By J. Brian Steele, Esq.
Among the reviews conducted by our firm prior to filing a foreclosure complaint is a review of your title to the mortgage and the perfection of your security interest against a borrower and third parties. It’s not unusual to find issues—whether it be unreleased prior mortgages, issues with the legal description in the mortgage or a lost note. We will work with you to determine whether an issue requires addressing, and if so, whether a title claim is called for or whether an issue requires resolution through litigation.
In this article, I want to focus on resolutions involving litigation. I’ll use serious problems with the legal description contained in the mortgage as an example—the legal description either is deficient to such an extent the tract can not be located with certainty by the description[i] or the description names an entirely different parcel of real estate.[ii] Litigation is not the only method to resolve an issue with the legal description. Once though a mortgage loan has gone into foreclosure, and the issue with the legal description has been discovered as part of the foreclosure review process, litigation is a common method for handling errors with the legal description. Indiana is a judicial foreclosure state[iii]. Knowing a foreclosure complaint is likely to be filed, dealing with the legal description through the complaint fits the workflow.
Often a legal description error is first reviewed for a claim under a lender’s title policy. If a title claim is deemed appropriate and the insurer determines the issue is covered, the title insurer typically will agree to cover the additional fees and costs of the lender to remedy the issue or will hire its own counsel to remedy the issue.
By addressing a legal description error in the mortgage by the foreclosure complaint, we are asking a court to reform the mortgage such that it contains the correct legal description. I’m more concerned about the process or manner of the reformation in this article, not the substance of what is required to show entitlement to reformation.[iv] Without getting into the nature of the claim for reformation, then, two methods are commonly used to put the reformation claim before the court in a foreclosure complaint.
The first is to put the claim for reformation as part of the foreclosure claim itself. The intent is that plaintiff will seek a judgment that both reforms the legal description in the mortgage and forecloses the equity of redemption of the borrower and any lien-holders at the same time in the same judgment order. This is the simplest route and is an effective method of achieving the desired result.
The problem with this method is that it typically fails to resolve the issue if the foreclosure complaint is dismissed. Foreclosure complaints get dismissed for any number of reasons. If, amid a foreclosure, the foreclosure is dismissed, and the note and mortgage is reinstated, any attempt at reformation of the legal description would be dismissed and abandoned as well. The same deficient legal description would remain in force. This potentially leaves the mortgagee susceptible to intervening liens, loss of priority, additional expenses and loss of title coverage.
The second method for including a claim of reformation as part of the foreclosure complaint is to seek reformation of the legal description as a separate, declaratory portion of the same complaint. This is a fairly common practice for title counsel hired by an insurer to remedy a legal description under a lender’s title policy.
This method makes use of Indiana’s Declaratory Judgment Act[v] to seek an order finding the mortgagee is entitled to have the mortgage reformed to correct a defective legal description. As a party, or an assignee of a party, to a written contract[vi], a mortgagee is entitled to bring a declaratory judgment action. It matters not that the action is brought after breach of the written agreement[vii].
Bringing a separate declaratory claim does not alter the analysis as to whether a mortgagee is entitled to a judgment reforming the mortgage. The elements of the claim and the standard of proof are the same. By bringing the separate claim for declaratory relief, the request for reformation of the legal description can survive a reinstatement or modification-cure of the mortgage and note. The foreclosure claim can be dismissed without affecting the reformation claim.
Under this method, the judgment for reformation may be sought separately and prior to the judgment of foreclosure since the declaratory claim is not subject to the same three-month delay of execution that exists in Indiana for mortgage foreclosures[viii].
The primary drawback to pursuing a declaratory judgment action as part of the foreclosure is the additional cost. It does require more time, pleadings and management than just alleging the reformation as part of the foreclosure. It’s possible to tailor its use, where reformation is necessary, to exclude accounts in foreclosure where deceleration of the note and mortgage is most unlikely (deceased borrower(s), home equity conversion mortgages, second mortgages).
The risk of dismissing a reformation claim when it is needed can be much greater of a loss in the future if the same file returns to default. A title insurer who already accepted a claim to reform a legal description once, will exclude that, and likely any consequential loss, as a covered item a second time the same issue comes up.
While I have focused on reformation of the legal description, the same process or method can, perhaps should, be used for a number of other potential title issues. If you would like to discuss these issues, or any particular case, the attorneys at Reisenfeld & Associates are ready to assist.
[i] Keybank Nat. Ass’n v. NBD Bank, 699 N.E.2d 322, 327 (Ind.Ct.App.1998).
[ii] Rinehardt v. Reifers, 64 N.E. 459, 459 (Ind.1902).
[iii] Indiana Code 32-30-10-3.
[iv] Please note, reformation of a mortgage is not a simple request. The case cited below describes it as “an extreme” remedy and it carries a higher than normal standard of proof: clear and convincing. For a discussion of the elements necessary to establish entitlement to reformation of the mortgage legal description, see, for instance, Estate of Reasor v. Putnam Cnty.,635 N.E.2d 153, 158 (Ind.1994), a more commonly cited case.
[v] I.C. 34-14-1-1
[vi] I.C. 34-14-1-2
[vii] I.C. 34-14-1-3
[viii] I.C. 32-29-7-3