Known Judgment Lien Is Purchaser’s Downfall In Recent Lien Enforcement Case

Judgment liens and the bona fide purchaser doctrine are topics in the Indiana Court of Appeals’ decision in Lobb v. Hudson-Lobb, 2009 Ind. App. LEXIS 1630 (Ind. Ct. App. 2009) (Lobb.pdf) .  The case arises out of a trial court’s order to sell real estate to satisfy a judgment lien created by a prior divorce decree.  As explained, the purchaser acquired the property subject to an enforceable judgment lien.

The setting.  Lobb involved Husband, Wife and the husband’s Parents.  Husband filed for divorce, which resulted in a decree that in part granted Husband title to real estate previously owned jointly by the couple.  The decree also provided that Wife receive $50,000 for her interest in the real estate, plus another $167,000 in cash.  Wife deeded her interest in the real estate to Husband and received the required $50,000.  Although Wife received additional cash payments, the entire amount owed by Husband remained unpaid when Husband deeded the real estate to Parents.  Wife later filed the subject action against Parents to foreclose her judgment lien on the real estate.  The trial court rendered a foreclosure judgment in favor of Wife that led to the subject appeal.

Valid lien?  The first issue addressed in the Lobb opinion was whether the money judgment in the divorce decree constituted an enforceable judgment lien.  Parents contended that the lien was not valid because it was not recorded with the county recorder’s office.  In Indiana, a judgment lien is purely statutory, and Ind. Code § 34-55-9-2 provides that all final judgments for the recovery of money constitute a lien upon real estate in the county where the judgment has been “entered and indexed . . ..”  T.R. 58(A) states, in part, that the court shall promptly prepare and sign the judgment, and “the clerk shall thereupon enter the judgment in the Record of Judgments and Orders” (commonly known in Indiana as the “judgment docket”).  This step is an act to be performed by the county clerk, not the parties.  As such, Wife was not required to cause the decree to be entered in the judgment docket.  Perfection of judgment liens in Indiana essentially occur automatically and do not involve recordation in the recorder’s office. 

BFP defense defeated.  The Lobb opinion suggests that it was not entirely clear whether the divorce decree had been entered into the judgment docket.  Nevertheless, the Parents lost the case because it was clear that they had prior, actual knowledge of Wife’s judgment lien.  Parents asserted that Wife’s foreclosure action should be defeated because Parents were bona fide purchasers without notice - a doctrine I’ve discussed here previously.  But the Court noted that “the controlling and dispositive fact is that the [Parents] had actual notice of Wife’s judgment lien.”  Before buying the real estate, Parents had a copy of the decree and knew the decree awarded wife $167,000.  In Indiana, “a person with actual notice is bound by the terms of a valid instrument, even when that instrument has not been recorded so as to provide constructive notice.”  The Court concluded Parents were bound by such decree:

[Parents] are not bona fide purchasers and, thus, they have not shown that they are exempt from execution levy.  In sum, this case does not involve a good faith purchaser of the property for value and without notice, and our holding is limited to situations in which the purchaser of the property has actual knowledge of the unsatisfied judgment lien.

Points.  The primary thing secured lenders can take away from Lobb is that any money judgment they obtain in Indiana automatically becomes a lien on real estate owned by the defendant in the county where the judgment was entered.  Unlike with mortgages, deeds, etc., there is no need in Indiana to separately record the judgment with the recorder’s office.  A secondary point from Lobb is that proof of a purchaser’s actual knowledge of an adverse lien will prevent the purchaser from utilizing the bona fide purchaser defense to defeat the lien enforcement action.