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Lis Pendens Lessons

If you’re wondering what an Indiana lis pendens notice is, look no further than the December 12, 2007 Indiana Court of Appeals opinion in Clarkson v. Neff, 2007 Ind. App. LEXIS 2752 (ClarksonOpinion.pdf).  The opinion provides some history, addresses common law rules and discusses Indiana’s lis pendens statute, I.C. § 32-30-11.  (I previously touched upon a lis pendens issue in my September 20, 2007 post.)

The Clarkson case surrounded a residential construction contract dispute, including an effort to secure a Court order requiring the purchase of a home.  During the pendency of the litigation between the builder and the original buyers (the Clarksons), a third party (Neff) purchased the home from the builder.  The question was whether Neff acquired the property free and clear of any interest of the Clarksons, who had filed a lis pendens notice.

Common laws tidbits.  Indiana’s lis pendens rules require that a separate, written notice of a pending suit be filed with the Clerk of the Court of the county where the real estate is located in order for the lawsuit to affect the interests of third-party purchasers.  Clarkson at 5-6.  The purpose of a lis pendens notice is:

to provide machinery whereby a person with an in rem claim to property, which is not otherwise recorded or perfected, may put his claim upon the public records so that third persons dealing with the defendant . . . will have constructive notice of it.

Id. at 6.  “If a lis pendens notice is properly filed on the public records, a subsequent purchaser will take the property subject to a judgment in the pending claim.”  Id.  “To protect an interest in the property, the subsequent purchaser may either ensure that the grantor does not harm his rights or intervene in the action.”  Id

The statute.  I.C. § § 32-30-11-3 and 32-30-11-9 specifically applied to the Clarkson case.  Lis pendens notices are not filed with the County Recorder’s office.  Rather, by statute, they must be filed with the Clerk’s office.  I.C. § 32-30-11-3(b).  Clarkson also illustrates that the validity of a lis pendens notice hinges upon whether there exists a pending lawsuit. 

In Clarkson, a lis pendens notice was properly filed with the appropriate County Clerk’s office thirteen days before third-party Neff closed on the purchase of the property.  The Indiana Court of Appeals concluded that “clearly, Neff had constructive notice of the Circuit Court lawsuit when he purchased the property, as provided by the lis pendens statutes, because the Clarksons correctly filed a lis pendens notice in Hancock County.  Id. at 8.  Neff thus was deemed to be bound by any judgment entered in the suit.  The suit was not yet resolved, so the Court concluded that Neff “does not at this time own the property in question free of any and all claims of the Clarksons as a matter of law.”  Id. at 11. 

Practical application.  A lis pendens filing will provide constructive notice (implied knowledge) that a piece of property is embroiled in litigation.  The notice—the document filed with the Clerk—will lead the researcher to the particular pleadings filed in the pending lawsuit, which pleadings will describe the nature of the legal dispute, including its potential impact upon title to the property.  If the I’s are dotted and the T’s are crossed, a lis pendens notice will demonstrate to a party doing due diligence that the property is or may be encumbered.  Although lis pendens-related matters rarely arise in a commercial foreclosure case, it is important for representatives of commercial lending institutions to be familiar with the concept.  In certain cases, a lis pendens notice could affect a lender’s priority.

What Is Indiana's Post-Judgment Interest Rate?

General rule.  Indiana Code 24-4.6-1-101, sometimes called the "Post-Judgment Interest Statute," generally provides for a post-judgment interest rate of eight percent (8%) per annum (the annual rate).  The statute applies to money judgments, including in personam (personal) judgments entered in favor of lenders in commercial foreclosure actions.  The rate runs from the date of the Court finding (judgment) until the date the defendant (borrower/guarantor) satisfies the judgment.

Exception.  8% actually is a statutory cap.  The rate can be less if the original contract sued upon, such as a promissory note, provides for a lesser rate.  In other words, the loan documents will control the post-judgment interest rate if the negotiated rate is less than 8%.  See, I.C. 24-4.6-1-101(1).  Otherwise, the statutory rate of 8% per annum will apply. 

Potential Negligence Of An Indiana Receiver

Judge Theresa Springmann of the Northern District of Indiana issued an opinion on November 5, 2007 in the case FTC v. Think Achievement, 2007 U.S. Dist. LEXIS 82621 (N.D. Ind. 2007) (ThinkAchievementOpinion.pdf).  Think Achievement was a negligence case brought against a court-appointed receiver relating to the alleged failure to preserve and protect the assets of the receivership estate.  The opinion addresses some of the general rules in Indiana and the Seventh Circuit that apply to receivers.  Although the underlying case dealt with Federal Trade Commission Act violations, the opinion relates to secured lenders because of their interest in holding receivers accountable for the protection of the receivership estate. 

Why the suit?  The receiver failed to procure insurance for a valuable estate asset, specifically a private residence in Carmel, Indiana.  The residence was damaged by arson, and there was no insurance coverage for the fire-related losses.  The question was whether the receiver should pay for the damage. 

More background.  The court-appointed receiver was an attorney with no prior experience as a receiver.  Interestingly, he also acted as legal counsel for the receiver.  (In essence, he provided legal counsel to himself.)  The receiver understood he had a responsibility to protect the assets in the receivership estate, including keeping insurance on property.  He ultimately dropped the ball, however, despite a seemingly reasonable excuse.  (I won’t bore you with the relevant insurance law.) 

Legal theories.  The case was a negligence action asserting that the receiver breached his duty, owed to the receivership estate, “to exercise reasonable care to protect and preserve the assets of the receivership estate.”  Id. at 8.  Here are a couple important points cited in the opinion:

• Standard:  In carrying out the duties of a receiver, the receiver “must exercise ordinary care and prudence, that is, the same care and diligence that an ordinary prudent person would exercise in handling his or her own estate, or under like circumstances.”  Id.

• Help:  “If a receiver is uncertain how to preserve property, he should petition the court for instructions.”  Id.

In this particular case, the plaintiff argued that the scope of the duty included, specifically, a duty to obtain insurance for the protection of the estate assets and that the receiver breached that duty. 

Outcome.  The dispute did not center upon whether a duty existed.  Indeed, the defendant did not deny that he had a duty of care to the receivership estate requiring him to obtain insurance on insurable assets.  Id.  Instead, the issue was whether and to what extent he appropriately carried out that duty, and the Court held there was evidence from which a jury could conclude either way.  Although Judge Springmann pointed to facts unfavorable to the defendant, in the final analysis she held that the facts concerning whether the receiver breached (violated/failed to comply with) his duty did not “lend of themselves to only a single inference.”  Id. at 12.  In other words, whether the receiver conformed his conduct to the applicable standard of care was a triable issue of fact that must be reserved for the jury.   

The upshot for receivers.  There are a handful of points receivers can take away from the Think Achievement opinion.  First, a court-appointed receiver may be exposed to liability for damages if it acts unreasonably with regard to its duty to protect the assets of the receivership estate.  Second, if the receiver is faced with an issue and is unsure as to what to do, the receiver can and should petition the court for direction.  Finally, as suggested by Judge Springmann, it may be prudent to seek the assistance of outside legal counsel. 

Neither receivers, nor parties involved in a receivership, want to see unnecessary or avoidable expenses incurred.  Hiring lawyers and filing motions with courts can become expensive and can, indirectly, dissipate the assets of the receivership estate.  However, reasonable measures need to be undertaken to prevent damage to the property, such as the fire-related losses addressed in the Think Achievement case.  Receivers are well advised to consider the retention of legal counsel when confronted with a tricky issue. 

Lender applicability.  From the perspective of a secured lender, the Think Achievement case is important because it is a reminder that, not only is a receiver’s purpose to protect loan collateral, but an unreasonable failure to do so may expose the receiver to a damages claim.  Secured lenders might be able to seek recourse against receivers that negligently cause losses to the receivership estate.