Indiana Commercial Foreclosure Law

Property Owner May Dodge Tax Sale Bullet

This is my fourth post regarding Indiana tax sales, which is the method by which Indiana counties foreclose on real estate in order to collect delinquent real estate taxes. Once again, these issues are relevant to lenders because tax sales terminate mortgages. McCord Investments v. Sawmill Creek, 210 Ind. App. LEXIS 2250 (Ind. Ct. App. 2010) is another recent Indiana decision dealing with the tax sale notice requirements. (Also see my posts of November 16, 2010 [pre-sale notice] and December 30, 2011 [post-sale notice].) In McCord, the property owner received quite a break, in my opinion, but the case isn’t over. The Indiana Supreme Court has granted transfer and vacated the Court of Appeal’s decision. Once the Supreme Court issues its opinion, I’ll update this post.

Procedural history. In McCord, County appealed an order granting owner’s motion to set aside a tax deed. The opinion centered upon the adequacy of County’s attempts to provide notice of the sale. Even though the County followed Indiana’s statutory scheme at the time, the Court found the notice to be constitutionally inadequate.

Comedy of errors. The Court of Appeals recognized that:

this entire controversy could have been avoided had [the owner] shown even a modicum of responsibility himself. He could have made certain that the Lot was deeded to Sawmill Creek instead of “Saw Creek.” Had he properly ensured that his current address for the taxation of the Lot was on file with the Auditor, and if he had simply noticed that he had not been paying the taxes due on the Lot, all of the current controversy could have been avoided.

Nevertheless, the trial court and the Court of Appeals ruled in favor of the owner.

Indiana’s statutory tax sale scheme. The McCord case arose out of pre-2006 events, and Indiana’s tax sale statutes have been amended since then. The tax sale scheme in Indiana requires three notices to be sent to the property owner in connection with the sale. The first is a pre-sale notice. The second is the right of redemption notice. And the third is the notice of the petition for a tax deed. In McCord, “it appears to be undisputed that [County] complied with the applicable versions of the relevant statutes.”

Constitutional due process. Despite compliance with the statutory scheme, the Court turned to the United States Supreme Court’s opinion in Jones v. Flowers, which analyzed the notice requirements of a pending tax sale. Jones established the following notice sufficiency test: while actual notice is not required, notice must be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” In the wake of Jones, Indiana’s General Assembly amended the pre-sale notice statute to deal with notice attempts via certified mail when certified mail is not returned or signed. The new language in Ind. Code § 6-1.1-24-4 requires a duplicate notice to be sent by first class mail.

McCord, the particulars. The problem in McCord was that County was aware that the owner of the lot had not received any of the three required notices, all of which were sent via certified mail and returned as unclaimed. Again, the question was not what would have been best to ensure the owner did, in fact, receive notice. Instead, the issue was “what additional reasonable steps the County could have taken that were reasonably calculated under the circumstances to apprise interested parties of the pendency of the action after the initial attempts at notice were returned as unclaimed.” The Court concluded that the County could have resent the notice by first class mail – even though the statutes did not require it at the time. Had the County done that, it appears that the outcome of the litigation would have been different. It remains to be seen what the Indiana Supreme Court will do.

Lender claim? The question I’m left to ponder is whether a mortgagee would have standing to set aside a tax deed if there was evidence the mortgagor did not receive the appropriate notices. In other words, could a lender make an owner’s case so as to preserve title and, in turn, the mortgage lien? Lenders may not be able to avail themselves of the constitutional protections afforded to owners, which is to say that a lender may not catch the break the owner got in McCord.

Indiana Tax Sale Notices To Mortgagees

This follows up my two posts from last year concerning pre-sale notices of Indiana tax sales, which counties hold to satisfy delinquent real estate taxes: (1) Mortgagees Beware: Only Owners Receive Notices of Tax Sale and (2) Indiana Tax Sales, Part II: Redemption. A recent Indiana Court of Appeals opinion – Wells Fargo Bank v. Allen County, 955 N.E.2d 849 (Ind. Ct. App. 2011) –addressed post-sale notice requirements, including where the notices must be sent. These matters are important to lenders/mortgagees because a tax sale can terminate a mortgage lien.

Pre-sale notices. The Court’s opinion teaches us that there are three statutory notices issued by the county. The first relates to the sale itself and was the subject of post (1) above. I.C. § 6-1.1-24-4(a) controls that notice requirement, and it is clear that the initial sale notice only goes to the property owner. In Badawi, the parties did not dispute that the county properly issued the § 24-4(a) notice.

Post-sale notices. Badawi focused upon the post-sale statutory notices required by I.C. § 6-1.1-25-4.5(d) and I.C. § 6-1.1-25-4.6(a), for the right of redemption and for the petition for tax deed, respectively. In addition to the owner, those two notices must be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest,” which includes a mortgagee. I.C. § 6-1.1-25-4.5(d)(2).

Where? In Badawi, the county sent the required post-sale notices to the mortgagee at its local business office and at the address identified on the recorded mortgage. The mortgagee failed to redeem. In an effort to avoid having its mortgage lien extinguished, the mortgagee objected to the county’s petition for issuance of a tax deed, contending that it should have received notice pursuant to the service of process requirements found in Indiana’s trial rules. (See, Service of Process Fundamentals for the Plaintiff Lender.) The mortgagee claimed that the notices should have been served upon an executive officer or a designated resident agent. The Court rejected the mortgagee’s argument:

The sending of tax sale notices is governed by statute, and the fact that the Indiana Supreme Court has set out a different procedure in the trial rules for service of process upon organizations is of no moment. Under both Indiana Code § 6-1.1-25-4.5(d) and § 6-1.1-25-4.6(a)(2), tax sale notices are required to be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest.” Nowhere in the statute does it require compliance with Trial Rule 4.6 when sending tax sale notices.

Practical problem. Badawi is a fairly scary result for secured lenders holding mortgage liens in Indiana. Forbes contributor Peter Reilly noted as much in his November 28 piece. The county sent the notices, and it appears the mortgagee received them. But, from experience, I know that addresses identified in loan documents typically are not addresses of corporate legal departments or of resident agents, which in Indiana are persons or entities specifically designated to process important legal papers and help meet critical deadlines. Evidently, the notices in Badawi slipped through the cracks, and the lender’s mortgage lien was extinguished.

Fixes. My November 16, 2010 post cited to I.C. § 6-1.1-24-3(b), which provides a mechanism for mortgagees to receive pre-sale notices upon submission of written, annual requests to the county auditor. Perhaps every mortgagee doing business in Indiana should make it their New Year’s resolution to send these letter requests. The other solution is to set out, in the mortgage instrument, a contact address designed to deal with legal matters. Also, if you’re an assignee, ensure that you promptly record the mortgage assignment and identify your address on the assignment document. Whatever it takes, mortgagees should be vigilant about real estate tax reconnaissance.

FORBES/Reilly On Indiana Property Tax Collection, Part II

In follow-up to the article cited in my October 21st post, Mr. Reilly's cleverly-titled article Indiana Property Tax Collection - We Need Jimmy Stewart is worth a look.  (I was flatterred that he mentioned my blog in his piece.)  Whether you're an owner/mortgagor or a lender/mortgagee, make sure real estate taxes are paid timely, paid before any tax sale or, at the very latest, paid before the tax sale redemption period.  Otherwise, the consequences could be severe.    

FORBES Columnist Critical Of Indiana Tax Sale/Redemption Scheme

On October 19th, Forbes contributor Peter J. Reilly wrote a column about the potential hardships on Indiana property owners under the State's delinquent real estate tax redemption scheme.  He titled his piece How To Sell Your Home To A Stranger For A Fraction Of Its Value.  The September 28th Indiana Court of Appeals opinion in M Jewell, LLC v. Powell formed the basis of Mr. Reilly's column.  Here is his conclusion:   

I find that when I talk to a lot of people about different issues, many of them will reflexively indicate that either government or greedy business is the problem, depending on their ideological perspective.  Other times people will trumpet the virtues of public/private partnerships.  The collection of real estate taxes by auctioning off liens and tax deeds appears to have the potential of being a toxic mixture of the worst aspects of government and business. Clearly it helps local governments keep overhead down, which is a good thing, but at least in Indiana, it appears that there needs to be some greater protection for hapless homeowners.

Jewell is an interesting and educational case for mortgagees, mortgagors, tax sale purchasers and real estate lawyers.  For more background on the law and related issues regarding Indiana tax sales, and how they affect secured lenders, please review my two posts on the subject from last November. 

Indiana Tax Sales, Part II: Redemption

My November 16, 2010 post discussed how lenders can and should be proactive in monitoring their commercial real estate loan collateral for delinquent taxes and tax sale status.  Today’s post addresses what to do upon the “oh no!” moment when the lender learns, after the fact, that a tax sale occurred.  Assuming the lender wants to keep its collateral in tact, the lender should exercise the statutory option to redeem as quickly as possible. 

Time to redeem.  Buyers at Indiana tax sales acquire a super-priority lien on the property for the amount paid.  Ind. Code § 6-1.1-24-9.  Buyers do not immediately receive a deed.  They simply receive a certificate from the County Auditor.  The lien trumps any and all other liens, including a lender’s mortgage lien.  The lien converts to a deed (title/ownership) after a statutory redemption period.  Depending upon the nature of the property and whether the County or a third party was the purchaser, the period can be 120 days or up to a year.  Generally, improved commercial property can be redeemed, with a 10% penalty, for up to six months, or for up to a year with a 15% penalty.  (I recommend that mortgagees and their counsel study the applicable tax sale statutes, I.C. § 6-1.1-24 and 6-1.1-25, for any specific questions.  The statutes are intricate and can be challenging to interpret.  I could never address every issue or nuance in one or two blog posts.) 

Redemption amount.  The amount required for redemption is covered by I.C. § 6-1.1-25-2.  Property sold at a tax sale can be redeemed for:  the “minimum bid” (meaning the pre-sale delinquent taxes, interest, penalties and sale fees) + a 10% penalty based upon the “minimum bid” + 10% per annum interest on any surplus paid (any amount paid over the “minimum bid”).  The 10% penalty becomes a 15% penalty after six months.  Note there will be a per diem interest amount if there was a surplus payment, so you’ll need that number to ensure the redemption check is correct.  On the other hand, if there was no surplus (a/k/a overbid), then there will be no per diem.

Redemption payee.  Redemption checks must be made payable to the County Treasurer and should be certified funds.  Upon receipt of the redemption payment, the Treasurer will provide a payment receipt and another official-looking document, sometimes labeled a “Quietus,” that documents the tax sale redemption.

Marion County (Indianapolis) information/guidelines.  Marion County’s website, http:\\www.indy.gov, has the following information , written in "plain English," that help explain the statutory procedure with regard to tax sales in Indianapolis:   

• Treasurer’s introduction
• Information for current owners of property
• Information for purchasers of tax sale certificates

Again, Indiana statutes applicable to tax sales are clouded and complicated, and I understand that they have been subject to revision fairly regularly over the years.  Secured lenders are advised to consult with their Indiana foreclosure counsel in the event they learn that their real estate collateral was unexpectedly sold at a tax sale.  Even though there is a grace period to redeem, the clock begins ticking immediately.  Ultimately, the lien from the sale can and will result in the issuance of a tax deed (title/ownership), at which point any prior mortgage lien is terminated. 

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales

Typically, an owner of commercial real estate that has failed to make its mortgage payments to its lender also has failed to make its real estate tax payments to the county treasurer (assuming no escrow).  When the taxes become delinquent, the real estate can become eligible for a tax sale.  (The statutory scheme for Indiana tax sales is located at Ind. Code 6-1.1-24.)  Tax sales are not good, and I’ll expand on that point another day.  Today’s post provides a tip to mortgagees on how to learn about, and avoid, their real estate collateral from being sold out from under them. 

Super-priority.  Because a secured lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important for lenders/mortgagees to monitor the status of the real estate taxes on their loan collateral and take action (read:  advance the taxes), if warranted.  Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place. 

Owners only.  The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale.  See, I.C. 6-1.1-24-4.  This makes monitoring the status of the real estate tax situation challenging for lenders, particularly when dealing with uncooperative borrowers. 

Written request.  The Indiana Code does, however, provide a mechanism for mortgagees to receive certain notices.  I.C. 6-1.1-24-3(b) deals with notices of the sale:

At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice.

I.C. 6-1.1-24-1(d) similarly provides for the mailing of a list of properties eligible for sale: 

Not later than fifteen (15) days after the date of the county treasurer's certification under subsection (a), the county auditor shall mail by certified mail a copy of the list described in subsection (b) to each mortgagee who requests from the county auditor by certified mail a copy of the list.   

So, if the mortgagee, on an annual basis, sends the required letter to the county auditor requesting tax sale information, the mortgagee should automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself. 

No guarantee.  Please note that both sections 3(b) and 1(d) contain language stating that the auditor’s failure to provide the requested notice will not invalidate an otherwise valid sale.  

Cost/benefit analysis?  Whether the benefits of receiving the statutory notices exceed the costs (time and expense) of sending the annual letters is unknown to me.  The important point is that the option is available should mortgagees choose to utilize it.  Otherwise, lenders will need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is scheduled.  I welcome comments or emails from anyone who has had experiences with the statutory letter requests, particularly any comments on how effective they’ve been in monitoring for tax sales.