Background
This is a dispute between the Bank of New York and Tod D. and Pamela
E. Owens, husband and wife, over the priority of their mortgages on a
residence in Hamilton County. In capsule form, Mr. and Mrs. Owens sold the
property and took back a second mortgage to finance part of the purchase
price. The Bank’s assignor later refinanced the first mortgage. The issue
is whether the mortgage held by the Bank is superior to the Owens mortgage.
The material facts are not in dispute.
On December 16, 1996, the Owenses conveyed the real estate by warranty
deed to Stephen H. and Jennifer R. Nally, husband and wife. On the same
day, the Nallys also executed a mortgage in favor of Amtrust Financial
Services, Inc. in the amount of $204,000, with a variable initial interest
rate beginning at 7.250% and not to exceed 13.250%. The Nallys also
executed a promissory note and mortgage to the Owenses in the principal
amount of $22,490.91 plus 21% annual interest to maturity and 24% interest
thereafter. The Owens mortgage states, “This mortgage is subordinate to
the mortgage lien of Amtrust Financial Services, Inc. dated December 16,
1996 in the amount of $204,000.00.”
Tod Owens is a licensed title insurance agent and runs an escrow
company. Mr. Owens prepared the Owens mortgage himself. He attended the
closing but chose not to have the closing agent record his mortgage with
the other documents. Ten days after closing, on December 26, 1996, Mr.
Owens recorded the Owens mortgage and a record of the Owens mortgage was
noted in the mortgagor-mortgagee index. On January 21, 1997, thirty-six
days after the closing, and twenty-six days after the Owens mortgage was
recorded, the warranty deed from the Owenses to the Nallys was recorded and
noted in the grantor-grantee index. Immediately after the deed was
recorded the Amtrust mortgage was recorded. Eighteen months later the
Amtrust mortgage was released and Stephen H. Nally, unmarried, executed a
mortgage on the real estate in favor of EquiVantage, Inc. in the amount of
$265,500.00. The record does not disclose the applicable interest rate on
the EquiVantage mortgage. The EquiVantage mortgage was recorded on June
12, 1998. Proceeds from the EquiVantage mortgage were used to pay off the
Amtrust mortgage and a number of Nallys’ creditors, but none of the
EquiVantage mortgage proceeds went to pay off the Owens mortgage.[1] In
November 1999, the EquiVantage mortgage was assigned to the Bank in the
normal course of business for value and four months later the assignment
was recorded. The Bank relied on EquiVantage’s title insurance and did not
conduct its own title search. EquiVantage’s search did not reveal the
Owens mortgage. At the time the Bank acquired the EquiVantage mortgage, it
did not have actual knowledge of the Owens mortgage. The record is silent
as to EquiVantage’s actual knowledge of the Owens mortgage at the time
EquiVantage refinanced and paid off the Amtrust mortgage.
In April 2000, the Bank sued to foreclose its mortgage. Four months
later Mr. and Mrs. Owens sought and received permission to intervene as
third-party plaintiffs. The Owenses then filed a counterclaim and cross-
claim seeking to foreclose their mortgage, which they contended was
superior to the Bank’s. The Bank responded that it was a bona fide
purchaser for value without notice of the Owens mortgage. Alternatively,
it argued it was entitled by equitable subrogation to assert Amtrust’s
priority because it was an assignee of EquiVantage and EquiVantage had paid
off the Nallys’ debt to Amtrust. After the parties filed cross motions for
summary judgment, the trial court denied the Bank’s motion and granted
summary judgment in favor of the Owenses. The Court of Appeals affirmed.
The Court of Appeals concluded, “a purchaser is required to search the
mortgagor-mortgagee index and is held to constructive notice of those
documents recorded in [that index].” Bank of New York v. Nally, 790 N.E.2d
1071, 1073 (Ind. Ct. App. 2003). Additionally, the Court of Appeals held
that the Bank was ‘“culpably negligent’ by not locating the mortgage to
Owens” and thus not entitled to equitable subrogation necessary to assert
Amtrust’s priority over Owens. Id. On rehearing, the Court of Appeals
explained that “[b]ecause Indiana Code § 36-2-11-12(b) requires mortgages
to be kept in a separate index from the grantor-grantee index, . . . [the
Bank] is held to constructive notice of documents contained in both
indexes.” Bank of New York v. Nally, 801 N.E.2d 688, 689 (Ind. Ct. App.
2004). We granted transfer. Bank of New York v. Nally, 812 N.E.2d 806
(Ind. 2004).
Standard of Review
Motions for summary judgment are properly granted only when the
pleadings and designated evidence reveal that there is no genuine issue of
material fact and that the moving party is entitled to judgment as a matter
of law. Worman Enters., Inc. v. Boone County Solid Waste Mgmt. Dist., 805
N.E.2d 369, 373 (Ind. 2004). This is the same standard used by the trial
court in deciding to grant or deny summary judgment. Id. In determining
whether issues of material fact exist, the court must accept as true those
facts established by evidence favoring the nonmoving party and resolve all
doubts against the moving party. Id.
I. Notice of Recorded Documents
The Bank contends it is a bona fide purchaser for value and without
notice of the Owens mortgage. In order to qualify as a bona fide
purchaser, one must purchase in good faith, for valuable consideration, and
without notice of the outstanding rights of others. John v. Hatfield, 84
Ind. 75, 81-82 (1882); Keybank Nat’l Ass’n v. NBD Bank, 699 N.E.2d 322, 327
(Ind. Ct. App. 1998). Good faith and consideration are not at issue here,
but the Owenses contend, and the Court of Appeals agreed, that the Bank was
charged with notice of the Owens mortgage as a matter of law.
The law recognizes both constructive and actual notice. Altman v.
Circle City Glass Corp., 484 N.E.2d 1296, 1298 (Ind. Ct. App. 1985). A
“purchaser of real estate is presumed to have examined the records of such
deeds as constitute the chain of title thereto under which he claims, and
is charged with notice, actual or constructive, of all facts recited in
such records showing encumbrances, or the non-payment of purchase-money.”
Smith v. Lowry, 113 Ind. 37, 44, 15 N.E. 17, 20 (1888). Accord Mettart v.
Allen, 139 Ind. 644, 39 N.E. 239 (1894); Wagner v. Winter, 122 Ind. 57, 63
23 N.E. 754, 755 (1889); State ex rel. Lowry v. Davis, 96 Ind. 539, 544
(1884). A mortgage provides constructive notice to subsequent purchasers
when it is properly acknowledged and recorded. Sinclair v. Gunzenhauser,
179 Ind. 133, 135-36, 100 N.E. 376, 378 (1913); Keybank, 699 N.E.2d at 327.
However, “[a] record outside the chain of title does not provide notice to
bona fide purchasers for value.” Szakaly v. Smith, 544 N.E.2d 490, 492
(Ind. 1989). These rules apply to both purchasers and mortgagees. See id.
(purchasers); Sinclair, 179 Ind. 133 (mortgagees); Keybank, 699 N.E.2d 322.
Owens argues that the Bank had constructive notice of the Owens
mortgage because it was properly recorded in the mortgagor-mortgagee index
and the Bank had a duty to search that index along with the grantor-grantee
index. The General Assembly has provided that recorders are to create
separate indices for deeds and mortgages on real estate.[2] The Court of
Appeals concluded that “[b]ecause Ind. Code § 36-2-11-12(b) requires the
maintenance of separate indexes for mortgages and deeds, we find that in
addition to searching the grantor-grantee index, a purchaser is required to
search the mortgagor-mortgagee index and is held to constructive notice of
those documents recorded in both indexes.” Bank of New York, 790 N.E.2d at
1073. We agree that a purchaser must search both indices, but the issue is
what period of time the search must cover. The Bank argues that the search
is only from the date of recording the deed to the mortgagor and the Court
of Appeals appears to conclude that the search must be back to the origin
of title, in this State typically a grant from the United States. We
disagree with both.
The mortgage to the Owenses was recorded before the deed to the Nallys
was recorded, but after the Nallys had obtained title. The Indiana
recording statute provides that:
a) A:
1) Conveyance or mortgage of land or of any interest in land;
and
2) a lease for more than three (3) years;
must be recorded in the recorder’s office of the county where the
land is situated.
b) A conveyance, mortgage, or lease takes priority according to the
time of its filing. The conveyance, mortgage, or lease is
fraudulent and void as against any subsequent purchaser, lessee, or
mortgagee in good faith and for a valuable consideration if the
purchaser’s, lessee’s, or mortgagee’s deed, mortgage, or lease is
first recorded.
Ind. Code § 32-21-4-1 (2002).
The purpose of recording a mortgage is to give notice to persons
subsequently dealing with the property of the existence of the mortgage and
to charge them with notice of what the records disclose. Szakaly, 544
N.E.2d at 491-92; Keybank, 699 N.E.2d at 327. To charge subsequent
purchasers with notice, a mortgage must be recorded in the proper county,
First Nat’l Bank of Carlisle v. Coen, 76 Ind. App. 143, 144-45, 131 N.E.
531, 532 (1921), and must contain an accurate legal description of the
property, Rinehardt v. Reifers, 158 Ind. 675, 676-77 64 N.E. 459, 459
(1902). Both of these requirements were met by recording the Owens
mortgage in the office of the Hamilton County Recorder. A third
requirement, however, is disputed. We have said on a number of occasions
that a recorded mortgage must be in the “chain of title.” Szakaly, 544
N.E.2d at 492; Sinclair, 179 Ind. at 117, 98 N.E. at 61 (“when the record
[of a mortgage] is not in the chain of title, it is almost universally held
that the record is not notice”); Meyer v. Marine Builders, Inc., 797 N.E.2d
760, 774 (Ind. Ct. App. 2003) (“A record [of a mortgage] outside the chain
of title does not provide notice to bona fide purchasers for value.”).
In Szakaly, this Court described the concept of “chain of title” to a
tract of land:
In a title search, the prospective purchaser or his abstractor
assesses the marketability of title to a tract of land by determining
the “chain of title.” Beginning with the person who received the
grant of land from the United States, the purchaser or abstractor
traces the name of the grantor until the conveyance of the tract in
question. The particular grantor’s name is not searched thereafter.
As the process is repeated, the links in the chain of title are
forged.
544 N.E.2d at 491-492 (citing Schroeder, Title Searches and Marketable
Title, Basic Real Estate Practice I-30 (1986)). The prospective purchaser
or his abstractor need search the mortgagor-mortgagee index only for
mortgages recorded while the mortgagor holds title to the tract. The
Owenses argue that when a mortgage is recorded it is in the chain of title
regardless of when the mortgagor’s deed is recorded. The Bank argues that
the Owens mortgage is outside the chain of title because it was recorded
before the deed was recorded. We think neither is correct. Once recorded,
a deed gives notice of the grantee’s title as of the date of the deed, not
the date of recording. A purchaser conducting a search in the interim
between closing and recording is without notice, but a purchaser searching
after recording is on notice of the grantee’s title as of the date of
transfer. This is because the deed, once recorded, tells the world the
date on which title was transferred. “[T]he period of notice, and hence
the period of search, extends as to a particular owner from the date that
he acquires title (not the date at which the transfer is recorded) to the
date of the recording of a conveyance by him.” 4 American Law of Property
§ 17.19 (1952). Accord Higgins v. Dennis, 74 N.W. 9 (Iowa 1898); 14 Powell
on Real Property § 82.03[2][a] (Michael Allan Wolf ed., Matthew Bender
2000) (“each link [in a chain of title] begins with the date on which the
interest is conveyed to a specific individual in the chain and ends with
the date on which a conveyance from that individual is recorded”). Any
mortgage recorded in that time period is within the chain of title.
This principle has been applied in other jurisdictions to
mortgages.[3] In Indiana it has been applied to easements.[4] We see no
reason why a broader search should be required for mortgages than for other
encumbrances. We hold that a prospective purchaser or mortgagee is on
notice of outstanding mortgages for the period that the mortgagor held
title of the real estate according to the chain of title. The Bank is
correct that it (or its predecessor in interest) was not required to search
the period antedating Nally’s appearance as owner. But the fact that the
Owens mortgage was recorded before the deed to Nally was recorded does not
relieve EquiVantage of its duty to search the mortgagor-mortgagee index
back to December 16, 1996, the date of Nally’s deed according to the public
record. Because the Owens mortgage was recorded after the date the deed to
Nally was executed, the mortgage was within the chain of title at the time
EquiVantage made its mortgage. EquiVantage was therefore on constructive
notice of its existence. Because the Bank chose to rely on EquiVantage’s
title insurance and did not conduct its own title search, the Bank also had
constructive notice of the Owens mortgage and thus is not a bona fide
purchaser protected by the Indiana recording statute.
II. Equitable Subrogation
The EquiVantage mortgage was used to pay off and retire the Amtrust
mortgage, which the Owens mortgage expressly acknowledged to be superior.
The Bank argues that equitable subrogation permits it to place its mortgage
into the shoes of the Amtrust mortgage and retain its priority. The
doctrine of equitable subrogation, sometimes misleadingly called “legal
subrogation,” has been recognized in Indiana for over a century. See Birke
v. Abbott, 103 Ind. 1, 5, 1 N.E. 485, 487 (1885). Subrogation arises from
the discharge of a debt and permits the party paying off a creditor to
succeed to the creditor’s rights in relation to the debt. Matter of
Lehman, 690 N.E.2d 696, 699 (Ind. 1997). It “arises by operation of law,
that is to say it is created by the legal consequences of the acts and
relationships of the parties, and thus is a legal fiction.” 83 C.J.S.
Subrogation § 2 at 499 (2000) (citations omitted). In the case of a
purchaser of a note and mortgage for value, the classic formulation is that
the “purchaser’s right of subrogation to the mortgage he or she discharged
includes its priority over junior liens of which he or she did not have
actual knowledge, [and] where he or she was not culpably negligent in
failing to learn of the junior lien.” 83 C.J.S. Subrogation § 46 at 576
(2000). The Court of Appeals has described the doctrine as “a highly
favored doctrine, which is to be given a liberal application.” Osterman v.
Baber, 714 N.E.2d 735, 738 (Ind. Ct. App. 1999). Equitable subrogation
requires the subrogee to discharge the entire debt held by the original
obligor. Partial subrogation to a mortgage is not permitted because it
“would have the effect of dividing the security between the original
obligee and the subrogee, imposing unexpected burdens and potential
complexities of division of the security and marshalling upon the original
mortgagee.” Restatement (Third) of Prop.: Mortgages § 7.6 cmt. a (1997).
The EquiVantage mortgage was used to discharge Nally’s entire obligation to
Amtrust, and thus it met that requirement.
A. Actual or Constructive Knowledge as a Bar to Equitable Subrogation
For the reasons given in Part I, EquiVantage had at least constructive
knowledge of the Owens mortgage.[5] The Bank contends that it did not have
actual knowledge of the Owens mortgage, and relied on EquiVantage’s title
insurance. To the extent knowledge is relevant to equitable subrogation,
the relevant knowledge is both the Bank’s and EquiVantage’s. The Bank
acquired no superior right to subordination than its assignor had. 83
C.J.S. Subrogation § 66 (2000) (“One who acquires or succeeds to rights,
claims, or securities through equitable subrogation ‘steps into the shoes’
of the subrogor and takes them burdened with the defenses, limitations, and
disqualifications to which they were subject.”). The record here is silent
as to EquiVantage’s knowledge at the time it paid off Amtrust. The Bank,
the proponent of summary judgment, has the burden of establishing the facts
necessary to its claim. “The majority of jurisdictions continue to state
that actual knowledge precludes the application of equitable subrogation,
while constructive knowledge does not.” Osterman, 714 N.E.2d at 739. See,
e.g., United States v. Baran, 996 F.2d 25, 29 (2d Cir. 1993) (applying New
York law); Dietrich Indus., Inc. v. United States, 988 F.2d 568, 572 (5th
Cir. 1993) (applying Texas law); Brooks v. Resolution Trust Corp., 599 So.
2d 1163, 1165 (Ala. 1992); Smith v. State Sav. & Loan Ass’n, 223 Cal. Rptr.
298, 301 (Cal. Ct. App. 1985); United Carolina Bank v. Beesley, 663 A.2d
574, 576 (Me. 1995); Houston v. Bank of Am. Fed. Sav. Bank, 78 P.3d 71, 74
(Nev. 2003); Enter. Bank v. Fed. Land Bank, 138 S.E. 146, 148-50 (S.C.
1927).
The Third Restatement of Property states that neither actual nor
constructive notice of the preexisting junior lien is a bar to the
equitable remedy of subrogation. Restatement (Third) of Prop.: Mortgages §
7.6 cmt. e (“Under this Restatement, . . . subrogation can be granted even
if the payor had actual knowledge of the intervening interest; the payor’s
notice, actual or constructive, is not necessarily relevant”); see also
Houston, 78 P.3d at 73 (adopting the Restatement’s rule and rationale).
In Osterman, the Court of Appeals declined to follow the Restatement
approach. Rather, in order to determine culpability the Osterman court
balanced the payor’s notice with other factors such as the sophistication
of the parties and whether the transaction was commercial. 714 N.E.2d at
739. We disagree with this approach. Precluding equitable subrogation
when a mortgagee discovered or could have discovered a junior lien holder
runs contrary to the purposes underlying the doctrine. Equitable
subrogation is a remedy to avoid an unearned windfall. Restatement (Third)
of Prop.: Mortgages § 7.6 cmt. a. If there were no subrogation in this
case, the Owenses, as junior lien holders, would be promoted in priority
and receive a windfall to the extent the property is worth less than
$224,813.95 ($202,323.04 used to pay off the Amtrust mortgage plus
$22,490.91 secured by the Owens mortgage). Neither negligence nor
constructive notice of an existing lien is relevant to whether the junior
lien holder will be unjustly enriched or prejudiced. Rather, the basis for
subrogation in this context is “the lender’s justified expectation of
receiving [a] security” interest in the property. 2 Grant S. Nelson & Dale
A. Whitman, Real Estate Finance Law § 10.6, at 15-16 (4th ed. 2002).
In addition to avoidance of windfalls, equitable subrogation requires
consideration of other equitable factors, notably the absence of any
prejudice to the interests of junior lienholders.
Perhaps the case occurring most frequently is that in which the payor
[i.e. the party asserting a right to equitable subrogation] is
actually given a mortgage on the real estate, but in the absence of
subrogation it would be subordinate to some intervening interest, such
as a junior lien. Here subrogation is entirely appropriate, and by
virtue of it the payor has the priority of the original mortgage that
was discharged. This priority is often of critical importance, since
it will place the payor’s security in a position superior to
intervening liens and other interests in the real estate. The holders
of such intervening interests can hardly complain of this result, for
it does not harm them; their position is not materially prejudiced,
but is simply unchanged.
Restatement (Third) of Prop.: Mortgages § 7.6 cmt. e. Although not
applicable in this case, recent legislation seems consistent with this
view.[6]
We agree with the Restatement at least in the context of a
conventional refinancing. A lender providing funds to pay off an existing
mortgage expects to receive the same security as the loan being paid off.
Refinancings are commonplace in today’s economy. Permitting a junior
lienholder to leapfrog the priority of the current senior mortgage would
impair the owner’s access to more favorable interest rates. Unless a
junior lienholder is disadvantaged by permitting subrogation, we see no
reason to give the junior lienholder in effect the right to block or object
to the refinancing. We conclude that a mortgagee who refinances an
existing mortgage is entitled to equitable subrogation even if it had
actual or constructive knowledge of an existing lien on the property unless
the junior lienholder is disadvantaged or the mortgagee is “culpably
negligent” as that term is explained in Part II.B, but this remedy is
subject to the rights and limitations of the subrogor.
As long as neither EquiVantage nor the Bank was culpably negligent,
the Bank as assignee of the EquiVantage mortgage is allowed to stand in the
shoes of the Amtrust mortgage and retain its priority status over the Owens
mortgage, but only to the extent the EquiVantage mortgage proceeds were
used to pay off the previous first lien held by Amtrust. In this case, the
amount is $202,323.04, plus any applicable interest not to exceed 13.250%.
One basis for equitable subrogation is to prevent a windfall but
subrogation is also justified on the basis that the junior creditor (the
Owenses) is not disadvantaged by replacing the senior priority. To allow
subrogation to apply to amounts in excess of the obligation under the
Amtrust mortgage would place the Owens mortgage in a worse position than it
held before refinancing. Of the proceeds from the EquiVantage mortgage
$63,176.96 went into Nally’s pocket or was used to pay off other Nally
creditors. EquiVantage is entitled to no better priority status than
whatever priority those creditors held with regard to the Owens mortgage.
We assume they were not superior to the Owens mortgage, but the record is
silent on this point.
B. Culpable Negligence
A volunteer or one charged with “culpable negligence” may not be
entitled to equitable subrogation. The Owenses argue that EquiVantage was
culpably negligent in not discovering the Owens mortgage during the title
search prior to their loan to Nally, and that the Bank is culpably
negligent for not performing its own independent title search before it
acquired the EquiVantage mortgage on assignment. In resolving this issue,
the Court of Appeals looked to negligence law derived from tort doctrines,
and found persuasive its earlier observation in Wilshire Servicing Corp. v.
Timber Ridge Partnership:
Under Indiana common law, there are no degrees of negligence.
It is therefore difficult, at best, to place the term “culpable
negligence” within an appropriate frame of reference. Suffice it to
say, however, we conclude that the term contemplates action or
inaction which is more than mere inadvertence, mistake or ignorance.
743 N.E.2d 1173, 1178 (Ind. Ct. App. 2001), trans. denied (citations
omitted).
We agree with Osterman that application of the doctrine of equitable
subrogation depends on the equities and attending facts and circumstances
of each case. 714 N.E.2d at 737. We also agree with the result in
Osterman, where a lender purchased a mortgage with an explicit reference to
a “new judgment against” the seller. The lender was held culpably
negligent for failure to identify a lien that was recorded before the loan
closed but after the purchaser performed a title search. Id. at 739. We
think, however, that the important fact in Osterman was not the degree of
negligence by the lender. Subrogation, if allowed, would have elevated the
mortgagee in priority over an intervening creditor who had properly
perfected its lien on an apparently unencumbered property.
The term “culpable negligence” focuses on the activity of the party
asserting subrogation. In fact, as the Court of Appeals observed, the
level of culpability is essentially the same in most cases. Id. at 738.
In Osterman, the error was in failing to update the search as of closing.
In the case at bar, EquiVantage’s search failed to identify a mortgage
within the chain of title, but recorded before recording of the deed to the
mortgagor. Both are simply omissions with no suggestion of malice or
trickery. The key to subrogation however is an equitable result.
Preservation of the rights of intervening creditors who record their
interests is, we think, plainly equitable. This is what occurred in
Osterman. On the other hand, the Owenses seek to leapfrog a senior claim.
This is precisely what equitable subrogation is designed to prevent.
At best, EquiVantage is negligent in failing to discover the Owens
mortgage which was recorded and noted in the mortgagor-mortgagee index
before the deed to Mr. and Mrs. Nally was recorded. However, this error
does not rise to the level of culpability. 83 C.J.S. Subrogation § 13
(2000) (“The mere fact that a person seeking subrogation was negligent does
not bar him or her from relief where such negligence is as to his or her
own interests and does not affect prejudicially the interest of the person
to whose rights subrogation is sought”). Equity should not allow the Owens
mortgage to gain an unexpected elevated priority status because of the
negligence of EquiVantage or its assignee that did the Owens no harm. 4
American Law of Property § 16.150 (1952) (“subsequent lien holders should
not be permitted to gain by another’s mishap or carelessness when thus
granting would be purely fortuitous and accidental”).
Conclusion
The judgment of the trial court is reversed. This case is remanded
for further proceedings consistent with this opinion.
Shepard, C.J., and Dickson, Sullivan, and Rucker, JJ. concur.
-----------------------
[1] Of the $265,500.00 from the EquiVantage mortgage $15,403.58 was
disbursed to Mr. Nally. The balance was used to pay off the Amtrust
mortgage ($202,323.04), the Nallys’ creditors (First of America: $9,547;
Union Federal: $6,040; Key Bank: $6,045; L.S. Ayres: $976; Nordstrom:
$235; Sears: $1,836; Levitz: $660; IRS (tax lien): $3,400; State of
Indiana: $580; National City: $602; HHD Bank: $2,136; Key Bank: $2,458;
Bank One: $864), and settlement charges ($12,404.38).
[2] Indiana Code section 36-2-11-12 (1997) provides that:
a) The recorder shall index each volume of instruments he records by:
1) the name of each grantor, promisor, or covenantor, in
alphabetical order and cross-referenced to the proper grantee,
promise, or covenantee; and
2) the name of each grantee, promise, or covenantee, in
alphabetical order and cross-referenced to the proper grantor,
promisor, or covenantor.
b) The recorder shall accurately maintain separate indexes of all the
records of:
1) deeds for real estate; and
2) mortgages on real estate;
in his office. The recorder shall index each deed or mortgage
alphabetically, by the name of each grantor and grantee or mortgagor
and mortgagee, and shall include in each index entry a concise
description of the real property, the date of the deed or mortgage,
and the number or letter of the book and the page at which each deed
or mortgage is recorded.
[3] In Landis v. Miles Homes, Inc., 273 N.E.2d 153 (Ill. App. Ct. 1971),
the purchasers, husband and wife, of real estate executed a mortgage to
Miles before they took title and recorded the warranty deed. Landis, a
subsequent purchaser, bought the real estate at a tax sale. Landis had
conducted a title search which did not reveal the Miles mortgage because it
had been recorded before the deed was executed and recorded. The court
held that the Miles “mortgage cannot be considered to be ‘of record’ merely
because it was recorded. . . . The record of a mortgage given prior to the
time of the acquisition of record title by the mortgagor is not in the
chain of title and is not constructive notice to third persons.” Id. at
155; See also Far West Sav. & Loan Ass’n v. McLaughlin, 246 Cal. Rptr. 872
(Cal. Ct. App. 1988).
[4] Hartig v. Stratman, 729 N.E.2d 237 (Ind. Ct. App. 2000), dealt with an
instrument found to be outside the chain because it was recorded after the
grantor’s deed was recorded. The case involved a dispute over an easement
to a driveway shared among neighbors. On June 8, 1994, Connell sold his
property to Holmes and recorded the deed at 2:24 p.m. One minute later
Connell recorded the disputed easement given to his former neighbor
Stratman. In 1995, Hartig purchased the property that Connell had sold to
Holmes without knowledge of the Connell/Stratman driveway easement. Id. at
238. The Court of Appeals held that the driveway easement was outside
Hartig’s chain of title. It was recorded after the deed to Holmes had been
recorded, albeit only one minute after, and therefore Connell’s name would
not have been searched after this conveyance to Holmes was discovered. Id.
at 240. Since the easement was not within Hartig’s chain of title he did
not have constructive notice of its existence. Id.
[5] The Court of Appeals noted that “Owens presented evidence of four
different title searches where the Owens mortgage was uncovered, at least
two of which were completed before the Bank was assigned the EquiVantage
mortgage. There is no evidence that the Bank ever performed a title search
or, in the alternative, that its search failed to uncover the Owens
mortgage.” Bank of New York v. Nally, 790 N.E.2d 1071, 1077 n.4 (Ind. Ct.
App. 2003). The Bank contends that these title searches are hearsay, self-
serving, and were conducted at the request of Mr. and Mrs. Owens.
[6] Indiana Code section 32-29-1-11(d) (Supp. 2004) (second version),
provides in pertinent part that except for those instances involving liens
defined in Indiana Code section 32-28-3-1 (mechanic’s liens) or a municipal
sewer lien under Indiana Code section 36-9-23:
[A] mortgagee seeking equitable subrogation with respect to a lien may
not be denied equitable subrogation solely because:
1) the mortgagee:
A) is engaged in the business of lending; and
B) had constructive notice of the intervening lien over which the
mortgagee seeks to assert priority;
2) the lien for which the mortgagee seeks to be subrogated was released;
or
3) the mortgagee obtained a title insurance policy.