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.