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What Is A Vendor’s Lien?

Workout professionals and their foreclosure counsel often encounter unexpected liens on, or claims to, the subject real estate.  One of the purposes of my blog is to identify such liens and discuss recent Indiana case law dealing with them.  Wachovia v. Dune Harbor, 2011 Ind. App. LEXIS 712 (Ind. Ct. App. 2011) is one such case, and the opinion teaches us about a “vendor’s lien,” something that we certainly don’t encounter every day.

Setup.  If you are interested in learning about the convoluted facts, circumstances and cast of characters in Wachovia, I recommend that you read the opinion.  Here is how the Court summarized the case and the issue:

This case involves lenders who contend priority for their liens in the foreclosure of a failed real estate development project  . . ..  [Lender] appeals from a trial court’s summary judgment in favor of Lefty’s Co-Ho Landing, Inc. (“Lefty’s”).  [Lender] raises four issues for our review, of which we find the first dispositive and restate as:  whether a vendor’s lien was created in favor of Lefty’s and in force when [Lender]recorded its mortgages. 

Lien for unpaid purchase price.  The Wachovia Court articulated Indiana’s general rules related to this uncommon claim against real estate:

Ordinarily a vendor (seller) of realty has an implied lien for the amount of the unpaid purchase price.  A vendor’s implied lien, as distinguished from a lien expressly reserved, or from the security which the vendor has while he holds the legal title under an unexecuted contract to convey, is the equitable right, which by implication is accorded to one who has conveyed the title to land without reserving a lien thereon, and has taken no security for the purchase money other than the personal obligation of the purchaser, to subject the land in equity to the payment of the purchase price.  The lien is not dependent on any agreement between the parties other than the contract to pay the purchase money, and it is presumed to exist in all cases in which such a lien is allowed by law in the absence of a showing of an intent to the contrary.

In Wachovia, the alleged vendor’s lien arose out of an exercised option to purchase real estate.  The heart of the case involved an examination of the option’s language, or lack thereof, and the actions or inactions of the parties in the wake of its execution.

Created upon transfer.  As noted in Wachovia, a vendor’s lien is created “when title to land is transferred before payment is completed . . ..”  Under such circumstances, “the seller has lent money to the buyer in the form of a purchase-money mortgage, and the seller retains an automatic security interest in the property.”  The creation of a vendor’s lien occurs “at the moment the seller of the land completes a transfer of title to the buyer and the purchase price or a portion thereof remains unpaid.”  It’s like an invisible mortgage. 

Unrecorded, and thus problematic.  The Court confirmed that, to be effective, a vendor’s lien does not need to be recorded:

We also acknowledge the controversy surrounding vendors’ lien law, particularly the relatively unique characteristic that vendor’s liens need not be recorded to be effective . . ..  The Seventh Circuit Court of Appeals has commented on a related quandary:  “[t]he doctrine [of a vendor’s lien] arbitrarily advances the vendor over the vendee’s other creditors, and complicates real estate financing.  It has been abolished in a number of states, but not in Indiana.”

Release?  Once created , a vendor’s lien “may be expressly or impliedly abandoned or extinguished, thereby cutting off any future obligations to the vendor.”  The Wachovia opinion wrestled with whether the vendor’s lien had been abandoned or extinguished before the date of the lender’s mortgages.  The inquiry is fact sensitive. 

Wachovia holding.  Genuine issues of fact remained as to whether a vendor’s lien was created in favor of Lefty’s, and if so, whether it was abandoned or extinguished before Lender recorded its mortgages.  Due to the claimed vendor’s lien, the Court remanded the case for trial.  I’m sure the Lender never expected such a mess when it made its loan.