The Indiana Supreme Court in 2010 reversed the Indiana Court of Appeals’ decision that was the subject of my 2009 post, Indiana Judgment Liens Are Subordinate to Prior Liens. See, Johnson v. Johnson, 920 N.E.2d 253 (Ind. 2010). For purposes of this blog, the essential points in my January 2009 post remain unchanged. The Indiana Supreme Court’s take on the situation, however, warrants some comment.
The circumstances. Johnson arose out of divorce proceedings, specifically a settlement and divorce decree. The husband agreed that the settlement created a judgment lien (under Ind. Code § 34-55-9-2) in favor of the wife on the husband’s farm. The wife agreed that a bank’s mortgage on the husband’s farm, which mortgage secured a line of credit to operate the farm, had priority over the wife’s judgment lien. The disagreement surrounded lines of credit entered after the date of the settlement and resulting judgment lien. The wife essentially argued that her lien was only subordinate up to the historical amount needed for past farm operations. The husband claimed that the settlement agreement subordinated the wife’s lien priority without limit.
General priority rules. The Indiana Supreme Court thoroughly discussed the nature of the wife’s lien. Indiana common law states that “priority in time gives a lien priority in right.” Also, a lien is discharged when the underlying debt is paid. Further, “when a lien with first priority is discharged, the second lien takes its place in priority, and subsequent liens would be junior to it.” However, by agreement, typically labeled a “subordination agreement,” an individual may waive a lien’s priority. As noted in my 2009 post, and as reiterated by the Indiana Supreme Court, “the taking of a new note and mortgage for the same debt upon the same land will not discharge the lien of the first mortgage unless the parties so intended.” Thus if the farm’s debt merely was being renewed, then the bank’s lien would retain its superiority. In Johnson, instead of merely renewing the debt, the husband sought to incur new debt to pay the wife for her interest in the farm.
Subordination. The specific question before the Court was whether the trial court had the authority to modify the wife’s lien to permit the husband to finance his divorce obligations. The wife, while agreeing to subordinate her lien to the bank’s in an amount sufficient to continue consistent operation of the farm, did not agree to a finance of the divorce settlement. The Court stated that any order subordinating the wife’s lien to the bank’s for amounts over and above past operational amounts would result in an impermissible modification of the prior deal:
We have already determined that subordinating [wife’s] lien up to an amount necessary to maintain the farm’s operation is not a modification but an enforcement. Once having approved the parties’ settlement agreement and incorporated it in the device, a court directive compelling [wife] to do more than that by subordinating her lien to allow [husband] to finance his divorce obligations constituted a modification and was impermissible.
Johnson informs parties to divorce proceedings more than it does parties to loan enforcement/foreclosure proceedings. Nevertheless, the Indiana Supreme Court’s general statements regarding Indiana lien law are important to bear in mind as transactions are closed, loans are enforced and work-outs are accomplished.