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Don’t Forget To Record The Deed

The Indiana Court of Appeals in Kumar v. Bay Bridge, 2009 Ind. App. LEXIS 507 (Ind. Ct. App. 2009) (.pdf) explained what might happen if one purchases real estate but fails to record the deed.  In Kumar, prior owner, INB National Bank Trust, had not paid property taxes for years.  Mr. Kumar acquired the subject real estate at a tax sale but didn’t immediately record the tax deed.  After the tax sale, the successor-in-interest to the Trust conveyed the property to Bay Bridge, which recorded the trustee’s deed shortly thereafter.  Bay Bridge later discovered that Kumar claimed an interest in the property.  Bay Bridge filed a complaint to quiet title to the real estate and named Kumar as a defendant.  In response, Kumar quickly recorded his tax deed, but the Court held it was too late.

The recording statute.  Ind. Code § 32-21-4-1 provides that deeds must be recorded in the Recorder’s Office of the county where the land is situated and, furthermore, that a conveyance “takes priority according to the time of its filing.”  The purpose of this so-called recording statute “is to provide protection to subsequent purchasers, lessees and mortgagees.”

Bona fide purchaser doctrine.  Because Kumar failed to record his tax deed as required by I.C. § 32-21-4-1, Bay Bridge did not have notice of Kumar’s interest when it purchased the property.  In the lawsuit, Bay Bridge argued for the application of Indiana’s bona fide purchaser doctrine with respect to Kumar’s claim to ownership of the real estate.   The Court of Appeals stated the general rule that “to qualify as a bona fide purchaser, one has to [1] purchase in good faith, [2] for valuable consideration, and [3] without notice of the outstanding rights of others.”  This acts as a defense to title, and the theory “is that every reasonable effort should be made to protect a purchaser of legal title for a valuable consideration without notice of a legal defect.” 

Notice.  There was no question Bay Bridge was a purchaser in good faith for valuable consideration.  The only issue was whether it was without notice of Kumar’s interest.  In Indiana:

 A purchaser of real estate is presumed to have examined the records of such deeds as constitute the chain of title thereto under which he claims, and is charged with notice, actual or constructive, of all facts recited in such records showing encumbrances, or the non-payment of purchase-money.  A record outside the chain of title does not provide notice to bona fide purchasers for value.

Kumar failed to record, so Bay Bridge wasn’t deemed to have notice.  Also, there was evidence in Kumar that, before purchasing the property, Bay Bridge had requested a title search and found nothing with regard to the tax sale or Kumar’s tax deed.

Unfortunate, but understandable, result.  The Court of Appeals affirmed the trial court’s summary judgment in favor of Bay Bridge on its complaint to quiet title.  The Court wiped away Kumar’s interest in the property.  Had Kumar simply recorded the tax deed, there never would have been a issue.  The Kumar case is a reminder for foreclosing lenders and their counsel to record the sheriff’s deed following a sheriff’s sale, or any deed executed in connection with a deed-in-lieu of foreclosure.  Bizarre problems like the one illustrated in Kumar are rare but can arise in connection with a commercial mortgage foreclosure.  Moreover, secured lenders need to be aware of the bona fide purchaser doctrine should unexpected claims to title arise during or after the foreclosure process. 

As Predicted, Cleveland Suit Over Foreclosures Dismissed

On January 11, 2008, I wrote about the City of Cleveland's lawsuit against several residential lenders, and I suggested that the case would not survive a pre-trial motion to dismiss.  It appears from this media report that the "public nuisance" civil case was dismissed on Friday, although the City is appealing the trial court's decision. 

Assets Cannot Be Frozen By An Injunction

As mentioned in my May 4, 2007 post “Nuclear Weapon of the Law" Unavailable to Creditor in Recent Case, getting a judgment is one thing; collecting it is another.  Secured lenders embroiled in commercial foreclosure litigation always focus upon their ability to collect any deficiency judgment, and defendant borrowers or guarantors may attempt to dispose of assets during the course of litigation.  The March 16, 2009 opinion by Judge Simon in Yessenow v. Hudson, 2009 U.S. Dist. LEXIS 21393 (N.D. Ind. 2009) reminds us that the law prohibits courts from freezing a defendant’s assets to protect the recovery of damages.  Indiana law offers a handful of remedies to deal with this concern, but an injunction is not one of them.

The situation.  The Yessenow case arose out of a business deal in which two doctors and a banker invested in a hospital.  Later, a venture capital company offered to purchase five of the hospital’s ancillary medical facilities through a sale/leaseback transaction, but the company required an initial security deposit of about $1,500,000 in case the hospital defaulted on any of the sale payments.  One of the doctors, Yessenow, who became the plaintiff in the litigation, posted the security deposit.  To do so, he obtained a letter of credit backed by a promissory note and secured by a mortgage on his condo in Chicago.  Yessenow and the two other investors (the defendants) entered into an indemnification agreement that they and the hospital would indemnify (reimburse) Yessenow for any losses incurred as a result of the loan.  A couple years later, the bank demanded a draw on the full amount of the letter of credit, and Yessenow filed suit for indemnification, which his partners/co-investors had refused to do.  In the action, Yessenow filed a motion for preliminary injunction to freeze those defendants’ assets.

No injunction.  One of the reasons Judge Simon denied Yessenow’s request for injunction, which sought a preliminary asset freeze, was the precedent set by the United States Supreme Court in Grupo Mexicano de Desarrolla v. Alliance Bond Fund, 527 U.S. 308 (1999):

[Trial courts have] no authority to issue a preliminary injunction preventing defendants from disposing of their assets pending adjudication of a plaintiff’s contract claim for money damages. 

The rationale behind this rule is that “until a creditor has established title, he has no right to interfere with the debtor’s property, and it would lead to an unnecessary, and perhaps, a fruitless and oppressive interruption of the debtor’s rights.”  Judge Simon concluded that the Grupo decision directly applied to this case.  Plaintiff Yessenow had sued the defendants for damages and had feared that they would secrete their assets or reinvest their money into other ventures to evade paying such damages.  “But fear that a debtor will avoid paying their debts is nothing new or exceptional.”  Hence the development and purpose of the law of fraudulent conveyances and bankruptcy. 

Other avenues for relief.  In Indiana, secured lenders cannot invoke a trial court’s equitable power to restrict a defendant’s use of his unencumbered property before judgment.  While a foreclosing lender could pursue the remedies of pre-judgment attachment and/or pre-judgment garnishment discussed in my 12-14-06 and 3-6-07 posts, pre-judgment remedies can be difficult and expensive to prosecute.  (Remember that, after the fact, Indiana’s Uniform Fraudulent Transfer Act at I.C. 32-18-2 may apply.)  Lenders may be better served to litigate their underlying actions as quickly as possible, and then utilize the post-judgment collection tools,  prescribed by Indiana statutes, that are readily enforced by Indiana’s courts.  The fact is - as frustrating as these situations may be, temporary restraining orders and injunctions are not the way to go.

If Strict Foreclosure Isn’t The Remedy, What Is?

Today’s article provides further guidance to secured lenders facing situations in which your title company or foreclosure counsel missed a perfected junior lien during the suit to enforce your mortgage.  This is Post III of my ongoing analysis of Indiana strict foreclosure law in the wake of Deutsche Bank.  Here are links to Parts I and II:  April 17 Post and April 24 Post

Worst case.  In the event the Indiana Supreme Court on appeal of the Deutsche Bank case were to either disregard or not apply the anti-merger rule addressed in Brightwell, things could get ugly for attorneys and title companies.  Rather than simply dealing with the time and expense of clearing up title with litigation post-sale, there could be financially devastating consequences if a junior creditor were to leapfrog a senior mortgagee.  Recently, I handled a case involving a debt of about $1,500,000.  As we proceeded to a foreclosure judgment, we ordered a date down of our title work that disclosed for the first time two judgment liens on the property totaling about $12,000,000.  We quickly amended our complaint and included the interests of the judgment lien holders.  Had we failed to do so, or if our title company had missed the liens, the judgment creditors could try to spin Deutsche Bank and ask the court to trump our client’s senior mortgage lien, effectively negating our client’s interest in the collateral.  Our client would realize no recovery whatsoever on its $1,500,000 debt.  Before Deutsche Bank, had we missed the junior liens, we would’ve filed a strict foreclosure suit to remedy the situation.  Now, it’s unclear exactly what we’d do, or the cheapest way to do it. 

How to clear title.  The Court in Deutsche Bank held that the property must be sold to satisfy the liens belonging to the judgment creditors.  The court’s ordering of this execution sale helped, or will help, to bring the title issues to a head.  (Generally, an execution sale is a tool to collect a money judgment previously entered in a lawsuit and involves a judicial sale of the real estate of a defendant/judgment debtor.  There are, however, differences between an execution sale and a foreclosure sale that go beyond the scope of today’s post.)  The point is - in Deutsche Bank, the question of lien priority will be determined as a result of action taken by the junior lien holders.

But what if a junior lienor doesn’t incur the time and expense of pursing its lien and forcing an execution sale?  It’s not unusual for liens to remain dormant.  Indeed some liens are recorded in error.  Title could remain clouded indefinitely.  Upon discovery of the encumbrances, usually when it’s time to resell the property, the senior mortgagee will want to clear title.  At this point, I’m not sure anyone knows for certain what to do, but there appear to be at least two avenues for relief. 

    Second bite at the apple.  First, assuming the lender/mortgagee is in title, it might be able to bring a second mortgage foreclosure suit.  Admittedly, I haven’t comprehensively researched this.  But Brightwell seems to support the notion that the mortgagee, assuming the mortgage hasn’t merged with title, could bring a new, albeit unconventional, mortgage foreclosure proceeding solely against the overlooked junior lien holders.  The foreclosure action would lead to a determination of priority in title, lien amounts, etc., followed by another sheriff’s sale giving the junior lienors an opportunity to recover any sale proceeds or to make a credit/judgment bid at the sale. 

    Do-over.  A second, and perhaps more viable, possibility would be to set aside the first sheriff’s sale and obtain an amended judgment in the original case that includes the overlooked junior lien holders.  Indiana law recognizes setting aside sheriff’s sales and, in essence, having a do-over of that phase.  The Court in Deutsche Bank said: 

Accordingly, trial courts have considerable equitable discretion to set aside sales of property resulting from their foreclosure judgments.  In addition, trial courts have full discretion to fashion equitable remedies that are complete and fair to all parties involved.

Both the second foreclosure sale and the do-over sale “remedies” raise all sorts of procedural and evidentiary problems about which I could write for pages and pages.  My only real point is that there may be feasible alternatives to a strict foreclosure suit.  Perhaps the Deutsche Bank case, or a subsequent decisions, will fashion an equitable remedy tied to Indiana’s statutory action to quiet title, Ind. Code § 32-30-3-13 to 21.   

Where to go from here?  Whatever the legal theory, secured lenders, foreclosure lawyers, trial courts and title companies need direction from Indiana’s appellate courts concerning how to solve these problems.  My hope is that the Indiana Supreme Court accepts the Deutsche Bank case and clarifies, once and for all, the proper method for senior mortgagees to clear title after a foreclosure sale.  For now, it’s simply important for lenders to be reminded that accurate date-downs are critical and that Indiana’s strict foreclosure remedy is either dead or is in the process of being reformed.