Indiana Commercial Foreclosure Law

Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b).  Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure sale.  Unlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

Thanks to our firm’s summer associate, Adam Wanee, for helping with this research.

Known Judgment Lien Is Purchaser’s Downfall In Recent Lien Enforcement Case

Judgment liens and the bona fide purchaser doctrine are topics in the Indiana Court of Appeals’ decision in Lobb v. Hudson-Lobb, 2009 Ind. App. LEXIS 1630 (Ind. Ct. App. 2009) (Lobb.pdf) .  The case arises out of a trial court’s order to sell real estate to satisfy a judgment lien created by a prior divorce decree.  As explained, the purchaser acquired the property subject to an enforceable judgment lien.

The setting.  Lobb involved Husband, Wife and the husband’s Parents.  Husband filed for divorce, which resulted in a decree that in part granted Husband title to real estate previously owned jointly by the couple.  The decree also provided that Wife receive $50,000 for her interest in the real estate, plus another $167,000 in cash.  Wife deeded her interest in the real estate to Husband and received the required $50,000.  Although Wife received additional cash payments, the entire amount owed by Husband remained unpaid when Husband deeded the real estate to Parents.  Wife later filed the subject action against Parents to foreclose her judgment lien on the real estate.  The trial court rendered a foreclosure judgment in favor of Wife that led to the subject appeal.

Valid lien?  The first issue addressed in the Lobb opinion was whether the money judgment in the divorce decree constituted an enforceable judgment lien.  Parents contended that the lien was not valid because it was not recorded with the county recorder’s office.  In Indiana, a judgment lien is purely statutory, and Ind. Code § 34-55-9-2 provides that all final judgments for the recovery of money constitute a lien upon real estate in the county where the judgment has been “entered and indexed . . ..”  T.R. 58(A) states, in part, that the court shall promptly prepare and sign the judgment, and “the clerk shall thereupon enter the judgment in the Record of Judgments and Orders” (commonly known in Indiana as the “judgment docket”).  This step is an act to be performed by the county clerk, not the parties.  As such, Wife was not required to cause the decree to be entered in the judgment docket.  Perfection of judgment liens in Indiana essentially occur automatically and do not involve recordation in the recorder’s office. 

BFP defense defeated.  The Lobb opinion suggests that it was not entirely clear whether the divorce decree had been entered into the judgment docket.  Nevertheless, the Parents lost the case because it was clear that they had prior, actual knowledge of Wife’s judgment lien.  Parents asserted that Wife’s foreclosure action should be defeated because Parents were bona fide purchasers without notice - a doctrine I’ve discussed here previously.  But the Court noted that “the controlling and dispositive fact is that the [Parents] had actual notice of Wife’s judgment lien.”  Before buying the real estate, Parents had a copy of the decree and knew the decree awarded wife $167,000.  In Indiana, “a person with actual notice is bound by the terms of a valid instrument, even when that instrument has not been recorded so as to provide constructive notice.”  The Court concluded Parents were bound by such decree:

[Parents] are not bona fide purchasers and, thus, they have not shown that they are exempt from execution levy.  In sum, this case does not involve a good faith purchaser of the property for value and without notice, and our holding is limited to situations in which the purchaser of the property has actual knowledge of the unsatisfied judgment lien.

Points.  The primary thing secured lenders can take away from Lobb is that any money judgment they obtain in Indiana automatically becomes a lien on real estate owned by the defendant in the county where the judgment was entered.  Unlike with mortgages, deeds, etc., there is no need in Indiana to separately record the judgment with the recorder’s office.  A secondary point from Lobb is that proof of a purchaser’s actual knowledge of an adverse lien will prevent the purchaser from utilizing the bona fide purchaser defense to defeat the lien enforcement action.  

Indiana Delinquent Sewer Fee Liens

In the case of Pinnacle Properties v. City of Jeffersonville, 893 N.E.2d 726 (Ind. 2008) (Pinnacle.pdf), the Indiana Supreme Court on September 17, 2008 handed down an informative opinion indirectly applicable to lenders who foreclose upon, and ultimately own, commercial real estate collateral.  There are many different liens that can be asserted against real property.  Delinquent sewer fees is one of them. 

The dispute.  The City of Jeffersonville provided sewer service and billed tenants directly for the service.  The issue was whether the city could transfer a tenant’s delinquent balance to the landlord’s (property owner’s) account without notice. 

The holding.  Indiana’s highest court held that the city could do so “because the property owner is ultimately responsible for payment of sewer fees.”  Note the following general rule: 

Although the statutes do not specifically authorize a municipality to transfer tenants’ delinquent sewer balances to the property owner’s account, the liability is the owner’s.  Billing the tenant is a convenience afforded the owner, but the owner is ultimately responsible for the sewer service. 

The Court concluded:

In sum, the statutes provide that owners are responsible for fees incurred by renters, and those fees can be collected from the deposit or by a civil action.  However, the statutes do not require municipalities to collect delinquent fees from tenants.  Ultimately, whoever owns the property at the time fees are incurred remains responsible for the fees, and the municipality can foreclose a lien against the property.

The statute.  The statute in question was Ind.Code § 36-9-23 et. seq., which generally authorizes recovery of delinquent fees and penalties through the filing by the municipality of a lien against the property served.  The lien “may be foreclosed to satisfy fees, penalties, and reasonable attorney’s fees.”  I.C. § 36-9-23-34(a).  When notice of a lien is filed with the county recorder, the lien attaches “and becomes enforceable by foreclosure against the property.”  I.C. § 36-9-23-32(a). 

The priority.  I.C. § 36-9-23-32(a) provides that such “lien is superior to all other liens except tax liens.”  Thus a municipality’s sewer lien will have priority over a lender’s mortgage lien, regardless of the recording dates.  However, a lien is not enforceable against a “subsequent owner of property unless the lien for the fee was recorded with the county recorder before the conveyance to the subsequent owner.”  I.C. § 36-9-23-32(b).    

The “subsequent owner” and sheriff’s sale.  In the commercial mortgage foreclosure context, the “subsequent owner” noted in Section 32(b)’s recording provision usually will be the lender/mortgagee.  Although I found no case law to support this proposition, logic dictates that the “conveyance” under that statue would be the sheriff’s sale.  It follows that, to be enforceable against a lender, the lien must be recorded before the sheriff’s sale. 

Notably, I.C. § 36-9-23-33(i) provides that these liens “shall be collected by the county treasurer in the same way that delinquent property taxes are collected.” At least in Marion County (Indianapolis), therefore, sewer liens, like real estate taxes due and owning, will be paid at the sheriff’s sale.  (For more on this payment, please see my January 9, 2007 post:  Statutory Disposition Of Foreclosure Sale Proceeds.)  Sewer liens are never going to be a big deal in terms of dollars.  When I’ve seen these, the lien amount has been limited to the hundreds.  Nevertheless, they are a potential cost of doing business in Indiana of which secured lenders should be aware.  As a practical matter, unless a third party acquires the property at the sheriff’s sale, lenders will get stuck with these fees.   

Bout Over An Indiana Warehouseman’s Lien

Although the Miller’s Turnkey v. Cybertek case from the Indiana Court of Appeals may not directly affect most commercial lenders, the case does speak to the enforcement of an Indiana lien under the Uniform Commercial Code.  If you happen to be involved in, or want to learn about, the foreclosure of a warehouseman’s lien in Indiana, you or your counsel should review Miller’s Turnkey, 878 N.E.2d 280 (Ind. Ct. App. 2007) (Miller'sOpinion.pdf). 

Punch.  Plaintiff Miller owned a warehouse and stored defendant Cybertek’s equipment for a fee.  Cybertek delivered the equipment to Miller but never paid rent.  Miller sued Cybertek and obtained a judgment for $23,600, presumably the amount owed for storage fees, and a decree authorizing the foreclosure of the possessory lien held by Miller.  To satisfy the judgment, Miller sold Cybertek’s equipment for $45,000 to a third party in a private sale.  (Miller put the proceeds in escrow.) 

Counterpunch.  Thereafter, Cybertek pursued a counterclaim against Miller for damages due to alleged non-compliance with Indiana’s Uniform Commercial Code in the sale of the equipment.  Cybertek’s action sought damages for what it claimed to be the fair market value of the goods - $93,500.  At issue was Indiana Code § 26-1-7-210, which deals with the enforcement of a warehouseman’s lien in Indiana. 

Knockdown.  The Indiana Court of Appeals concluded that defendant Cybertek was correct in that plaintiff Miller didn’t follow the rules when it disposed of the equipment.  First, the Court found Miller did not provide the appropriate notice to Cybertek with regard to the sale.  Second, the Court found that the sale was not “commercially reasonable” as required by statute.  Finally, the Court found that there was sufficient evidence to support the contention that the fair market value of the goods was $93,500, not the $45,000 received in the Miller’s private sale.  The opinion provides a road map for parties and their counsel who need to enforce a warehouseman’s lien, including how to establish a proper sale and sale price.  Please read the opinion for more details.

Split decision.  Although plaintiff/creditor Miller, the warehouse owner, ultimately was defeated by defendant Cybertek, the debtor who did not pay rent, all was not lost.  At the end of the day, Miller will forfeit about $25,000, not $93,500.  This is because Miller will get a credit for the initial $23,600 judgment it obtained against Cybertek.  Furthermore, Miller’s private sale of the equipment, albeit defective, netted $45,000, which will be used to pay Cybertek.  $93,500 – ($23,600 + $45,000) = $24,900, the net amount Miller will be out of pocket to Cybertek. 

Lest we forget the attorneys’ fees and litigation costs both parties incurred in fighting one another.  Neither the trial court nor the Court of Appeals awarded Cybertek attorney’s fees as a part of the judgment against Miller.  Cybertek, in the end, probably lost money because it likely spent more than $25,000 in defending Miller’s lien foreclosure claim and in prosecuting its counterclaim.  The same can be said for Miller –not only did it lose net $25,000, but it surely lost more when attorney’s fees and litigation costs were considered.  The result of this case brings to mind a quote from our sixteenth president, Abraham Lincoln:  “Discourage litigation.  Persuade your neighbors to compromise whenever you can.  As a peacemaker the lawyer has superior opportunity of being a good man.  There will still be business enough.”  Perhaps the lawyers followed Lincoln’s advice in Miller’s Turnkey.  Maybe the parties – the litigants themselves – just didn’t heed it.