Liens Arising Out Of Sewer Connection Penalties

In 2008, I wrote about the Indiana Supreme Court’s decision in Pinnacle Properties v. City of Jeffersonville, which related to delinquent sewer fee liens.  In Baird v. Lake Santee Regional Waste and Water District, 2011 Ind. App. LEXIS 535 (Ind. Ct. App. 2011), the Court of Appeals addressed liens for sewer connection penalties.  There are many different debts that can lead to a lien against real estate, and a sewer connection penalty, not unlike a sewer fee, is one such debt.

The dispute.  In 1999, the Lake Santee Regional Waste and Water District (“District”), an Indiana municipal corporation formed under I.C. § 13-26, adopted three ordinances requiring owners of real estate to discontinue use of septic tanks and to connect to a sewer system.  The ordinances established connection fees and corresponding penalties for the failure to connect.  Defendant Baird did not connect to the sewer system.  The District assessed statutory penalties and later recorded liens on her real estate.  The District then filed a complaint to foreclose the liens that eventually led to the Baird opinion. 

Broad powers.  Baird contested the District’s scheme on constitutional due process grounds.  I’ll spare you the technical analysis.  Essentially, the Court in Baird held that a municipality’s liens against property for utility fees are constitutional.  The Court concluded that there is no significant difference between unpaid penalties for failure to connect to a sewer system and unpaid sewer fees.  I.C. § 13-26, including specifically §§ 5-2, 12, and 14-1, established the District’s right to set up penalties, impose liens and foreclose.  The ordinances, including the $25 per-day penalty, were “rationally related to [legitimate legislative goals of public health, safety and welfare].” 

Priority.  Unlike Pinnacle Properties, Baird did not deal with the issue of priority, namely whether the liens maintain a super priority status.  I am currently involved in a case where another such district has asserted similar penalties and has claimed that its liens have priority over our client’s mortgage lien.  Although the law is not 100% clear, there appears to be a solid argument that liens of this nature are treated like delinquent real estate taxes so as to hold senior lien status.  (See my October 24, 2008 post for more.) 

Unlike sewer lien fees, which typically are fairly nominal, these connection penalties can become quite substantial given their per-day calculation.  In a foreclosure scenario, unless a third party acquires the property at the sheriff’s sale, as a practical matter lenders will get stuck with these penalties.  Secured lenders in Indiana should proceed with their eyes wide open accordingly.