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House Bill 1132: Indiana’s Requirement For Pre-Sale Payment Of Delinquent Sewer Fee Liens

Distressed loans secured by commercial property often involve delinquent sewer fee liens, which I discussed in my 10/24/08 post.  These liens typically go hand-in-hand with delinquent real estate taxes.  Workout professionals should remain mindful of this possibility as they analyze their collateral and make decisions concerning the enforcement of the loan.  Questions I’m frequently asked are whether the lender should pay the real sewer fees liens and, if so, when. 

Prior procedure.  Indiana law historically required the plaintiff/lender, assuming it was the winning bidder at the sheriff’s sale, to pay any delinquent sewer fees, along with real estate taxes, immediately after the sale.  In the case of a cash bidder (third party), sewer liens would be paid off the top or, in other words, the county treasurer got the first cut of the sale proceeds.   

2011.  We then noticed that some county sheriff’s offices started to require the plaintiff/lender to pay delinquent real estate taxes and sewer fee liens before the sale.  In 2011, prepayment of delinquent real estate taxes became a statutory requirement by virtue of Ind. Code § 32-29-7-8.5 “Requirements for Payment of Property Taxes and Real Estate Costs Before Sheriff’s Sale.”  See my 1/21/11 post for more. 

2013.  In this year’s session, Indiana’s General Assembly enacted HB 1132, which added delinquent sewer fee liens to the mix.  HB 1132 amends Ind. Code Sec. 32-29-7-8.5 and will be effective July 1, 2013.  The statute will now state, in pertinent part, that “the party that filed the praecipe for the sheriff’s sale shall pay . . . all delinquent property taxes, sewer liens described in IC 36-9-23-32, special assessments, penalties, and interest that are due and owing on the property on the date of the sheriff’s sale.”  A failure to pay will result in the cancellation of the sale.

Policing the issue?  Beginning in January 2011 in Marion County (Indianapolis), the Treasurer, in conjunction with the Sheriff, required that a Tax Clearance Form be (a) completed by the party requesting the sale, (b) stamped by the Treasurer’s Office and (c) then submitted to the Sheriff’s Office with the written bid.  I’ve seen other counties utilizing forms like this.  I suspect any such forms will be amended to include a statement about sewer fee liens.  Please remember to confer with the particular county sheriff’s office in advance because rules and procedures may vary by county

Build into judgment.  Since I.C. § 32-29-7-8.5 will require sewer fee liens to be satisfied before the sale, the amount of any such lien that either has been or will be paid by the lender should be an item of damages identified in the judgment.  Before the statutory change, borrowers theoretically could attack that damage figure as being speculative.  Some borrowers claimed that, because the lender had not actually incurred the loss at the time of the entry of judgment, courts could not award the damages.  Hypothetically, the borrower might later pay the fees or a third-party buyer might pay them  Now, because the foreclosing lender is compelled to advance payment of the sewer fee liens, courts in turn should be compelled to include such losses in the calculation of damages.

Sewer connection penalties?  On 8/1/12, I wrote about liens arising out of sewer connection penalties, which are similar to sewer fee liens.  The 2013 amendment to Ind. Code Sec. 32-29-7-8.5 does not appear to require connection liens to be paid before the sheriff’s sale. 

Plan ahead.  Lenders and their foreclosure counsel should make it their routine practice, when calculating the debt, to verify with the county treasurer the status of both the real estate taxes and sewer fee liens.  Indeed a sewer fee lien should be identified in a title commitment.  As a practical matter, these liens will be a component of the amount owed by the borrower (and guarantor).       

2013 Legislation Ends Post-Sale Redemption Discussion

Last year, the Indiana General Assembly amended Ind. Code 32-29-8-3.  For more, please read my 3-29-12 post.  But the Court of Appeals' 2011 opinion in CitiMortgage v. Barabas and 2012 statutory amendment left open the question of whether Indiana had a limited post-sheriff's sale right of redemption.   

When the Indiana Supreme Court issued its 2012 opinion on transfer in the CitiMortgage v. Barabas case, the Justices answered some important questions about Indiana mortgage law, including the role of MERS, but as I wrote on 10-12-12 the post-sale redemption question was not one of them.  Some confusion remained.  (Note:  federal tax liens give the IRS a post-sale right of redemption, which is the only such right of which I'm aware in Indiana.)

In this year's session, the General Assembly in Senate Bill 279 finally axed the statutory language that purported to grant a one-year post-sale right of redemption to certain parties.  Ind. Code 32-29-8-3 has been amended, effective July 1, 2013, as follows:  

Sec. 3. A person who:
         (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
         (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of
             (A) an assignment that is not of record; or
             (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

For parties involved in Indiana foreclosure actions, the bottom line is this:  a foreclosure sale cuts off a the right of redemption.  Parties can redeem right up to the sheriff's sale, but the game ends there.  End of discussion.    



Failure To Docket Judgment Lien Dooms Creditor And Opens Door For Bona Fide Purchaser Defense

This follows up last week’s post about Hair v. Schellenberger, 2012 Ind. App. LEXIS 158 (Ind. Ct. App. 2012) and digs deeper into the bona fide purchaser doctrine.  The purported judgment lien holder (“Judgment Creditor”) in Hair contended that the buyer of the subject real estate (“Purchaser”) was not a bona fide purchaser (“BFP”) and thus acquired the real estate subject to the Judgment Creditor’s interests.  The result in Hair was the opposite of that in Lobb, which was the topic of my post Known Judgment Lien Is Purchaser’s Downfall In Recent Lien Enforcement Case.

BFP basics.  To be a BFP, one must purchase real estate in good faith, for valuable consideration, and without notice of the outstanding rights of others.  Judgment Creditor argued that Purchaser had notice of Judgment Creditor’s outstanding rights against the subject property.  In Indiana:

A purchaser of real estate is presumed to have examined the records of such deeds as constitute the chain of title thereto under which he claims, and is charged with notice, actual or constructive, of all facts recited in such records showing encumbrances, or the non-payment of purchase-money.

Prospective purchasers are on notice of any outstanding encumbrances, such as judgment liens, that appear in the appropriate county indices.  But “a record outside the chain of title does not provide notice to bona fide purchasers for value.” 

Issue.  The critical question in Hair was whether the Judgment Creditor’s 2006 judgment became a lien on the subject real estate before Purchaser bought it in 2007.  Judgment liens are statutory in Indiana and depend upon the clerk of the courts timely and properly indexing of them.  In Indiana, “courts cannot create judgment liens.”  Their “very existence is dependent upon compliance with the statutory requirements.” 

No notice.  In Hair, the former owners conveyed the real estate to a third party (a land trust) after Judgment Creditor’s judgment had been rendered, but neither the county docket nor the index contained any entry indicating that Judgment Creditor had obtained a money judgment against the former owners.  (Judgment Creditor’s judgment arose out of a cross claim.  Since Judgment Creditor was not the named plaintiff in the suit, but instead a defendant, the clerk likely overlooked the entry in Judgment Creditor’s favor.)  In 2007, when Purchaser bought the subject real estate, after the property had been foreclosed upon by the prior mortgagee, there was nothing in the county records that would have placed Purchaser on notice of Judgment Creditor’s interest in the parcel.  “[Judgment Creditor’s] 2006 judgment simply was not there . . ..” 

Lesson to judgment holders.  The Indiana Court of Appeals concluded that Purchaser was a BFP as a matter of law and that Purchaser did not acquire the real estate subject to [Judgment Creditor’s] judgment against the former owners of the property.”  Here is the Court’s  rationale: 

In sum, as between these two relatively innocent parties . . . we find that the equities favor [Purchaser].  As a BFP, [Purchaser] could be responsible only for what was in the county records at the time Lawyers Title searched the county records.  He could not cure deficiencies in the records of which he was totally unaware.  In contrast, as a judgment holder, [Judgment Creditor] could have taken steps to cure the deficiencies, i.e., he could have checked the records to ensure that his judgment was on record and perfected, . . ..  In short, he was in a better position to prevent the dispute at hand.

In Indiana, one expects a judgment to be automatically indexed, but Hair tells us that mistakes occur and that follow-up is prudent.