Due Diligence

due diligence

How Much Effort is Required to Find the Person You are Suing?

In what should have been an otherwise uneventful mortgage foreclosure, the Indiana Court of Appeals recently made clear to parties in lawsuits that they must take some reasonable efforts to notify all necessary parties of a lawsuit before they will be entitled to a judgment.  In Hair v. Deutsche Bank National Trust Company, a bank filed a foreclosure action, and needed to name another lien holder in order to complete the foreclosure, clear title to the real estate, and obtain a judgment.  There was no question that the bank’s mortgage lien was the first lien on the property, but Hair held a “junior” lien on the property.  After the bank was unable to serve a summons on Hair, it attempted to serve him through “publication”, which is a technique allowed under Indiana law.  However, a party may only rely upon service by publication after providing evidence that a diligent search was made and that the party cannot be found, has concealed his whereabouts, or has left the State.

The Court found that the bank had not made a diligent effort to ascertain Hair’s whereabouts, and held that “mere gestures are not enough” and the “means employed must be such as one desirous of actually informing the party might reasonably adopt to accomplish it.”

Because the Court found that the bank had not exercised that due diligence, and that had the bank performed even a bit of Internet research Hair could have easily been located, the Court granted Hair’s motion to set aside the judgment.  The Court of Appeals then sent the case back to the trial court for further handling.

Where this case will end up remains to be seen because the real estate has already been sold to a third party.  However, by operation of law, Hair’s lien was not foreclosed and therefore is still attached to the real estate.  At the same time, there is no dispute that Hair’s lien was inferior to the bank’s lien, and the property sold at the sheriff’s sale for less than what was owed to the bank.  Therefore, even if Hair had been properly served with a summons, the bank would have foreclosed the lien and Hair would not have received any of the proceeds of the sale.  The Court of Appeals did not address that issue, and sent the case back to the trial court for further proceedings.

The practical lesson here is that it is not sufficient to simply serve a party by publication without being able to demonstrate that you have exercised reasonable efforts in your due diligence to locate that party so that the party can be personally served.  The failure to do this can result in the setting aside of a foreclosure judgment and the unwinding of subsequent transactions based upon that judgment.  Furthermore, with modern technologies, particularly the Internet and Internet based applications, what constitutes due diligence is likely more extensive now than what would have been required in the past.