RUCKER, J.
This case presents the question of whether a tenant’s leasehold interest in property survives a land contract vendee’s forfeiture when the tenant is not made a party to the forfeiture action and the vendor has actual knowledge that the tenant is in possession of the property. We conclude that in this case the tenant’s leasehold interest survives.
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The underlying rationale for the majority view is that a tenant who takes a lease from the owner of the equity of redemption in mortgaged property, subsequent to the execution of the mortgage, is a necessary defendant in a foreclosure so that title may be conveyed free from any claim or lease on his part. Albert W. Fribourg, Seth V. Elting & Louis M. Fribourg, 1 Wiltsie on Mortgage Foreclosure § 369 (5th ed. 1939). Further, since the objective of foreclosure is to extinguish the equity of redemption and obtain a valid sale of the mortgaged property, all parties who own the equity of redemption, in whole or in part, should be made defendants. George W. Thompson, 10 Thompson on Real Property § 5144 (1957 Replacement Volume). This premise is consistent with longstanding Indiana case authority. See, e.g., Murdock v. Ford, 17 Ind. 52, 54 (1861) (noting, “Where a prior mortgagee, at the time of filing his bill, has either actual or constructive notice of a junior mortgagee, or other subsequent incumbrance, he is bound to make the holder thereof a party to the action, or the proceedings therein will not affect him”) (emphasis added) (citations omitted). And it is also consistent with principles of notice required by due process and an opportunity to be heard. See Como, Inc. v. Carson Square, Inc., 648 N.E.2d 1247, 1249 (Ind. Ct. App. 1995) (declaring that tenant’s leasehold was a “property interest” for due process purposes and that tenant was denied due process when it was not named as a party in a foreclosure action), trans. deemed denied.
We adopt the majority view and hold that where at the time a mortgagee files suit for foreclosure it knows, or upon reasonable diligence should have known, that a tenant is in possession of the property, the tenant’s leasehold interest survives the foreclosure action unless the tenant is made a party to the action.
Of course this case involves forfeiture as opposed to foreclosure. . . .
For purposes of joining a tenant as a party to the litigation, we discern no logical reason or legitimate rationale for treating a putative forfeiture defendant any differently than a foreclosure defendant. In either event, a tenant’s leasehold interest in property survives a forfeiture or foreclosure action to which the tenant was not made a party where the vendor/mortgagee knew or upon reasonable diligence should have known that a tenant was in possession of the property.
Here, the record shows that at the time Myers filed his breach of contract action against Yoder, in December 2004, Myers knew that Leedy was farming the land. Yet Myers failed to join Leedy in the action. Under our holding today we conclude that the subsequent forfeiture of Yoder’s interest did not extinguish Leedy’s leasehold interest.
Myers contends that regardless of whether Leedy should have been joined as a party to the breach of contract action, Leedy’s leasehold interest was nonetheless extinguished because Leedy had both constructive as well as actual notice of the legal dispute between Myers and Yoder at the time Leedy entered a contract for the 2006 crop season.
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We have no quarrel with the general proposition that the commencement of a foreclosure action standing alone provides third parties with constructive notice of a pending lawsuit. Indeed one of the underlying purposes of lis pendens is to “provide[] a mechanism for a person to put third parties on notice that he may acquire an interest in real property as a result of a pending legal dispute.” Grubb v. Childers, 705 N.E.2d 180, 181 n.1 (Ind. Ct. App. 1998). But in our view it makes no sense to say that a lis pendens notice of a foreclosure proceeding should bind a tenant already in possession. “To hold otherwise would mean that a tenant in possession must regularly check the records of the county recorder’s office to determine whether a foreclosure action has been filed.” Applegate Apartments Ltd. P’ship v. Commercial Coin Laundry Systems, 657 N.E.2d 1172, 1179 (Ill. App. Ct. 1995). Instead, we reiterate that the leasehold interest of a tenant in possession of property is not extinguished upon constructive notice of pending litigation involving the subject property.
But what of actual notice? Myers essentially contends that it is inappropriate to absolve Leedy of the binding effect of the forfeiture action when Leedy knew of the pending litigation and could have protected his interest by intervening in the lawsuit. First, we are of the view that actual notice may be relevant where a seller recaptures property without the aid of a court. See Restatement (Third) of Property: Mortgages § 7.1 & cmt. a. & Reporters’ Note cmt. b (1997) (power of sale foreclosure terminates junior interests if it complies with applicable notice requirements). But where, as here, a seller recaptures property through judicial action, the weight of authority holds that junior lessees must be joined for their interest to be affected. Id. at cmt. a; Nelson, supra n.2, § 7.12 & n. 31; Powell on Real Property § 37.36 [6]. Second, even if actual notice were a relevant consideration, Meyers’ claim still fails.
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. . . Here, Myers failed to carry any burden he may have had in proving by a preponderance of the evidence that Leedy had actual knowledge of the pending legal dispute between Myers and Yoder concerning the farm land.
In this case of first impression we hold that where at the time a land contract vendor files suit seeking forfeiture it knows, or upon reasonable diligence should have known, that a tenant is in possession of the property, the tenant’s leasehold interest survives the forfeiture action unless the tenant is made a party to the forfeiture litigation. Consistent with this holding the trial court entered judgment in favor of the tenant Leedy. We affirm the judgment of the trial court.
Dickson and Boehm, JJ., concur.
Shepard, C.J., concurs in result with separate opinion in which Sullivan, J., concurs.
SHEPARD, Chief Justice, concurring in result.
What we have here is an appeal involving a contract sale of 200 acres and a single tenant-farmer in a rural area. The court has used this case to alter the property interests of owners and lenders in billions of dollars of commercial and industrial real estate. There is no need for this sort of sua sponte expansiveness.
To be sure, we have been treating termination of land-sale contracts largely by reference to the law of mortgage foreclosure since the 1973 decision in Skendzel v. Marshall, 301 N.E.2d 641. Principles from mortgage foreclosure law are thus helpful to resolving the present case. By the same token, the majority makes quite clear that it intends the legal rule announced in this case to govern future decisions in mortgagor/mortgagee cases, a vastly larger and more complex part of the state’s economy.
The generic rule that foreclosure by a mortgagee extinguishes the property interests of others named in the foreclosure but not the interests of those not named is simple hornbook law. Ind. Law Encyclopedia, Mortgages § 143 (West 2001). I take this to be a nearly ironclad principle in the world of foreclosing recorded interests. Where the holder of a first mortgage forecloses on the property owner without for some reason naming the holder of the second mortgage or the holder of a subsequent lien, the latter’s interest in the property remains unaffected.
The law of mortgage foreclosure as respects varying unrecorded interests is rather different, as one of the authorities cited in the majority opinion demonstrates.
It is true that the court in Farm Credit Bank of St. Paul v. Martinson, 478 N.W.2d 810 (S.D. 1991), majority opin. at 4, recited the same general rule that appears in I.L.E. on the merits; however, the court rejected Martinson’s contention that his continued use of the land “as if it were his own” by agreement with his mother, the owner/mortgagor, constituted an interest in the land that was not extinguished in the foreclosure action between the bank and his mother.
The approach to interests more formal than Mr. Martinson’s appears to be that where a formal lease predates a lender’s mortgage, foreclosure and sale on the demised premises does not terminate the lease. Malamut v. Haines, 51 F.Supp. 837 (M.D. Pa. 1943); Bank of America v. Hirsch Mercantile Co., 64 Cal. App. 2d 175, 148 P.2d 110 (1944). By contrast, mortgage foreclosure does operate to terminate a leasehold created subsequent to the mortgage, even where the lessee has not been named in the foreclosure action. Hecht v. Dittman, 56 Iowa 679, 7 N.W. 495 (1880); Korean Presbyterian South Church v. Rack & Ball Club, Inc., 116 Misc.2d 849, 456 N.Y.S.2d 627 (N.Y. Civ. Ct. 1982). Even where a foreclosing mortgagee is deemed not to have extinguished a lease by virtue of an initial foreclosure, the lease may be subject to reforeclosure. Neustadter Foundation v. Bernfeld, 165 Misc. 640, 1 N.Y.S.2d 58 (N.Y. Sup. Ct. 1937).
Whether Indiana ought to follow these authorities or others should the questions involved be squarely put to us in a mortgage foreclosure case I do not know. But this is not a mortgage foreclosure case. It is a forfeiture of interest in a contract sale of agricultural land featuring just three parties who all plainly knew about each other. Since Skendzel, we have treated land contract arrangements like mortgages as a matter of common law equity.
Importing the open-ended idea of equity into the complicated, largely statutory system which governs the massive interests of commercial real estate mortgages, applying it to past and present financial commitments, and declaring that all subordinate unrecorded or informal possessors survive unaffected by foreclosure unless the lender undertakes to obtain service of process on all of them is really quite remarkable.
I perceive that today’s ruling is not really consonant with prevailing national doctrine on mortgages, but would put off that debate until such moment as we might have before us parties like mortgage lenders and owner/mortgagors of apartment buildings, shopping centers, or other commercial or industrial real estate whose world is being altered by today’s declaration.
Sullivan, J., concurs.