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Senior Mortgagee Loses Priority Claim In Bankruptcy Court After Being Defaulted In State Court

Lesson.  The Rooker-Feldman doctrine can operate to defeat a lender’s post-foreclosure federal court claims, not just a borrower’s.  Don’t ignore state court actions.  Respond to complaints.  A junior mortgagee’s foreclosure action, which named the senior mortgagee as a defendant, resulted in the junior mortgagee leapfrogging into senior position due to the failure of the senior mortgagee to participate in the foreclosure. 

Case cite.  Chamberlin v. 1st Source Bank, 2015 Bankr. LEXIS 15393 (N.D. Ind. 2015) (.pdf).

Legal issue.  Whether the senior mortgagee held its senior priority secured claim even though an Indiana state court previously defaulted the senior mortgagee in a foreclosure proceeding that occurred before the bankruptcy case.  Does the Rooker-Feldman doctrine apply to lenders too?    

Vital facts.  Chase held a mortgage on the subject real estate that Chase recorded in 1999.  1st Source held a mortgage recorded in 2002.  Chase was senior in time.  In 2011, 1st Source filed a state court mortgage foreclosure action and named Chase as one of the defendants.  The state court defaulted Chase in the action and granted summary judgment to 1st Source declaring that 1st Source was the “first and prior” lien holder on the subject real estate.  Subsequently, Chase moved to set aside the trial court’s judgment but was unable to convince the state court to do so.  In 2014, the mortgagors filed a Chapter 13 bankruptcy case, and both 1st Source and Chase filed proofs of claim asserting senior priority.  The instant adversary proceeding followed. 

Procedural history.   Chamberlin was the bankruptcy court’s opinion arising out of the motion for summary judgment to determine lien priority matters between Chase and 1st Source.        

Key rules.  The Court discussed at length the Rooker-Feldman doctrine and its applicability here.  For more on these rules, click here, as I’ve discussed that doctrine many times.  In a nutshell, “state-court losers” cannot commence proceedings in federal court to review and reject state court judgments.  Under Indiana law, Chase’s failure to answer the state court complaint resulted in its lien being extinguished.      

Holding.  The Rooker-Feldman doctrine prevented relitigation of the 1st Source foreclosure action.  The bankruptcy court did not disturb the state court’s decision defaulting Chase and rendering the lien of 1st Source first and senior.  

Policy/rationale.  The Court reasoned:  “Chase had a full and fair opportunity to participate in the 1st Source state court foreclosure action.  Any adverse outcome from that litigation is of Chase’s own making.  [The bankruptcy court] is not the proper forum to review the determination of the state court.”

Related posts.     

Even If Real Estate Taxes Are Delinquent, Don't Name The County In The Foreclosure Complaint

"Old school" Indiana foreclosure procedure required a plaintiff lender/mortgagee to name the county in cases where there were delinquent real estate taxes.  The county would answer the complaint and document its super-priority lien in the amount of the past due taxes.  The foreclosure decree, in turn, would order that the county must be paid first out of any sheriff's sale proceeds, which as a practical matter meant that the lender advanced the delinquent taxes to the county at the time of the sheriff's sale. 

All that changed in 2011.  I'm "reprinting" my 1/21/11 post below that explains this.  Counties no longer need to be named because, as a matter of law, the sheriff's sale cannot even be scheduled until the plaintiff pays the taxes.  Despite this, I still see confusion with judges and counsel regarding the treatment of counties in foreclosure litigation.  Again, as explained below, my opinion is that Indiana law is crystal clear that counties, which are owed taxes, no longer need to be parties to foreclosure cases.


Distressed loans secured by commercial property often involve 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 estate taxes 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 real estate taxes immediately after the sale.  In the case of a cash bidder (third party), taxes would be paid off the top or, in other words, the county treasurer got the first cut of the sale proceeds.   

2011.  In recent years, we noticed that some county sheriff’s offices started to require the plaintiff/lender to pay delinquent real estate taxes before the sale.  This has now become a formal, 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.”  The statute states, in pertinent part, that “the party that filed the praecipe for the sheriff’s sale shall pay . . . all delinquent property taxes, 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, requires that a Tax Clearance Form (.pdf) 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.  The form must be stamped regardless of whether delinquent taxes were ever an issue.  Lender’s counsel needs to complete the information at the top of the form (the date of the sheriff’s sale, file number, owner, address and parcel number), as well as the contact information at the bottom of the form.  The Treasurer’s Office completes everything else.  Note that one form needs to be completed for each parcel number (i.e. 4 parcels, 4 forms). 

As I’ve said on this blog many times, please be sure to confer with the particular county sheriff’s office in advance because rules and procedures may vary by county.  Perhaps other counties will follow Marion County’s lead in terms of documenting the status of the real estate taxes.  For now, call ahead to see what is needed. 

Timing.  At last week’s Marion County sales, we were able to submit payment for delinquent property taxes and obtain the stamped clearance form on the same day.  The better approach would be to allow yourself and your foreclosure counsel a few days before the sale to address the matter in case there are problems or the Treasurer’s Office is congested.  Without the stamped form, the Sheriff will not hold the sale.  It is my understanding that the Treasurer may set up an e-mail address so these forms can be submitted and completed via e-mail.  I will provide more information as it becomes available. 

Build into judgment.  Since I.C. § 32-29-7-8.5 now requires real estate taxes to be satisfied before the sale, the amount of any delinquent real estate taxes that either have 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 taxes or a third-party buyer might pay the taxes.  Now, because the foreclosing lender is compelled to advance the taxes, courts in turn should be compelled to include such losses in the calculation of damages.

Plan ahead.  In the past, delinquent real estate taxes may have popped onto the lender’s radar in the days leading up to the sheriff’s sale.  Now, that issue should be addressed at the time of the filing of a motion for default judgment, motion for summary judgment or trial.  Lenders and their foreclosure counsel should make it their routine practice, when calculating the debt, to verify with the county treasurer the status of the real estate taxes generally and the amount of any delinquent real estate taxes specifically.  (As an aside, delinquent taxes frequently are identified in a title commitment.)   

For more on this subject, please see my November 16 and November 24, 2010 posts that deal with tax sales.

Alleged Tax-Sale Scam At Heart of Indiana AG's Suit

News broke earlier this week about alleged tax-sale schemes committed by three different companies within the context of Indiana tax sale proceedings.  Here are links to the stories:

    The Indianapolis Star:  Indiana Attorney General Greg Zoeller files suit in tax-sale scam

    Indianapolis Business Journal:  Indiana AG sues 3 companies in alleged tax-sale scheme

The media has been all over alleged problems with Indiana's tax sale system of late.  As a reminder, here is a link to my 12/15/15 post:  Indianapolis Star Series: Blight Inc. - Examining Indiana's Tax Sale System