Failure To Name Scam-Financing Lender As Defendant In Suit To Undo Sale Leaseback Equity Stripping Ripoff Leads To Never-Ending Litigation Marathon

An Indiana sale leaseback ripoff transaction that dates back to 2002 has been the subject of multiple rounds of court proceedings over the last eight years, and was the subject of a recent ruling by the Indiana Court of Appeals. In a nutshell:

1. One, Swafford (the home owner), who was unable to obtain conventional financing through a mortgage company, asked one, Seitzinger, the agent of the mortgage company, if she could help him save his home from foreclosure.



2. Seitzinger contacted Hodges, her brother, who proposed a sale leaseback arrangement, whereby Swafford sold the home to Hodges, and where a land contract between Swafford and Hodges was contemporaneously entered into to effect the planned repurchase by Swafford.



3. The total effective sale price paid by Hodges to Swafford was $39,514.17, and the contemporaneous buy back agreement (the land contract) required Swafford to repurchase his home for $59,000.00, with interest at the rate of 8.50 percent per annum.



4. As part of consummating the transaction, Hodges obtained an institutional mortgage loan for $57,400, paying Swafford $39,514.17 (all but $4,000 going to pay off existing liens/debts), and pocketing the balance.



5. In 2003, a year after the deal was done, and after some disagreements that arose, Swafford filed a lawsuit against Hodges & Seitzinger to rescind the deal, alleging violations of the federal Truth in Lending Act, the federal Home Ownership and Equity Protection Act, the federal Real Estate Settlement Procedures Act, the Indiana Deceptive Consumer Sales Act, among other claims.



6. When filing the suit, however, Swafford failed to name, as an additional defendant, the holder of the mortgage loan that financed Hodges' purchase from Swafford.



7. Swafford ultimately prevailed in Round 1 of this litigation, with the sale leaseback being voided by the trial court. Among other things, Swafford recovered title to his home, subject to the mortgage loan Hodges obtained to finance the sale leaseback, and Hodges was instructed to continue making payments on said loan.



8. In Round Two, the ruling of the trial court was affirmed on appeal. See Hodges v. Swafford, 863 N.E.2d 881, amended on reh'g, 868 N.E.2d 1179 (Ind. Ct. App. 2007).



9. At some point after losing Round 2, Hodges stopped making the payments he was ordered to make to the mortgage lender, and the lender began Round 3 of this battle by filing a foreclosure action against both Hodges, the sale leaseback peddler, and homeowner Swafford.



10. In Round 3, the trial court concluded that because the transaction between Swafford (the homeowner) and Hodges (the sale leaseback peddler) had been rescinded, Hodges had no interest in the property when he obtained his loan, and as a result, the mortgage never attached to Swafford's home.



11. The trial court therefore concluded that the Bank could not foreclose on the property; however, it was entitled to summary judgment against sale leaseback peddler Hodges for the remaining amount due and owing under the mortgage loan. Homeowner Swafford (now with a home free & clear of Hodges' mortgage) was dismissed from the foreclosure action.



12. Unsatisfied with this result, the bank commenced Round 4 and filed this appeal.

After an analysis of the federal Truth in Lending Act, the Indiana Court of Appeals ruled that the mortgage loan made to Hodges by the lender was not void ab initio, but merely voidable. Accordingly, it reversed the trial court finding that the mortgage did not attach at the time the sale leaseback was consummated, seemingly resulting in a reinstatement of the mortgage as a lien on Swafford's home.

However, the appeals court then went further, and instructed the trial judge to begin Round 5 of this seemingly never-ending mess by holding off on proceeding with a foreclosure sale of Swafford's home until certain issues have been addressed, as explained in the following excerpt (bold text is my emphasis):

• It does not necessarily follow, however, that the Bank is entitled to foreclose on the mortgage. We believe that substantial genuine issues of material fact remain regarding the equities of this case, and the interplay between those equities and the Bank's security interest in Swafford's property.
  
  Because Swafford has already paid off the amount he owed to the Hodgeses, it may be inequitable to allow the Bank to foreclose on the mortgage and thereby deprive Swafford of ownership of the property.
  
  On the other hand, it may be inequitable to cut off the Bank's right to foreclose on the mortgage based on the Hodgeses' wrongdoing, assuming the Bank was not in a position where it knew or should have known of that wrongdoing.
  
  We find it particularly troubling that the Bank was not joined as a necessary party to Swafford's action to enforce his right to rescind under the TILA. It seems evident on the face of the record that the Bank was a necessary party to any action seeking to transfer title to the property subject to the Bank's mortgage. See In re Paternity of C.M.R., 871 N.E.2d 346, 349 (Ind. Ct. App. 2007) (noting that a necessary party as one who must be joined in the action for a just adjudication).
  
  If the Bank had been made a party to the underlying litigation, the parties may have been able to reach a settlement or, if no settlement could be reached, the trial court could have fashioned a complete and appropriate, equitable remedy at a much earlier time.
  
  If Swafford was aware of the Bank's interest in the property during the course of his suit to enforce his right to rescind under TILA, but nevertheless chose not to join the Bank, he may be estopped from denying the Bank's interest. See Zoller v. Zoller, 858 N.E.2d 124, 127 (Ind. Ct. App. 2006) (noting that all forms of estoppel "are based upon the same underlying concept: a person who, by deed or conduct, has induced another to act in a particular manner will not be permitted to adopt an inconsistent position, attitude, or course of conduct that causes injury to the other.").
  
  Likewise, if the Bank was aware of the litigation and chose not to intervene, it may be estopped from asserting any right to enforce or reform the terms of the mortgage. See id..
  
  Swafford's level of sophistication ("a retired laborer, has a sixth grade education and is illiterate, except that he can read numbers and sign his name") and whether he was aware that the Hodgeses intended to finance their loan to Swafford by mortgaging the property, together with the extent to which the Bank's assignor knew or should have known of Swafford's interest in the property at or about the time the Hodgeses executed the promissory note and mortgage at issue will also be very relevant in balancing these equities.(1)
  
  For all of these reasons, we reverse and remand with instructions for the trial court to receive additional evidence on whether any legal or equitable remedy is available to the Bank, and if so, what the terms of that remedy should be
  
  Reversed and remanded with instructions.

For the Indiana appeals court ruling in Round 4 of this continuing litigation marathon, see Wells Fargo Bank, N.A. v. Hodges, No. 55A01-1007-MF-334 (Ind. Ct. App. June 10, 2011) (unpublished).

(1) In suggesting that a determination should be made of the extent, if any, to which the bank "knew or should have known of Swafford's interest in the property at or about the time the Hodgeses executed the promissory note and mortgage at issue ...", it may be that the appeals court is telegraphing to the parties that the bank, by reason of Swafford's retained and continued possession of the premises at the time the bank financed the sale leaseback and thereafter, may have been been on notice of Swafford's ownership interest in the premises at that time. In such case, and assuming the bank failed to conduct a physical inspection of the premises in ascertaining the rights of persons in possession, Swafford may be able to successfully void the bank's mortgage and eliminate the lien thereof from his home after all.

Indiana case law appears to support the proposition that a lender's failure to examine the premises prior to making a mortgage loan will leave it vulnerable to the unrecorded rights and equities of the occupants, and without the protection of the recording statutes as a bona fide purchaser / bona fide mortgagee, as one disappointed Indiana lender sadly learned last year. Thomas v. Thomas, 923 N.E.2d 465 (Ind. Ct. App. 2010):

• "[T]o qualify as a bona fide purchaser,[[1]] one has to purchase in good faith, for a valuable consideration, and without notice of the outstanding rights of others." Kumar v. Bay Bridge, LLC, 903 N.E.2d 114, 116 (Ind.Ct.App.2009) (citation omitted). "The theory behind the bona fide purchaser defense is that every reasonable effort should be made to protect a purchaser of legal title for a valuable consideration without notice of a legal defect." Id. (citation omitted).
  
  There is no dispute that Benjamin failed to file a lis pendens notice when he filed his quiet title action against Richard on September 12, 2001. The trial court, however, concluded that Trustcorp did not qualify as a bona fide mortgagee because it did not act in good faith and had constructive notice of Benjamin's lawsuit. Trustcorp contends that these conclusions were erroneous. The record supports conclusions that Trustcorp did not act in good faith and can be imputed with notice of Richard's fraud and Benjamin's lawsuit.
  
  The Indiana Supreme Court has squarely held that "one who fails to examine land which he is about to purchase, and to inquire as to the rights of one in possession, is not acting in good faith and will not be treated as a bona fide purchaser." Mishawaka, St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433, 443, 196 N.E. 85, 90 (1935).
  
  Regarding notice of competing claims, the Court also held that "means of knowledge, with the duty of using them, are equal to knowledge itself." Id. The Indiana Supreme Court has also held that possession of land puts the world on notice that the possessor may have a claim of ownership and right to possession. See Olds v. Hitzemann, 220 Ind. 300, 308, 42 N.E.2d 35, 38 (1942) ("[Appellees] were still in possession of their land, and their possession was notice to the world of their claims to ownership and right to possession.").
  
  Quite simply, it is undisputed that Benjamin was in possession of the property in question and that Trustcorp nonetheless did nothing to ascertain his rights to it. It is apparent that even a cursory investigation would have quickly uncovered both Richard's fraud and Benjamin's claims on the home. Under the circumstances, Trustcorp cannot have been a bona fide mortgagee, and we therefore affirm the trial court's judgment in this regard.

(By the way, in footnote 1 of Thomas v. Thomas, the appeals court gives this reminder that, in Indiana, "[t]he law regarding bona fide purchasers applies with equal force to mortgagees. See, e.g., Weathersby v. JPMorgan Chase Bank, N.A., 906 N.E.2d 904, 910 (Ind. Ct. App. 2009).")

See also, Failure To Inspect Property & Inquire Into Rights Of Parties In Possession Prior To Making Loan Leaves Indiana Lender With Voided Mortgage.

See Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire for case law in other states addressing the effect of possession and a real estate purchaser's or lender's duty to inquire into the rights of the occupants when seeking the protection of the recording statutes as a bona fide purchaser or bona fide mortgagee/lender/encumbrancer.