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Indiana Lis Pendens Notices: What And When

If you’re wondering what an Indiana lis pendens notice is, Clarkson v. Neff, 878 N.E.2d 240 (Ind. Ct. App. 2007) provides some good insight.  The opinion articulates the history, addresses common law rules and discusses our lis pendens statute, I.C. § 32-30-11.  Although lis pendens matters don’t often arise in commercial foreclosure actions, it is important to be familiar with the tool, especially if you deal with real estate-related litigation. 

Real estate dispute.  Clarkson centered on a residential construction contract between a builder, who owned the real estate, and Clarkson, who contracted to build a home on the property.  A lawsuit arose.  During the pendency of the litigation between the builder and Clarkson, a third party (Neff) purchased the home from the builder.  The issue was whether Neff acquired the property free and clear of any interest of Clarkson, who had filed a lis pendens notice.

The statute.  I.C. § § 32-30-11-3 and 32-30-11-9 specifically applied to the Clarkson case.  Note that lis pendens notices are not filed with the county recorder’s office.  Rather, by statute, they must be filed with the clerk’s office.  I.C. § 32-30-11-3(b). 

Common law.  Clarkson said that the purpose of a lis pendens notice is:

to provide machinery whereby a person with an in rem claim to property, which is not otherwise recorded or perfected, may put his claim upon the public records so that third persons dealing with the defendant . . . will have constructive notice of it.

Indiana’s lis pendens rules require that a separate, written notice of a pending suit be filed with the clerk of the county where the real estate is located in order for the lawsuit to affect the interests of third-party purchasers.  The Court in Clarkson stated:  “if a lis pendens notice is properly filed on the public records, a subsequent purchaser will take the property subject to a judgment in the pending claim.”  Further:  “to protect an interest in the property, the subsequent purchaser may either ensure that the grantor does not harm his rights or intervene in the action.”  See also, Dempsey v. JP Morgan Chase Bank, 2007 U.S. Dist. LEXIS 58449 (S.D. Ind. 2007) (“Lis pendens is a way to give notice to the public, and in particular to potential buyers, that litigation is pending which may affect the rights in a piece of property.”) 

Outcome.  Clarkson filed a lis pendens notice with the appropriate county clerk’s office thirteen days before Neff closed on the purchase of the property.  The Indiana Court of Appeals found that “clearly, Neff had constructive notice of the Circuit Court lawsuit when he purchased the property, as provided by the lis pendens statutes, because Clarkson correctly filed a lis pendens notice in Hancock County.”  Neff thus was deemed to be bound by any judgment entered in the suit.  Since the suit was not yet resolved, Neff “[did] not at [the] time own the property in question free of any and all claims of Clarkson as a matter of law.”  

But, be careful.  Clarkson highlights that the validity of a lis pendens notice hinges upon whether there is a pending lawsuit.  The Dempsey opinion cited above illustrates that lis pendens notices generally are inappropriate encumbrances on title (1) when the party filing the notice has no interest in the real estate or (2) when litigation that may affect one’s rights in real estate has been concluded.  The point is that a bogus lis pendens notice could subject the filer to a claim for slander of title. 

Notice mechanism.  A lis pendens filing provides constructive notice (implied knowledge) that a piece of real estate is embroiled in litigation.  The law is designed for the notice—the document filed with the clerk—to lead third parties such as title searchers to the pleadings filed in the pending lawsuit that will describe the nature of the legal dispute, including its potential impact upon title.  If the I’s are dotted and the T’s are crossed, a lis pendens notice will demonstrate to any party undertaking due diligence that the real estate is or may be encumbered.  As a result, the notice effectively ties up the real estate until the litigation is resolved or the notice is released. 


Lien Priority Dispute: 2005 Mortgage v. 2000 Land Contract

The Indiana Court of Appeals, in Lunsford v. Deutsche Bank, 966 N.E.2d 815 (Ind. Ct. App. 2013), begins its opinion with this legal principle:  “. . . first in time is first in right . . . .”  In Indiana property and debt collection law, this means “a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds . . . .”  This rule doomed a land contract buyer (vendee) in his priority dispute with a lender (mortgagee).

The operative dates.  In Lunsford, the owner of the real estate entered into a land contract to sell on August 28, 2000, but the buyer failed to record the land contract until March 8, 2006.  On August 25, 2005, the owner obtained a mortgage loan, and the lender recorded the mortgage approximately six months before the recordation of the land contract.  The owner subsequently defaulted on the mortgage loan, resulting in the lender’s foreclosure suit. 

Priority dispute.  The issue in Lunsford was whether the land contract should have been foreclosed as a junior and subordinate interest to the lender’s mortgage.  In other words, was the land contract buyer’s claim to the real estate subject to the lender’s mortgage, even though the land contract predated the mortgage by five years?

Mortgage superior.  The Court in Lunsford swiftly dispensed with the land contract buyer’s priority contention.  Since the lender recorded its mortgage six months before the buyer recorded its land contract, the mortgage was senior in priority.  Further, since the lender made the buyer a party to the foreclosure action, thereby giving him the opportunity to assert his junior interest in the real estate, the trial court’s foreclosure decree was conclusive as to the buyer.  The Court affirmed the trial court’s summary judgment in favor of the lender accordingly.  Moral:  Don’t Forget To Record.

Different outcome.  While Lunsford appears to be a straight forward case, the Court of Appeals actually reached the opposite result in the 2007 Pramco opinion I discussed here.  The Pramco Court leaned on principles of equity and focused on, among other things, the amount of payments that the land contract buyer had made before the lender’s foreclosure suit.  The Pramco opinion was much more factually involved, while the land contract facts in Lunsford really were not addressed.  Note that the prevailing land contract buyer in Pramco was represented by counsel, whereas the losing buyer in Lunsford was pro se

 


Trustees Have Authority To Foreclose For Trusts

The world of securitization and mortgage-backed securities has resulted in many mortgage loans, both residential and commercial, being held by trusts instead of conventional banks or lending institutions.  As such, instead of seeing a mortgage foreclosure suit’s caption as "Local Bank v. Borrower, LLC," we see something like "Bank, as Trustee, for 2007 Mortgage Pass-Through Certificates Series 2007-H47 Trust v. Borrower, LLC."  (For background on today’s mortgage industry, see the Indiana Supreme Court’s Citimortgage opinion involving MERS.)  The Indiana Court of Appeals opinion in Lunsford v. Deutsche Bank, 966 N.E.2d 815 (Ind. Ct. App. 2013) tackles the question of whether the trust itself, as opposed to the trustee, needs to be a party to the foreclosure suit.

Another “standing” theory.  The defendant in Lunsford contended that the plaintiff didn’t have authority to enforce the underlying promissory note and mortgage.  The named plaintiff was “Deutsche Bank Trust Company Americas as Trustee.”  Deutsche was trustee for “RALI Series 2005-QS15 Trust.”  Normally we see the full name of the trust in the caption of the case, but for some reason only the trustee was identified in Lunsford.  The defendant asserted that the trustee had not joined an indispensable party because it failed to name the trust in the action.  See, Ind. Trial Rule 17(A)(1).  The contention was similar to the standing and “real party in interest” arguments made over the last several years.  (See:  10/25/13.)  The Court reminded us that the purpose of the standing rules “is to ensure that the party before the court has the substantive right to enforce the claim being asserted.”  For instance, if the court awards a money judgment, the system needs to ensure the plaintiff is the party entitled to the money.

Trustee rules.  The Court concluded it was not necessary for Deutsche Bank to name the actual trust as a party to the action.  Ind. Trial Rule 17(A) states that a “trustee . . . may sue in his own name without joining with him the party for whose benefit the action is brought . . . .”  Ind. Code § 30-4-3-15 provides that (paraphrasing) “trustees may maintain in their representative capacities civil actions for remedies against a third party that they could maintain in their own right if they were the owner.  In short, Deutsche Bank, the trustee, had the authority to enforce the loan documents in Lunsford.

Lunsford tells us that it is perfectly fine for the trustee to be the plaintiff in suits that foreclose mortgages held by trusts.


Standing: Bank Merger Rule Same For Corporate Entities

The Court in Beneficial Financial v. Hatton, 998 N.E.2d 232 (Ind. Ct. App. 2013), the case I discussed last week, applied a version of the bank merger rule about which I wrote on 01/25/13 and 09/19/14

Motion to dismiss.  The borrower in Beneficial sought dismissal of the lender’s foreclosure complaint on the theory that the subject promissory note and mortgage were not executed by the plaintiff but rather by its predecessor-in-interest.  The borrower claimed that the law required the lender to attach loan assignment documents to establish standing and thus proceed. 

Merger rule.  The Court concluded that the borrower’s argument was without merit.  Pursuant to Ind. Code § 23-1-40-6(a)(2), when a corporate merger takes effect, title to all real estate and other property owned by each corporate party to the merger is vested in the surviving corporation.  So, a surviving corporation assumes the assets of the assumed corporation as a matter of law.  “This obviates the necessity of creating a separate instrument reflecting the change in ownership of each such . . . asset.” 

No assignments needed.  In Beneficial, no loan assignment document, such as an endorsement, an allonge or an assignment of mortgage, existed.  But the lender was not required to supply such documentation, apart from some proof of the corporate merger itself.  The lender attached to its complaint a certificate of merger issued by the Indiana Secretary of State establishing, among other things, that the lender was the surviving entity, which the Court concluded was sufficient to prove the lender’s interest in the mortgage. 

Beneficial is a slightly different spin on the bank merger rule previously addressed in this blog, but the result is the same.  Assignment documents are not required to establish standing by a successor corporation.