Indiana Commercial Foreclosure Law

Indiana Judgment Liens Are Subordinate to Prior Liens

What is the priority of judgment lien versus other liens on real estate?  The March 4, 2009 opinion by the Indiana Court of Appeals in Johnson v. Johnson, 2009 Ind. App. LEXIS 355 (Johnson.pdf) provides some guidance on the matter.  Johnson dealt with the subordination of a lien arising out of an agreed judgment reached in a divorce case.  Yes, even dissolution of marriage litigation can teach lenders something about Indiana commercial foreclosure law. 

The judgment lien and the loan.  The divorce settlement, in part, involved the ownership and operation of a farming business, which maintained certain financing secured by the business’s assets, including its real estate.  The financing, which entailed a line of credit that came up for renewal annually, had been in place before the divorce.  Post-settlement, the business needed to restructure its debt, in part for the husband to sustain payments to the wife.  The divorce settlement constituted a judgment lien to the extent that the trial court had ordered the husband to pay the wife money in installments. 

The subordination problem.  The husband sought a court order forcing the wife to subordinate her judgment lien.  A representative of the bank testified that the bank would renew the line of credit only if it continued to hold a first priority lien on the business, including presumably a senior mortgage lien on the farm’s real estate.  However, the wife refused to sign a subordination agreement.  The trial court sided with the husband and ordered the wife to complete the necessary paperwork to permit the refinancing.  The wife appealed.

The priority rules.  The Court of Appeals first noted, generally, that judgment liens in Indiana are purely statutory.  Ind. Code § 34-55-9-2 states:

. . . [A]ll final judgments for the recovery of money or costs . . . constitute a lien upon real estate and chattels real liable to execution in the county where the judgment has been duly entered and indexed . . .

The Court held that “as the line of credit existed at the time parties filed the Settlement Agreement, Wife’s judgment lien was subordinate to the Bank’s prior, existing lien.”  This is because, in Indiana, “liens for judgments are subordinate to all prior legal or equitable liens.” 

The loan renewal matter.  The Court went on to articulate the following additional legal principles that guided its decision:

Indiana law on priorities of liens is clear that the taking of a new note and mortgage for the same debt upon the same land will not discharge the lien of the first mortgage unless the parties so intended.  A court considers the circumstances of the transaction and will not permit the release of the old mortgage and the execution and recording of the new mortgage to destroy the lien of the original mortgage when not so intended, or rights of the third parties have not intervened, or positions changed.  Where notes are renewals of prior indebtedness, an intervening lienor will not have a superior lien, and the original lien retains superiority. 

The Borrower defeated the judgment lien holder.  In Johnson, the bank provided testimony that the line of credit came up for renewal every year.  The Court thus concluded that, if the business’s “indebtedness was merely being renewed every April 15, then the Bank’s lien would have retained its superiority over Wife’s judgment lien.”  The Court therefore upheld the trial court’s order that the wife must subordinate her judgment lien in order to enable the husband to renew the business’s line of credit.

Although not 100% clear in the opinion, it appears to me that the Court thought the bank’s lien would have priority regardless of whether the wife signed a subordination agreement.  Yet, the Court took the matter a step further by compelling the wife to sign off, probably to give the bank additional comfort.  The Johnson case reminds us that a prior loan, secured by a mortgage, even if subject to a renewal, should maintain senior status in the event of the entry of a subsequent judgment lien.  But, a signed subordination agreement would leave no doubt, which is what the bank and the husband (the borrower) sought in Johnson.   

Time Limitations Upon The Enforcement Of Non-Indiana Judgments In Indiana

A lawyer from New York recently contacted me after reading my November 20, 2007 post 6 Steps To Enforce A Non-Indiana Judgment In Indiana.  Her client holds a 1994 judgment entered in the State of New York.  She was curious whether her fourteen-year-old New York judgment could still be enforced in Indiana.   

20 years-execution.  Yes, the New York party can domesticate its foreign judgment here in Indiana and proceed with execution, without fear of being time barred.  Ind. Code § 34-11-2-12, entitled “Satisfaction of Judgment or Decree by Expiration of Twenty Years,” states:

Every judgment and decree of any court of record of the United States, of Indiana, or of any other state shall be considered satisfied after the expiration of twenty (20) years. 

This is not a twenty-year statute of limitations but rather a rule of evidence creating a rebuttable presumption of satisfaction (payment) by the lapse of time (twenty years).  Odell v. Green, 121 N.E.2d 304 (Ind. Ct. App. 1918).  In a suit in Indiana on a foreign judgment, instituted after the expiration of twenty years after entry of the judgment, the plaintiff/judgment creditor cannot recover unless it proves the judgment remains unpaid.  Hendricks v. Comstock, 1859 Ind. LEXIS 111 (Ind. 1859).  Since the New York judgment falls within the twenty-year period, the plaintiff/judgment creditor, after domestication of the judgment under I.C. § 34-54-11, can immediately execute. 

10 years-lien.  When New York counsel contacted me, she feared that too much time had passed.  Based upon her quick review of Indiana law, it was her understanding that Indiana may have a statute of limitations of ten years.  I.C. § 34-55-9-2 “Lien Upon Real Estate – Time Limitation” states, in pertinent part:

All final judgments for the recovery of money . . . in Indiana . . . constitute a lien upon real estate . . . in the county where the judgment has been duly entered and indexed in the judgment docket as provided by law:  . . . (2) until the expiration of ten (10) years after the rendition of the judgment . . ..

This ten-year statute of limitations specifically relates to a judgment lien on real estate and not the judgment itself.  In Indiana, a money judgment automatically becomes a lien on real estate owned by the defendant/judgment debtor in the county where the judgment was rendered.  This lien, which can be foreclosed, exists on the real estate for ten years.  Although the lien expires, the judgment itself may be enforced up to twenty years after its entry.  Needham v. Suess, 577 N.E.2d 965 (Ind. Ct. App. 1991). 

Which state’s law applies?  What if New York law held that judgments were presumed paid after ten years?  Would Indiana’s twenty-year statute still apply, or would the Indiana action be subject to New York’s ten-year rule?  In 1859, the Indiana Supreme Court addressed that very issue in Hendricks.  The plaintiff/judgment creditor filed suit in Indiana to collect on a seventeen-year-old Michigan judgment.  Michigan at the time had a statute identical to I.C. § 34-11-2-12 except that the time period was ten years, not twenty.  The defendant/judgment debtor in Hendricks argued that the case should have been dismissed based upon the presumption of payment under the Michigan statute.  The Indiana Supreme Court rejected the argument and held that, because the defense related to the remedy, not the merits, the law of the state where the action was pending (Indiana) applied.  According to Hendricks, the rules of the foreign state do not govern judgment enforcement actions.  Indiana’s do.

6 Steps To Enforce A Non-Indiana Judgment In Indiana

If you hold a judgment entered in a state other than Indiana, and if you believe the judgment debtor has assets in Indiana that could satisfy the judgment, then keep reading.  The hoops through which you must jump to reach those assets are outlined in Indiana Code § 34-54-11 “Enforcement of Foreign Judgments.” 

I.C. § 34-54-11.  Enacted in 2003, this Indiana statute tells you just about everything you need to know.  Here are the six major steps:

1. Wait at least twenty-one days after the entry of the judgment in the original (non-Indiana) court.

2. File a certified and exemplified copy of the foreign judgment in the clerk’s office of the Indiana county where the debtor resides or owns property. 

3. File an affidavit, signed by the judgment creditor, that states:
a. the name/address of the judgment debtor; and
b. the name/address of the judgment creditor.

4. In accordance with Trial Rules 4 through 4.17, serve upon the judgment debtor a notice of the filing of the foreign judgment (like you’re serving a summons and complaint). This notice must contain: 
a. the name/address of the judgment creditor;
b. the name/address of the judgment creditor’s attorney, if any; and
c. the nature/amount of the claim under the foreign judgment.

5. Pay a filing fee, which is $133.00 currently.

6. Wait at least twenty-one days after the date the judgment debtor is served with the notice.  (See below).

Once the filing and service requirements have been met, and twenty-one days have passed with no action by the judgment debtor, the judgment creditor is free to proceed as if it holds an Indiana judgment.  In other words, you may begin to enforce the judgment by execution or other process.

21-day grace period.  My understanding always has been that, in cases of domesticating foreign judgments in Indiana, the judgment debtor’s (the defendant’s) only defense relates to jurisdiction.  In other words, the judgment debtor only can attack the validity of the judgment (halt enforcement) by establishing that the original court did not have the power to enter the judgment in the first place – an unlikely scenario.  Otherwise, the judgment essentially is presumed to be valid, and the underlying case will not be re-litigated in Indiana.  The other potential barrier is if the defendant files an appeal in the original case.  An appeal generally will stay the enforcement of the foreign judgment in Indiana until the underlying case concludes. 

Indiana Code §§  34-54-11-2(e)(i) and 4 address these two “defenses.”  The judgment debtor has twenty-one days to file a notice with the Indiana court asserting reasons (jurisdiction/appeal) that would prohibit the judgment creditor from enforcing the foreign judgment.  If filed, the enforcement of the judgment is stayed pending a ruling by the Indiana court.  (It should be noted, however, that a creditor filing a foreign judgment still is entitled to Indiana prejudgment remedies during the pendency of the stay, such as prejudgment attachment or garnishment.)

Old school.  I.C. § 34-54-11-5 states that the statute “does not impair” the right to bring an action to enforce a foreign judgment by other means.  Before the enactment of the statute, it was common to file a complaint to domesticate (certify) the non-Indiana judgment and to follow all the normal rules and procedures applicable to new lawsuits.  I no longer see a benefit to this course of action.  The new statute now allows the judgment creditor, initially, to bypass the judge because a separate Indiana court order domesticating or certifying the foreign judgment is not required, unless the debtor files a notice under Sections 2 or 4.  The statutory formula should result in the enforcement of a foreign judgment more quickly and, therefore, more inexpensively.

If as an out-of-state judgment creditor you need to pursue the assets of a judgment debtor that are located in Indiana, please contact me or another Indiana lawyer to assist with the process.  I.C. § 34-54-11, the relatively new “Enforcement of Foreign Judgments” statute, is your ticket to an expeditious and cost-effective enforcement of your lien.

Jail Time Is Not An Available Remedy In Collection Actions In Indiana

Do you ever get so frustrated with your attempts to collect a guaranteed commercial debt that you wish you could have your guarantor thrown in jail for a failure to pay?  While I understand the frustration, this drastic remedy typically is not available in Indiana.  The Indiana Court of Appeals’ August 8, 2007 opinion in Mitchell v. Mitchell, 2007 Ind. App. LEXIS 1805 (Mitchell.pdf)  reminds us of the applicable legal principles. 

The Court decided Mitchell in the context of a divorce proceeding, specifically a husband’s failure to comply with a dissolution decree requiring him to pay certain marital debts.  The wife sought to hold the husband in contempt for his failure to do so.  Although the opinion does not specifically apply to commercial lenders, some of the rules outlined by the Court are good to know:

1.  The Indiana Constitution, Article 1, Section 22, forbids imprisonment for debt, so contempt may not be used to enforce an order requiring one party to pay another a fixed sum of money.  Id. at 9.

2.  As to a final money judgment requiring a person to pay a fixed sum of money to another party, Indiana Trial Rule 69 contains the correct remedies for non-compliance with the judgment (selling the judgment creditor’s property, proceedings supplemental/garnishment, etc.).

So, a money judgment, such as a judgment on a guaranty, may only be enforced by execution (not the death kind; the seizing and selling of property kind).  As much as commercial lenders may at times want to have evasive guarantors sent to jail until they deal with their debts, this simply is not an option in Indiana.

As an aside, the situation in Mitchell did not involve a money judgment requiring the husband to pay a fixed sum of money to his wife.  Rather, the court order required him to pay, and hold his wife harmless from the payment of, mortgage and credit card debts.  As such, the trial court was not barred from using its contempt powers to enforce compliance with the order.  Thus there may be rare situations in which a lender can utilize the contempt powers of the court, but those powers are not available when the basic problem is a failure to pay money owed.