The Indiana Court of Appeals affirmed that a mortgage company shouldn't have been treated as a bona fide purchaser because it didn't act in good faith in providing a mortgage that was obtained by fraud.

In Richard Thomas, et al. v. Benjamin H. Thomas, No. 45A05-0906-CV-357, Trustcorp Mortgage Co. challenged the trial court's ruling that the mortgage it holds on Benjamin Thomas' home is invalid.

Benjamin remained in possession of his home that he owned since 1965, but his home was conveyed to his son Richard by a quit claim deed. After a family dispute, Benjamin asked Richard to convey the title back to him as agreed, but he refused. Benjamin filed notice of intention to hold a mechanic's lien for $200,000 on the home and filed a quiet title suit against his son. He didn't file a lis pendens notice at any point.

Richard then got an $118,000 mortgage on the home from Trustcorp by submitting a fraudulent loan application that included a purported release of the mechanic's lien. Richard never made any payments and filed for bankruptcy.

Benjamin received the title back via a mediated settlement and executed a release of the mechanic's lien to Trustcorp after the trial court issued partial summary judgment to the mortgage company on the lien's validity. Trustcorp conveyed the right to collect the mortgage loan to Fannie Mae and the servicing rights to EverBank.

The trial court then entered summary judgment for Benjamin in his suit, ruling the mortgage was invalid because it was a product of fraud. It also concluded despite Benjamin's failure to file a lis pendens, Trustcorp had constructive notice of his claims due to his pending litigation with Richard and the irregularities in the mechanic's lien release submitted with the loan application.

The trial court didn't err in finding Trustcorp's mortgage was invalid on the basis that the company wasn't a bona fide mortgagee. The record supports Trustcorp didn't act in good faith and can be imputed with notice of Richard's fraud and Benjamin's lawsuit, wrote Judge Cale Bradford.

"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," he wrote. "It is apparent that even a cursory investigation would have quickly uncovered both Richard's fraud and Benjamin's claims on the home."

In addition, the irregularities in the forged mechanic's lien release should have put a reasonably prudent person on notice that something was amiss, the judge continued.

Although Trustcorp couldn't have had constructive notice because Benjamin failed to file the lis pendens, the record contains sufficient evidence to support a finding of inquiry notice. Richard was the only person present when the lien was notarized, even though Benjamin supposedly signed it. Second, the lien had an incorrect number and Trustcorp had the means to verify it.

The same evidence supports the finding the mortgage was obtained by fraud, rendering it invalid, the appellate court concluded.