The Indianapolis Business Journal is reporting that Marion County (Indianapolis) has canceled its fall real estate tax sales (with a combined value of at least $6MM) due to a clerical error. The 2019 sales will occur 2/14/20. Here is the story. Click here for a post of mine from earlier this year talking about Indiana tax sales and notice-related issues. The "clerical error" leading to the postponement of the sales appears to be related to perfecting the statutory notice required for the sales to be valid. Better to have a do over now instead of dealing with potentially hundreds of tainted sales later.
Indiana Court Finds That Ex-Wife Held A Judgment Lien, Not A Security Interest, On Ex-Husband’s Farm
Lesson. Property settlement agreements in divorce cases can create judgment liens on real estate owned by the spouse holding title to the real estate post-dissolution. If an owner intendeds for the ex-spouse only to be a secured creditor, then the divorce court must specifically eliminate the application of Indiana’s judgment lien statute in connection with any approved settlement agreement.
Legal issue. Whether, post-divorce, wife held a judgment lien on the marital farm as opposed to a secured interest.
Vital facts. The marital property of the spouses included a farm. The couple got divorced and entered into a property settlement agreement (PSA), which provided that husband would keep the farm while making “equalization payments” to wife for her pro rata share of the farm’s value. Husband signed a promissory note for the full amount of the equalization payments. The note, which did not have an acceleration clause, granted husband the right to sell the marital assets. On the other hand, the PSA stipulated that wife could sell the farm to satisfy the debt if husband defaulted under the note. Husband failed to make any equalization payments, so wife obtained a court order permitting her to sell the farm – which she did over husband’s objection. Husband wanted to go a different direction with the farm’s liquidation. As you might suspect, there is more to the story, so read the opinion for a full report.
Procedural history. The trial court approved the sale of the farm to a third party to satisfy various secured creditors and ordered the net proceeds to be paid to each spouse pursuant to the PSA. The court based its ruling on the premise that wife held a judgment lien on the farm. For a variety of reasons, husband appealed.
In divorce cases, when one receives a money judgment against another, the judgment lien statute creates an automatic lien on the indebted party’s real estate. This is so even when one spouse agrees to pay the other in installments, which was the case in Kobold.
A trial court can overcome the presumption of a judgment lien, however, if the trial court “specifically eliminates” application of the judgment lien statute and finds that a settlement agreement creates a security interest under Ind. Code 31-15-7-8.
Holding. The Indiana Court of Appeals affirmed the trial court’s finding that wife held a judgment lien against the farm. This gave wife “the right to attach the judgment to the debtor’s property [the farm].” In turn, that lien “empowered [wife] to sell the farm to procure the full amount of the equalization payments.”
Policy/rationale. Husband contended that the trial court impermissibly modified the PSA by permitting wife to sell the farm. More specifically, husband argued that the trial court erred in concluding “that the dissolution decree gave [wife] a judgment lien … [granting wife] the right to refuse to release the judgment lien unless she was paid in full on the promissory note.” The Court of Appeals concluded that, although the record was not crystal clear, the trial court did not specifically eliminate the application of the judgment lien statute so as to overcome the wife’s presumptive judgment lien arising out of the PSA. As the holder of a judgment lien, wife, not husband, “had the right to negotiate a sale of the real estate.”
While I’m no divorce lawyer, and don’t pretend to understand fully how a settlement agreement with a promissory note constitutes a judgment lien, I see the justice in the Kobold's result. The Court stated that wife’s sale of the farm for $1.63MM, which was more than the appraised value of $1.56MM, “appears to have made the best of a bad situation” by paying off husband’s creditors, including the wife, and paying husband $500,000.
- Judgment Lien Principles Courtesy Of The Indiana Supreme Court
- Indiana Judgment Liens Are Subordinate To Prior Liens, REVISITED
- Mortgage On Wife’s Real Estate Discharged Post-Divorce Following Material Alteration Of Underlying Debt Owed By Ex-Husband’s Business
I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.
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.
Does Indiana allow “confessions of judgment?” Some states permit these, but Indiana is not one of them.
Definition. Black’s Law Dictionary defines a “confession of judgment,” in part, as:
The act of a debtor [borrower] in permitting judgment to be entered against him by his creditor [lender], for a stipulated sum, by a written statement to that effect . . . without the institution of legal proceedings of any kind . . ..
These essentially allow a judgment to be entered without a lawsuit.
Cognovit note. A confession of judgment goes hand in hand with a “cognovit note”. The Indiana Court of Appeals has cited to the following common law definition of such a note:
[a] legal device by which a debtor [borrower] gives advance consent to a holder’s [lender’s] obtaining a judgment against him or her, without notice or hearing. A cognovit clause is essentially a confession of judgment included in a note whereby the debtor agrees that, upon default, the holder of the note may obtain judgment without notice or a hearing. . . The purpose of a cognovit note is to permit the noteholder to obtain judgment without the necessity of disproving defenses which the maker of the note might assert . . . A party executing a cognovit clause contractually waives the right to notice and hearing. . . .
Jaehnen v. Booker, 800 N.E.2d 31 (Ind. Ct. App. 2004). Indiana has codified the definition of a cognovit note at Ind. Code § 34-6-2-22. As you can imagine, cognovit notes and confessions of judgment can be powerful loan enforcement tools for lenders.
Prohibited. Cognovit notes and confessions of judgment are prohibited in Indiana. In fact, a person who knowingly procures one commits a Class B misdemeanor pursuant to I.C. § 34-54-4-1. The Jaehnen Court suggested there is an “evil” associated with of obtaining judgment against a borrower without service of process or the opportunity to be heard.
An aside. The Jaehnen case addressed the issue of whether a party is precluded from enforcing a promissory note merely because it contained a cognovit provision. The Court noted that the plaintiff did not avail himself of the specific cognovit provision in the note. He sought payment only after filing a complaint, providing for service of process and allowing the defendant the opportunity to hire an attorney and to be heard. The Court held that the illegal provision did not destroy the overall negotiability of the note. In other words, cognovit paragraphs may be deleted by the plaintiff/lender/payee without destroying the right to a judgment on the note in a standard lawsuit.
Don’t be confused. Indiana has a statute entitled “Confession of judgment authorized” at I.C. § 34-54-2-1. However, the authorized confession of judgment is a different animal than what I discuss above. The statute states:
Any person indebted or against whom a cause of action exists may personally appear in a court of competent jurisdiction, and, with the consent of the creditor or person having the cause of action, confess judgment in the action.
This confession of judgment is not a unilateral filing by a creditor but rather an event arising within a standard lawsuit following notice and an opportunity to be heard.
Lesson. The filing of a lis pendens notice to protect one’s unrecorded interest in real estate will not give rise to liability for slander of title provided there was a basis for filing the notice.
Legal issue. Whether a lis pendens notice, filed by the buyer during litigation about a real estate purchase agreement, constituted slander of title.
Vital facts. The dispute in RCM involved a purchase agreement for a $9MM apartment complex located in Indianapolis. Lawsuits in both Texas and Indiana were filed relating to an alleged breach of the agreement, alleged fraud and an earnest money claim. The buyer filed lis pendens notices in Indiana for the pending Texas and Indiana lawsuits. Following the dismissal of the Texas case, and while the seller was negotiating with a third party for the sale of the property, the seller in the Indiana action asserted a slander of title claim against the buyer for not releasing the lis pendens notice.
Procedural history. After a bench trial, the seller prevailed on the underlying claims associated with the purchase agreement and the earnest money, but the trial court found in favor of the buyer on seller’s slander of title claim. Seller appealed.
Key rules. Ind. Code 32-30-11-3 spells out the requirements for a lis pendens notice in Indiana.
Parties with a claim to title of real estate under a contract for the real estate’s purchase “ha[ve] the kind of interest that requires filing a lis pendens notice under the statute to protect third parties.”
Indiana law is settled that “statements made in a properly-filed lis pendens notice are absolutely privileged … and defendants who file such a notice may not be held liable for slander of title.”
Holding. The Indiana Court of Appeals affirmed the trial court.
Policy/rationale. Seller contended that buyer slandered seller’s title to the real estate by filing a lis pendens notice when buyer knew it would not be able to perform under the purchase agreement. (Seller also claimed that buyer had waived the privilege defense, but the Court rejected the claim on procedural grounds.)
Lis pendens notices “provide machinery whereby a person with an in rem claim to property which is not otherwise recorded [like a purchase agreement] may put his claim upon the public records, so that third persons dealing with the [seller] … will have constructive notice of it.”
The Court reasoned that, since both parties had filed lawsuits regarding their interests in the real estate subject to the purchase agreement, buyer was actually “required” by law to file a lis pendens notice. It follows that the buyer’s notice was proper and therefore absolutely privileged.
Related posts. Your Source For Indiana Lis Pendens Law
I represent parties in real estate-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at firstname.lastname@example.org. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.