Distressed loans secured by commercial property often involve delinquent sewer fee liens, which I discussed in my 10/24/08 post. These liens typically go hand-in-hand with delinquent real estate taxes. Workout professionals should remain mindful of this possibility as they analyze their collateral and make decisions concerning the enforcement of the loan. Questions I’m frequently asked are whether the lender should pay the real sewer fees liens and, if so, when.
Prior procedure. Indiana law historically required the plaintiff/lender, assuming it was the winning bidder at the sheriff’s sale, to pay any delinquent sewer fees, along with real estate taxes, immediately after the sale. In the case of a cash bidder (third party), sewer liens would be paid off the top or, in other words, the county treasurer got the first cut of the sale proceeds.
2011. We then noticed that some county sheriff’s offices started to require the plaintiff/lender to pay delinquent real estate taxes and sewer fee liens before the sale. In 2011, prepayment of delinquent real estate taxes became a statutory requirement by virtue of Ind. Code § 32-29-7-8.5 “Requirements for Payment of Property Taxes and Real Estate Costs Before Sheriff’s Sale.” See my 1/21/11 post for more.
2013. In this year’s session, Indiana’s General Assembly enacted HB 1132, which added delinquent sewer fee liens to the mix. HB 1132 amends Ind. Code Sec. 32-29-7-8.5 and will be effective July 1, 2013. The statute will now state, in pertinent part, that “the party that filed the praecipe for the sheriff’s sale shall pay . . . all delinquent property taxes, sewer liens described in IC 36-9-23-32, special assessments, penalties, and interest that are due and owing on the property on the date of the sheriff’s sale.” A failure to pay will result in the cancellation of the sale.
Policing the issue? Beginning in January 2011 in Marion County (Indianapolis), the Treasurer, in conjunction with the Sheriff, required that a Tax Clearance Form be (a) completed by the party requesting the sale, (b) stamped by the Treasurer’s Office and (c) then submitted to the Sheriff’s Office with the written bid. I’ve seen other counties utilizing forms like this. I suspect any such forms will be amended to include a statement about sewer fee liens. Please remember to confer with the particular county sheriff’s office in advance because rules and procedures may vary by county.
Build into judgment. Since I.C. § 32-29-7-8.5 will require sewer fee liens to be satisfied before the sale, the amount of any such lien that either has been or will be paid by the lender should be an item of damages identified in the judgment. Before the statutory change, borrowers theoretically could attack that damage figure as being speculative. Some borrowers claimed that, because the lender had not actually incurred the loss at the time of the entry of judgment, courts could not award the damages. Hypothetically, the borrower might later pay the fees or a third-party buyer might pay them Now, because the foreclosing lender is compelled to advance payment of the sewer fee liens, courts in turn should be compelled to include such losses in the calculation of damages.
Sewer connection penalties? On 8/1/12, I wrote about liens arising out of sewer connection penalties, which are similar to sewer fee liens. The 2013 amendment to Ind. Code Sec. 32-29-7-8.5 does not appear to require connection liens to be paid before the sheriff’s sale.
Plan ahead. Lenders and their foreclosure counsel should make it their routine practice, when calculating the debt, to verify with the county treasurer the status of both the real estate taxes and sewer fee liens. Indeed a sewer fee lien should be identified in a title commitment. As a practical matter, these liens will be a component of the amount owed by the borrower (and guarantor).