Seventh Circuit Clarifies Indiana Mortgage Recording Statute, Holding 2007 Amendment - Providing That Recorded Mortgages With Technical Defects Give Constructive Notice To Bona Fide Purchasers - Applied To All Mortgages, Regardless When Recorded

In Miller v. LaSalle Bank Nat’l Assoc., 595 F.3d 782, 784 (7th Cir. 2010), the Seventh Circuit Court of Appeals resolved a question of statutory interpretation that had been the subject of considerable litigation.  

The issue came to the Seventh Circuit from an adversary proceeding in bankruptcy court between the Trustee and a bank. The Trustee argued that the mortgage was avoidable under Indiana law as amended in 2007 because “it did not impart constructive knowledge on a bona fide purchaser, here the Trustee.” Id. The bankruptcy court agreed, holding that the 2007 amendment to the recording statute applied only to mortgages recorded after the Amendment’s effective date of July 1, 2007. Id. The district court reversed and the Seventh Circuit affirmed.

The facts of the case were not disputed. In 2001, the debtors executed and delivered a mortgage to the bank’s predecessor to secure a loan. Although the mortgage was filed in the proper county in May 2001, the mortgage had a technical defect in that it did not identify the individuals who appeared before the notary and executed the document. The borrowers filed a voluntary petition for relief under Chapter 13 and the Trustee brought an adversary proceeding to avoid the lien in May 2008.

The Trustee relied upon the 2007 amendment to the mortgage recording statute, which allowed recorded mortgages with certain technical defects to provide constructive notice as if the mortgages were properly recorded and acknowledged. Id. at 785 (citing Ind. Code § 32-21-4-1). The following year, however, the Legislature again amended the statute, clarifying that the statute applied to all mortgages, regardless when recorded. Id. Consequently, the issue in Miller was whether the 2007 Amendment applied to purchasers of property encumbered by certain technically deficient mortgages recorded prior to the 2007 Amendment’s effective date. Id. The Trustee was one such purchaser.

Finding that the 2007 Amendment was ambiguous and applying Indiana rules of statutory construction, the Seventh Circuit held that the Legislature intended the 2007 Amendment to apply to all mortgages, regardless when recorded. In so holding, the Court found that it clearly appeared that the amendment was passed to clarify the Legislature’s original intent. Id. at 789 (citing Sun Life Assur. Co. of Canada v. Indiana Dept. of Ins., 868 N.E.2d 50, 56 (Ind. Ct. App. 2007) (internal citations omitted)). For this reason, the Court declined to abide by the presumption that “an amendment altering a prior statute suggests that the legislature intended to change the meaning of the law.” Id. The Court explained that the 2007 Amendment was obviously ambiguous and that many bankruptcy trustees were aggressively seeking to avoid mortgages on technical grounds even after the 2007 Amendment. Id. at 790. Consequently, these factors weighed against the presumption that the 2008 Amendment was substantive; instead, it merely clarified the 2007 Amendment. Id.  

Posted by: Jacob V. Bradley

Categories: Indiana