When real estate taxes become delinquent, the real estate becomes eligible for a tax sale. The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale. In M&M Investment Group v. Ahlemeyer Farms, 994 N.E.2d 1108 (Ind. 2013), a lender, to no avail, challenged the constitutionality of this scheme.
Trump. I post about tax sales because they terminate mortgage liens on the real estate. Best practices for secured lenders are to monitor tax payments and ensure tax sales do not occur without your knowledge. Since a lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important to monitor the status of the real estate taxes and take action (read: advance the taxes), if warranted. Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place.
3 Notices. In Indiana, there are three statutory tax sale-related notices. The first relates to the sale itself and is controlled by Ind. Code § 6-1.1-24-4(a). This initial sale notice, from the county auditor, only goes to the property owner. The second notice is from the party that purchases the property at the tax sale and is the notice of the right of redemption pursuant to I.C. § 6-1.1-25-4.5. The third notice again is from the tax sale purchaser and is the notice of filing of a petition for tax deed per I.C. § 6-1.1-25-4.6(a). Mortgagees (secured lenders) generally only get the second and third notices.
Written request. Lenders can receive the first notice, however, if, on an annual basis, they send a letter to the county auditor pursuant to I.C. 6-1.1-24-3(b) and/or 1(d). Upon request, the lender should then automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself. The burden is on the lender to cover this, and my sense is that the option is rarely exercised.
Constitutional. The M&M opinion addressed the issue of whether this statutory procedure is permissible under the Due Process Clause of the Fourteenth Amendment. In M&M, the bank failed to submit the required form to the county auditor and therefore was not notified that its mortgaged property was tax-delinquent until after it had been sold and the buyer had a tax deed. The operative question was whether it is constitutionally permissible for the statute to condition the first-class mailing of actual notice on a requirement that the lender first affirmatively request such notice by way of a form. The Indiana Supreme Court thought so, reasoning:
In short, the only reasonably certain way for an auditor to know who has a viable mortgage on a property so that adequate notice may be sent to the proper party is for the mortgagee to complete a simple form and submit it to the auditor. Whether mortgagees do this on their own, or an entity similar to MERS steps in and performs the task as an agent, this is hardly an onerous burden in light of the benefit obtained; and is far less onerous than the burdens the alternative would place on the State in exchange for a far lower degree of benefit.
The Court held that the requirement does not violate the Constitution.
Heads up. Whether the benefits of requesting the statutory notices exceed the costs of sending the annual letters is unknown to me and may depend upon the size and nature of a lender’s portfolio. The important point is that the option is available. Otherwise, lenders need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is will be. Indiana simply does not deem it reasonable or necessary for counties to incur the time and expense of notifying lenders of tax sales. On the other hand, lenders ultimately are protected because they are entitled to the second and third notices and thus can redeem the property from a sale, thereby avoiding mortgage lien termination.