Grand Beach Police Chief Dan Schroeder told CBS Affiliate WSBT that Charles Smith was apprehended at gunpoint in the driveway of a home in Grand Beach, the summer home of Mayor Daley.
Schroeder said police got a call Monday that a private security guard for Daley was holding the inmate at gunpoint in a home's driveway near the mayor's house, which is about eight miles from the prison.
A woman had become involved in what Schroeder described as a "verbal altercation" with one of the suspects, reported WSBT. No one was injured, but the woman called police.
Smith, 48, originally from New Castle, Ind., was convicted of murder and sentenced in 1999 to 95 years.
Authorities were still searching for the two other inmates.
Prison officials said the men were discovered missing about 10 a.m. Sunday.
A state prison agency spokesman said it appeared the three escaped by somehow getting past bars in the tunnels and pipe chases under the grounds of the prison about 30 miles west of South Bend.
Authorities identified the two still missing as:
Lance Battreal, 45, white, of Rockport, Ind. Battreal was sentenced in 1998 to 50 years for rape - Class A felony, 20 years concurrent for criminal confinement - Class B felony, and 3 years consecutive for stalking - Class D felony. His projected release date was October 16, 2047.
Battreal may have recently cut his hair or shaved it.
Anyone with information regarding these offenders should notify their local law enforcement agency. Both men should be considered dangerous.