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Memo To Title Insurers: Disclose All Recorded Liens, Even Legally-Deficient Ones

As reported on this blog, over the past several months the Indiana Court of Appeals has issued a number of opinions directly or indirectly related to defective titles searches.  On March 31, 2008, in House v. First American Title, et. al., 2008 Ind. App. LEXIS 618, the Court again provides guidance to commercial lenders and other parties affected by title defects post-foreclosure.  As always, I provide .pdf's of the opinions I discuss:  House.pdf.

Situation.  The facts of House are straightforward.  Plaintiff Wayne House bought a home from Centex, which held title after foreclosing on the prior owners.  Defendant Security Title had performed a title search for House and reported no liens on the property.  House improved the property and then attempted to flip it.  A prospective buyer wouldn't close upon learning that judgment liens existed on the property.  The judgment liens were held against the prior owners - the owners upon which Centex foreclosed.  House filed suit to clear title.

Security Title exposed to liability.  Security Title claimed it did not have to disclose the judgment liens because they were legally deficient.  The Court noted, however, that neither Indiana law nor Security Title's contract with House supported the proposition that Security Title was not required to disclose recorded liens it believed were legally deficient.  Moreover, given the procedural context of the decision - a Trial Rule 12(B)(6) motion to dismiss - the Court could not at the pleading stage determine as a matter of law, without further factual inquiry, whether the liens were in fact legally deficient. 

Some Indiana lien laws.  Security Title asserted that a handful of well-settled laws applicable to judgment liens, and enforcement of such liens, warranted a dismissal of House's case.  It's helpful to be reminded of these Indiana legal principles:

  • Real property held by the entireties is immune to seizure and satisfaction of the individual debts of the husband or wife.  A husband and wife are presumed to hold real property as tenants by the entireties.  Ind. Code 32-17-3-1.
  • A purchase money mortgage has priority over a prior judgment.  Ind. Code 32-29-1-4
  • Liens on real property expire ten years after judgment is rendered.  Ind. Code 34-55-9-2
  • A judgment lien can be executed after ten years, however, upon leave of court.  Ind. Code 34-55-1-2

The litigation continues....  Given the nature of the subject liens, Indiana's laws seemingly should protect Security Title from liability stemming from the judgment liens.  Nevertheless, issues regarding whether the prior owners held the property as tenants by the entireties and/or the priority or enforceability of the judgment liens were factual and thus inappropriate for a T.R. 12(B)(6) dismissal.  The House case generally teaches us that companies conducting title searches should disclose all recorded liens, regardless of whether the searchers believe such liens are deficient.  Indeed this is one of the primary reasons why foreclosing lenders order title work in the first place - to determine whether there are liens on the property that need to be dealt with during the foreclosure suit.