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Indiana Has Three-Month Waiting Period Before Sheriff's Sales Can Be Triggered

Workout specialists from commercial lending institutions often ask me how quickly they can repossess their real estate loan collateral here in Indiana. One of my very first posts, back in November of 2006, generally addressed that question: Basic Foreclosure Process/Timing In Indiana. As I've mentioned before, to the chagrin of secured lenders, particularly when they're facing loans in default with no hope of a turnaround, mortgage foreclosures must be judicial or, in other words, through the court system. Foreclosures are lawsuits, with all the attendant delays and expense.

Three months post-complaint. Generally, real estate collateral must be sold, pursuant to a judge's decree (a judgment), by the county civil sheriff. Before triggering the post-judgment sale process, lenders and their counsel should remain mindful that Indiana has a statutory three-month waiting period that must first expire. Ind. Code 32-29-7-3(a) states:

In a proceeding for the foreclosure of a mortgage executed on real estate, process may not issue for the execution of a judgment or decree of sale for a period of three (3) months after the filing of a complaint in the proceeding.

As noted, the period starts with the filing of the complaint.

Rare. My experience has been that this rule will be a non-issue in the vast majority of cases. As a practical matter, this grace period should only come into play in situations involving motions for default judgment, which I normally don't recommend in commercial foreclosure cases anyway.

Exception. There is an exception to the three-month rule in I.C. 32-29-7-3(a). Subsection (2) says:

if the court or an enforcement authority ... finds that the mortgaged real estate is residential real estate and has been abandoned, a judgment or decree of sale may be executed on the date the judgment of foreclosure or decree of sale is entered, regardless of the date the mortgage is executed.

As noted, this exception does not apply to commercial properties. For residential/consumer cases involving vacant/abandoned houses, you and your counsel should ensure the court includes these factual findings in your foreclosure decree so as to avoid the grace period.

Even though this three-month requirement will rarely be an obstacle in a commercial foreclosure, it's still important to know that it exists as you and your counsel consider how long it may be before there will be a sheriff's sale.

NOTE: I.C. 32-29-7-3 was amended in 2012. See my March 23, 2012 post.

Subsequent Federal And State Income Tax Liens: Priority And Redemption

Do federal or state income tax liens trump your Indiana mortgage lien?  Not if you recorded your mortgage first.  In Indiana, first in time is first in right.

Priority of state income tax liens.  Indiana is a “first to file” state.  Under the Indiana recording statute, a mortgage takes priority according to the date of its filing.  Ind. Code § 32-21-4-1(b)Unlike Indiana’s statutory treatment of delinquent real estate taxes , which are given a super-priority at foreclosure sales, there is no such statutory treatment of state income tax liens.  To my knowledge, Indiana’s tax code is silent with regard to the priority of state income tax liens.  Indeed a state tax lien is akin to a run-of-the-mill judgment lien.  I.C. § 6-8.1-8-2(e)(2) provides that a tax warrant for unpaid income taxes becomes a “judgment” against the person owing the tax and results in the creation of a judgment lien.  In Indiana, judgment liens, which are purely statutory, are subordinate to all prior or equitable liens, including mortgage liens. 

Perfection of state liens.  Logistically, the Department of Revenue will file a “tax warrant” in the county clerk’s office.  The clerk will then automatically enter the tax warrant into the judgment records so as to create the judgment lien on real estate owned by the taxpayer in that particular county.   

Priority of federal income tax lien.  The United States Code contains a provision governing actions affecting real estate on which the IRS has a lien.  28 U.S.C. § 2410(a) states, in pertinent part, that the United States “may be named a party in any civil action . . . (2) to foreclose a mortgage or other lien upon . . . real property on which the [United States] has a . . . lien.”  With regard to the question of priority, § (c) provides:

a judgment or decree in such action or suit shall have the same effect respecting the discharge of the property from the mortgage or other lien held by the United States as may be provided with respect to such matters by the local law of the place where the court is situated.

In other words, state law generally governs, meaning the “first to file” statute, I.C. § 32-21-4-1(b), applies.  See, Religious Order of St. Matthew v. Brennan, 1995 U.S. Dist. LEXIS 8909 (N.D. Ind. 1995) (“in general, the long-established priority rule with respect to federal tax liens is ‘first in time is first in right’”); see also, Citimortgage Inc. v. Sprigler, 209 U.S. Dist. LEXIS 27866 (S.D. Ind. 2009) (summary judgment order identifying second priority federal tax lien vis-à-vis mortgage). 

To perfect its lien, the IRS will record a notice of federal tax lien with the county recorder’s office.

Federal right of redemption.  The unique twist to the federal tax lien is the statutory right of redemption.  Judge Barker identified this in her summary judgment opinion in Citimortgage in which she cited to 28 U.S.C.  § 2410 for the proposition that the United States retains a 120-day right of redemption from the sheriff’s sale.  It’s my understanding that this federal statutory right of redemption trumps Indiana’s redemption statute found at I.C.§ 32-29-7-7, which holds that a right of redemption is terminated immediately upon the foreclosure saleUnlike mortgagors and other parties, therefore, Uncle Sam gets to redeem up to four months after the sale.

Federal redemption amount.  28 U.S.C. § 2410(d) describes how to calculate the redemption amount:

In any case in which the United States redeems real property under this section . . . the amount to be paid for such property shall be the sum of-
(1)  the actual amount paid by the purchaser at such sale . . .
(2)  interest on the amount paid . . . at 6 percent per annum from the date of such sale, and 
(3)  the amount (if any) equal to the excess of
(A)  the expenses necessarily incurred in connection with such property, over
(B)  the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

So, in the event of a redemption, the lender would receive cash for the amount of its bid, and then some.

Thanks to our firm’s summer associate, Adam Wanee, for helping with this research.

Negative Equity/PMSI - Split Of Authority In The Seventh Circuit

On August 29, 2008, I addressed the question of "What is a 'purchase money security interest?'"  The case giving rise to my discussion was In Re: Myers, 2008 Bankr. LEXIS 2172, and the circumstances surrounded a bankruptcy case and whether a creditor's purchase money security interest (PMSI) extended to the negative equity part of a loan to purchase a vehicle.  Although the primary purpose of my post was to define and illustrate a PMSI, I necessarily had to point out that Myers concluded that the entire loan was secured -- the creditor's PMSI covered the money used to finance the negative equity. 

The purpose of today's post simply is to provide a footnote that bankruptcy courts within Indiana's circuit (the Seventh Circuit) are split on the negative equity issue.  Although representative of the minority view, In Re: White, 2009 Bankr. LEXIS 3156 (.pdf) is a strong opinion from Judge Lorch that negative equity "is merely the debtor's antecedent debt which is assumed by the [creditor]."  Thus it "does not fit within the definition of a PMSI...." 

The Myers and White opinons offer differing views on the negative equity question, but both are helpful in understanding the nature of a PMSI and a secured lender's rights in such a lien.   


Despite Lis Pendens, Onus Generally On Plaintiffs (Mortgagees), Not Tenants, To Deal With Leasehold Interests In Mortgage Foreclosure Actions

This follows-up my June 28th post about Myers v. Leedy, “To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions.”  What actions must the tenant take if it knows or should know about a pending foreclosure action? 

Seller’s contention.  One of the arguments of the land contract seller on appeal of the Myers case was that the tenant had both constructive and actual knowledge of the pending breach of contract action at the time the tenant entered into the lease for the 2006 crop season.  The seller claimed it should not have been forced to name the tenant as a defendant in the action; rather, the tenant should himself have intervened in that action in order to protect his interests. 

Lis pendens, generally.  The seller’s argument triggered the Court’s analysis of Indiana lis pendens law.  See, Ind. Code §§ 32-30-11-1 to 10 and Indiana T. R. 63.1.  “Lis pendens” is Latin for “pending suit.”  The Court outlined that, historically, lis pendens provided that one who acquires an interest in real estate during the pendency of a lawsuit concerning the title to that real estate takes notice of such lawsuit and has to take its interest in the real estate subject to any subsequent judgment.  Ind. Code § 32-30-11-2 modified the common law and requires that the plaintiff file a separate, written notice with the county clerk’s office to perfect the lis pendens protections.  (I also wrote about lis pendens on 12-27-07 and 9-20-07.) 

Lis pendens, exception.  Statutory written notice is not required if the suit is founded upon a written instrument executed by the party having title to the real estate (like a mortgage) as appears from the properly-filed county records.  Thus the filing of the mortgage foreclosure complaint itself will provide the requisite constructive notice to post-suit claimants.  From the Court: 

We have no quarrel with the general proposition that the commencement of a foreclosure action standing alone provides third parties with constructive notice of a pending lawsuit. 

Constructive notice, but . . ..  In Myers, the seller retained legal title to the subject real estate, which interest was reflected by the memorandum of contract recorded in the county recorder’s office.  Under Indiana lis pendens law, therefore, the tenant was deemed to have constructive notice of the suit on the land contract against the buyer commenced two years before the subject lease.  But the Court did not adopt the seller’s lis pendens-related argument, reasoning that it “makes no sense” to say that a lis pendens notice of a foreclosure proceeding should bind a tenant already in possession.  To hold otherwise, a tenant in possession “must regularly check the records of the County Recorder’s office to determine whether a foreclosure action has been filed.” 

Actual notice side-stepped.  The Court also addressed the issue of the tenant’s alleged actual notice of the underlying lawsuit.  Should the tenant have intervened in the pending litigation of which he was aware?  In the final analysis, it appears that the Court may have simply concluded that the evidence was not altogether clear on whether, or to what extent, the tenant knew of the suit as it may have related to the real estate and his rights.  The Court ultimately affirmed the trial court’s finding that, among other things, the tenant should have been allowed to finish planting and harvesting his crop in 2006.  The Court had to choose a side, and it did.

“Should have known.”  As noted in my June 28th post, one of the critical factors in the Court’s decision was that the seller had actual knowledge that the tenant was farming the property at the time seller filed suit.  Thus the Court did not expand on the “upon reasonable diligence should have known” part of the test.  The Court appears to be deliberate in its requirement of notice of a tenant’s “possession” of the property.  The Court’s charge seems to be that lenders must undertake reasonable measures to determine whether there is a tenant in possession of the property.  To me, this implies observing the real estate.  Perhaps a site visit or property inspection may need to occur.  Having said that, we must remember that Myers was not a mortgage foreclosure case and dealt with the unique situation of a single tenant (farmer) on the property.  Ultimately, a secured lender’s “reasonable diligence” will need to be evaluated on a case-by-case basis. 

Business decision.  As a practical matter, in most commercial mortgage foreclosure actions the lender/mortgagee will not want to terminate any of the existing leases.  The leases generate income and thus increase the value of the property.  There are, however, instances where one or more tenants of a subject property may be undesirable and thus the target of termination.  If a business decision is made to terminate such post-mortgage leasehold interests, I recommend that you and your counsel ensure that those tenants are named as defendants in the foreclosure action. 

Definitive Commercial Real Estate Appraisals A Challenge Of Late

Last November, I wrote that, in Indiana, appraisals are important, but not required, in foreclosures.  At the end of my post, I kidded that, knowing the present value of loan collateral, particularly real estate, may not be possible given current market conditions.  In today's IBJ.com, Tom Harton has a nice article entitled "Appraisers Have Little To Go On In Tough Deal Market," which supports the notion that there may be an absence of reliable data that, in turn, can make an appraiser's job difficult these days.  Secured lenders should remain mindful of this problem as they decide what to do with their distressed loans collateralized by commercial real estate.    

IndyStar: Central Indiana Hotel Foreclosures

The Indianapolis Star has an article today entitled "Area Hotels Facing Foreclosure Hit By Downturn, Bad Reviews": 

The economic downturn of the past three years has dealt harshly with many hotels, lowering their occupancies, forcing constant cost-cutting, and making foreclosures and bank takeovers common.

Not surprisingly, hotels are yet another industry that has been hit with commercial foreclosure actions of late.