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.