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Indiana Judgment Liens Are Subordinate to Prior Liens

What is the priority of judgment lien versus other liens on real estate?  The March 4, 2009 opinion by the Indiana Court of Appeals in Johnson v. Johnson, 2009 Ind. App. LEXIS 355 (Johnson.pdf) provides some guidance on the matter.  Johnson dealt with the subordination of a lien arising out of an agreed judgment reached in a divorce case.  Yes, even dissolution of marriage litigation can teach lenders something about Indiana commercial foreclosure law. 

The judgment lien and the loan.  The divorce settlement, in part, involved the ownership and operation of a farming business, which maintained certain financing secured by the business’s assets, including its real estate.  The financing, which entailed a line of credit that came up for renewal annually, had been in place before the divorce.  Post-settlement, the business needed to restructure its debt, in part for the husband to sustain payments to the wife.  The divorce settlement constituted a judgment lien to the extent that the trial court had ordered the husband to pay the wife money in installments. 

The subordination problem.  The husband sought a court order forcing the wife to subordinate her judgment lien.  A representative of the bank testified that the bank would renew the line of credit only if it continued to hold a first priority lien on the business, including presumably a senior mortgage lien on the farm’s real estate.  However, the wife refused to sign a subordination agreement.  The trial court sided with the husband and ordered the wife to complete the necessary paperwork to permit the refinancing.  The wife appealed.

The priority rules.  The Court of Appeals first noted, generally, that judgment liens in Indiana are purely statutory.  Ind. Code § 34-55-9-2 states:

. . . [A]ll final judgments for the recovery of money or costs . . . constitute a lien upon real estate and chattels real liable to execution in the county where the judgment has been duly entered and indexed . . .

The Court held that “as the line of credit existed at the time parties filed the Settlement Agreement, Wife’s judgment lien was subordinate to the Bank’s prior, existing lien.”  This is because, in Indiana, “liens for judgments are subordinate to all prior legal or equitable liens.” 

The loan renewal matter.  The Court went on to articulate the following additional legal principles that guided its decision:

Indiana law on priorities of liens is clear that the taking of a new note and mortgage for the same debt upon the same land will not discharge the lien of the first mortgage unless the parties so intended.  A court considers the circumstances of the transaction and will not permit the release of the old mortgage and the execution and recording of the new mortgage to destroy the lien of the original mortgage when not so intended, or rights of the third parties have not intervened, or positions changed.  Where notes are renewals of prior indebtedness, an intervening lienor will not have a superior lien, and the original lien retains superiority. 

The Borrower defeated the judgment lien holder.  In Johnson, the bank provided testimony that the line of credit came up for renewal every year.  The Court thus concluded that, if the business’s “indebtedness was merely being renewed every April 15, then the Bank’s lien would have retained its superiority over Wife’s judgment lien.”  The Court therefore upheld the trial court’s order that the wife must subordinate her judgment lien in order to enable the husband to renew the business’s line of credit.

Although not 100% clear in the opinion, it appears to me that the Court thought the bank’s lien would have priority regardless of whether the wife signed a subordination agreement.  Yet, the Court took the matter a step further by compelling the wife to sign off, probably to give the bank additional comfort.  The Johnson case reminds us that a prior loan, secured by a mortgage, even if subject to a renewal, should maintain senior status in the event of the entry of a subsequent judgment lien.  But, a signed subordination agreement would leave no doubt, which is what the bank and the husband (the borrower) sought in Johnson.   

NOTE:  The Indiana Supreme Court reversed the Court of Appeals.  See my 1/25/14 post.

Recording Deeds In Indiana: Don't Forget The Sales Disclosure Form (Revised)

I have revised my January 23, 2009 post on sales disclosure forms to include these additional thoughts regarding signatures on the forms following sheriff's sales:

Signatures.  Based upon our experience, in the event of a sheriff's sale, the attorney for the "buyer" - usually the lender/mortgagee's attorney - has been able to execute the form for both the both buyer and seller (the sheriff).  This has avoided involving the sheriff's office in the past.  The better practice, however, is to submit the form for the sheriff's signature at the same time the sheriff's deed is tendered for execution.  That way, the sheriff's office can sign both documents at once.  We recently discovered that the Marion County Sheriff's Office provided this form signature page (.pdf) to the assessor's office for purposes of completing sales disclosure forms after sheriff's sales.  The assessor's office has instructed our office to attach this signature to future SDF's filed in Marion County.  

Upon further reflection and investigation, I believe this new information provides more clarity to the issue.  Thanks to my paralegal Mary Schroeder for her help with this subject.  Please email, post a comment or call with any questions or concerns, or different experiences, thanks.

Time and WSJ - "Commercial Real Estate: The Banks' Next Big Problem"

Here's a link to a story on Time magazine's on line site from yesterday:  Commercial Real Estate: The Banks' Next Big Problem.  Not long ago, most commercial lenders were telling me that default rates were under 1%.  As many of you know, things have changed dramatically, and quickly.  

3-27-09 Update - Here's a similar report from The Wall Street Journal:  Commercial Property Faces Crisis.

Marion County (Indianapolis) Local Rule: Mandatory Settlement Conferences In Mortgage Foreclosure Cases

Marion County has issued a new local rule, which I understand is already in effect, relating to mandatory settlement conferences.  The rule is limited to owner-occupied residential cases and does not apply to commercial real estate foreclosures.  It will be interesting to see whether, or to what extent, this procedural change will help with the residential foreclosure crisis. 

It's my understanding Indiana's General Assembly is considering a foreclosure-related bill that would include a similar rule, which bill conceivably could eclipse Marion County's new rule.  See, House Bill 1633.      

You can access copies of the Marion County rule and related forms by clicking on these links:    

- LR49 TR85 Rule 231

Notice and Order for Settlement Conference

Borrower Financial Information

Confirmation of Attendance at Settlement Conference

I'd like to thank Kelly Angelmeyer, Director of Operations for the Marion Superior Court, for providing copies of these materials to me.

Indiana’s Statute Of Limitations For The Enforcement Of Promissory Notes – 6 Years

Lenders filing loan enforcement cases in Indiana should know that their actions may be time-barred if not filed within six years. 

What is a “statute of limitations”?  When trying to describe general legal concepts, I often turn to (what else?) Black’s Law Dictionary:

Statute of limitations.  A statute prescribing limitations to the right of action on certain described causes of action . . . that is, declaring that no suit shall be maintained on such causes of action . . . unless brought within a specified period of time after the right accrued.  Statutes of limitation . . . are such legislative enactments as prescribe the periods within which actions may be brought upon certain claims or within which certain rights may be enforced.

Basically, a statute of limitations is a deadline to file a lawsuit. 

2 statutes – 6 years.  The Indiana Code’s provisions applicable to statutes of limitation include Ind. Code § 34-11-2-9 “Action upon promissory notes, bills of exchange, or other written contracts for payment of money:”

An action upon promissory notes . . . or other written contracts for the payment of money executed after August 31, 1982, must be commenced within six (6) years after the cause of action accrues.

Indiana’s version of the Uniform Commercial Code, specifically Chapter 3.1 “Negotiable Instruments,” has a similar provision at I.C. § 26-1-3.1-118 “Action to enforce obligation of party--”:

(a)  Except as provided in subsection (e) [not applicable], an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.

Both statutes seemingly apply to promissory notes, although as noted in my January 16, 2008 post, not all notes are negotiable instruments under the UCC.  While the two different statutes create some confusion as to which statute applies and when, both statutes fortunately have a six-year limitations period – a “distinction without a difference” kind of situation. 

The complicator - accrual.  Although Indiana law may be clear as to when the limitation period ends (six years), the more difficult issue surrounds when the limitation period begins.  What event, date, etc. causes the statute of limitations to start running?  Based upon my limited research for this post, there is not a readily-available, crystal-clear answer to the question. 

The “after the cause of action accrues” language in I.C. § 34-11-2-9 has been, and continues to be, subject to debate in all sorts of cases.  That language usually refers to the date the plaintiff knew or should have known it had a cause of action (i.e. a known default).  Here, the law is complicated by the fact that most promissory notes contain “no waiver” clauses, which serve to negate what could be various default-related triggers. 

I.C. § 26-1-3.1-118(a) is a little more clear, however, and suggests the applicability of a couple of different accrual dates:  either (1) the date of maturity or (2) the date of acceleration. 

The basics.  Although I have not comprehensively researched Indiana law on the subject, I think it’s safe to say that, generally, the day after the note’s maturity date usually will be the first day of the six-year limitations period.  If, however, the lender accelerated the note, then the date of acceleration may trigger the limitations period.  Of course there are many circumstances that might call for a different result.  The primary purpose of today’s post simply was to address the six-year time period and advise lenders and their counsel that, normally, you’ve got six years to initiate a promissory note enforcement action.  Given the negative consequence of an untimely lawsuit (i.e. loss of the case), it is good practice to be conservative in calculating deadlines of this type.

Unsettled: Recoverability Of Attorney’s Fees For In-House Counsel

If your lending institution uses staff lawyers to prosecute mortgage foreclosure actions, you may be interested in the case In Re Waugh, 2009 Bankr. LEXIS 254 (N.D. Ind. 2009) (Waugh.pdf).   Waugh touches upon the issue of whether, in Indiana, attorney’s fees can be awarded to a lender when that lender is represented by an in-house, salaried counsel.  Unfortunately, the issue remains unresolved. 

Lender’s contention.  Waugh arises out of a Chapter 13 bankruptcy case, specifically the debtor’s objection to a claim filed by People’s Bank.  People’s received a $3,000 attorney fee award in a state court residential foreclosure action.  The debtor in the subsequent bankruptcy case objected to the inclusion of the fee award in the bankruptcy claim.  People’s reasoned that, although it paid in-house counsel solely on a salary, “time expended in the prosecution of legal matters, and the fees collected, are not irrelevant in determining the salary paid to in-house counsel.”  Furthermore, People’s could locate no Indiana cases or statutes prohibiting or limiting the collection of attorney’s fees paid by a mortgagee to salaried, in-house counsel. 

Debtor’s contention.  The debtor cited a single case, Crum v. AVCO Financial Services, 552 N.E.2d 823 (Ind. Ct. App. 1990), for the proposition that a real estate mortgagee can only collect attorney’s fees if they were actually incurred in the foreclosure proceeding.  Bankruptcy judge Lindquist noted in his opinion, however, that Crum did not assist in resolving the Waugh matter because “Crum merely held that when awarding attorney’s fees, the trial court is empowered to exercise its sound discretion.” 

Loan docs.  As with most (if not all) loan documents, the mortgage in Waugh contained written provisions permitting the recovery of attorney’s fees and litigation costs upon the default by the mortgagor.  None of the language, however, specifically referred to in-house counsel or fees/costs associated with salaried personnel.  Certainly it was undisputed that the loan documents in Waugh provided for the recovery of reasonable attorney’s fees in the case. 

Not this time.  Ultimately, the Court in Waugh never reached the issue of whether the attorney fee claim was appropriate.  This is because People’s based its claim upon a summary judgment previously entered in the state court foreclosure action, which judgment already provided for the recovery of $3,000 in attorney’s fees.  As such, the issue in the bankruptcy case was not whether the attorney’s fee claim was viable, but whether the bankruptcy court should give preclusion effect to the state court summary judgment. 

Too late.  The Waugh opinion provides a lengthy, technical discussion of the legal doctrines of res judicata (claim preclusion) and collateral estoppel (issue preclusion) and whether a state court judgment entered before the date of the debtor’s petition has preclusive effect regarding issues subsequently raised by the parties in the bankruptcy court.  The Court noted that, in Indiana, the entry of summary judgment is a judgment on the merits.  The judgment thus barred the bankruptcy objection.  The Court had no choice but to overrule the debtor’s objection to People’s claim for $3,000 in attorney’s fees.  Although the lender in Waugh won on a technicality, Judge Lindquist expressed that the underlying issue is unsettled: 

Without this Court so deciding, the State Court may or may not have erred in awarding attorney’s fees in the sum of $3,000 when counsel for People’s was in-house counsel on a salary…. 

It’s unclear to me whether, or to what extent, lenders utilize in-house counsel to prosecute commercial foreclosure actions.  Those who do should remain mindful that there appears to be a gap in Indiana law as to whether the lender can recover attorney’s fees in a foreclosure case.  Perhaps some day there will be a definitive Indiana appellate decision on this issue.  If that happens, I will discuss it here.