Legal Alert: Lenders Must Diligently Protect Their Interests

Ninth Circuit Extinguishes Another Mortgage

On November 10, 2020, the Ninth Circuit Court of Appeals ruled that a mortgage lender who failed to adequately respond or prosecute their interests in the mortgaged property when another lien holder foreclosed on the property was barred from bringing a quiet title action four years later (Wells Fargo Bank, N.A. v. Mahogany Meadows Ave. Tr., No. 18-17320, 2020 WL 6498000, at *2 (9th Cir. Nov. 5, 2020)). Specifically, Wells Fargo failed to foreclose on its mortgage during the housing crisis for failure to make payments which opened the door for the HOA to foreclose on its lien at a later date. In Nevada, where the case originated, HOA liens also take priority over all other interests in real estate regardless of the date they are recorded. In this case, Wells Fargo did not bring a quiet title action until four years after the HOA foreclosed on the property. The Ninth Circuit declined to adopt Wells Fargo’s arguments, allowing the HOA lien to wipe out the $1.4 million Wells Fargo Mortgage.

Application to Indiana

Indiana is considered a “Race-Notice” jurisdiction for priority of interests in real estate (CitiMortgage, Inc. v. Sprigler, 2009 U.S. Dist LEXIS 27866 (S.D. Ind. 2009); IC § 32-21-4-1). Therefore, a subsequent purchaser cannot obtain priority if they knew about the mortgage to the first mortgage holder, or if they lost the “race” to record their interest. This means the priority issues experienced in Mahogany Meadows Ave. will not affect interests in Indiana. However, Mahogany Meadows Ave. provides an important reminder to lenders that they should A) ensure their recorded documents comply with Indiana’s recording statutes (“Indiana Changes Recording Requirements”), and B) lenders should actively monitor and protect their interests in real estate to prevent the avoidance of their mortgage like in Mahogany Meadows Ave.

Next Steps

While all aspects of Mahogany Meadows Ave. do not apply in Indiana, it is an important reminder to take each legal proceeding involving real estate encumbered by a lender seriously. If you receive notice of a foreclosure, you should contact your Rothberg attorney or the real estate team immediately. Additionally, it is important to ensure your interest is validly recorded and meets all of Indiana’s recording requirements. Again, contact your Rothberg attorney or the real estate team to review your document and verify it is compliant with Indiana law.

Additional information

Indiana Code Section 32-21-4-1 (Recording Priority)

If you have questions, please reach out to either of us or your Rothberg attorney.