BFP Defense Denied, And IRS Lien Prioritized

Last week’s post dealt with the successful application of the bona fide purchaser (“BFP”) doctrine in connection with the Kumar case.  This week’s post illustrates the opposite result, rendered by U.S. District Court Judge Barker in CitiMortgage, Inc. v. Sprigler, 2009 U.S. Dist LEXIS 27866 (S.D. Ind. 2009) (CitiMortgage.pdf).  Among other things, CitiMortgage shows secured lenders that, in Indiana, a recorded mortgage runs with the land and should be enforceable regardless of any subsequent transfers of the real estate.  The opinion also generally addresses the relative priorities of mortgage liens and IRS liens. 

What happened.  Borrowers signed a $300,000 promissory note and executed a mortgage on the subject real estate to secure the note.  The lender recorded the mortgage on April 2, 2002.  The borrowers later conveyed the property by warranty deed for “the sum of One Dollar ($1) and other good and valuable consideration” to Sprigler (a relative), who recorded the deed on November 30, 2005.  Sprigler did not assume the mortgage in the transaction.  The borrowers failed to make payments and therefore defaulted under the note and mortgage.  The default prompted the lender to initiate the mortgage foreclosure case. 

BFP?  My May 27 post outlines the elements of the bona fide purchaser doctrine, which Sprigler used to oppose the lender’s motion for summary judgment in CitiMortgage.  Sprigler contended that he “took in good faith believing that the real estate was being conveyed to him free and clear of all liens.” 

As the Indiana Court of Appeals did in Kumar, Judge Barker in CitiMortgage turned to Ind. Code § 32-21-4-1, which she labeled the “Race-Notice Statute.”  In Indiana, the question of priority as it relates to a good faith purchaser generally is governed by that statute.  Unlike in Kumar, the BFP defense didn’t fly in CitiMortgage.

“Race-Notice” statutes give all parties an incentive to record their interests in the subject property.  Under the Indiana statute, a subsequent purchaser (Sprigler) cannot obtain priority if he knew about the mortgage to the first mortgage holder (CitiMortgage), or if he lost the “race” to record his interest.  In the case at bar, Sprigler claims that he did not know about CitiMortgage’s mortgage.  While this may be true, the facts clearly demonstrate that he lost the race to record.  CitiMortgage recorded its mortgage on April 2, 2002.  Under Indiana’s Race-Notice statute, Sprigler was constructively on notice of CitiMortgage’s interest when he recorded his interest on November 30, 2005.  Thus, CitiMortgage’s interest has priority over Sprigler’s interest, and CitiMortgage is entitled to summary judgment.

Mortgagee protected.  In Kumar, there was no notice due the failure to timely record a tax deed.  In CitiMortgage, there was notice because the lender properly and timely recorded its mortgage.  One of Kumar’s lessons was “don’t forget to record the deed.”  One of CitiMortgage’s lessons is “don’t forget to record the mortgage.”  Although not expressed in the CitiMortgage opinion, clearly Sprigler failed to search title before acquiring the real estate.  The lender adequately protected itself by recording its mortgage.  Had it failed to do so, the BFP doctrine may have negated the mortgagee’s interest in the property. 

IRS lien.  As an aside, the United States of America had interests in the property arising out of IRS liens and thus was named as a defendant in the case.  The IRS filed notices of liens beginning on March 17, 2004, after the lender recorded its mortgage on April 2, 2002.  In response to the lender’s summary judgment motion, the United States sought the recognition of its liens and their priorities.  Specifically, a foreclosure decree must spell out the right of redemption of the United States contained in 28 U.S.C. § 2410(c).  Pursuant to Indiana’s recording statute, a/k/a the race-notice statute, the IRS lien interests have priority “according to the time of the filing thereof.”   Because the lender’s mortgage interest had first priority in the property, the liens of the United States were subordinate.  However, per § 2410(c), the United States retained a right of redemption for 120 days from the sheriff’s sale.  For more on liens of the United States, study 28 U.S.C. § 2410.