Indiana Supreme Court Tackles Lis Pendens Law

Lesson.  When filing suit to pursue an unperfected or unrecorded lien/interest in real estate, make sure you separately file a lis pendens notice.  This should put the world on notice of your claim and properly preserve your priority in title to such claim.  

Case cite.  JPMorgan Chase v. Claybridge, 39 N.E.3d 666 (Ind. 2015).

Legal issue.  Whether a lis pendens notice filed by the holder of an unperfected money judgment lien was valid.

Vital facts.  Mortgagee sought to become involved in an otherwise concluded judgment lien foreclosure action to assert its mortgage lien.  A homeowner’s association (HOA) previously got a money judgment against the mortgagor, but the county clerk failed to properly index the judgment and thus perfect the judgment lien.  The HOA subsequently filed an action to foreclose its judgment lien, and it simultaneously filed a lis pendens notice.  The trial court later granted the HOA a decree of foreclosure.  Separately, Mortgagee entered into a mortgage loan with Mortgagors after title work failed to pick up the lis pendens notice, which was filed after the initial title work for the loan but before the mortgage was recorded.  Mortgagee had no knowledge of the pending foreclosure action when it made the loan.

Procedural history.  Technically, the Claybridge opinion decided whether a mortgagee could intervene in a lien foreclosure action three years after the foreclosure judgment had been entered.  The trial court denied the motion as untimely, and our Supreme Court affirmed the denial.   

Key rules.  The Court’s opinion thoroughly summarized the doctrine of lis pendens and how to comply with Indiana’s lis pendens statute (Ind. Code 32-30-11).  Here are some highlights:

• A successor in interest to real estate takes notice of a pending action (through a lis pendens notice) involving title to that property and thus is subject to the case’s outcome.  In other words, a valid lis pendens notice gives third parties (the world) constructive notice of a pending lawsuit involving ownership and title to the subject real estate.
• The key purpose of Indiana’s statute is to protect plaintiffs seeking to enforce any unrecorded lien upon, right to, or interest in any real estate.  (A mortgage foreclosure case does not need a companion lis pendens notice because the mortgage [almost always] has been recorded.)
• The HOA’s judgment lien, albeit unrecorded, was an in rem interest in real estate and, as such, a legitimate basis upon which to file the lis pendens notice.  (As an aside, the Court also comprehensively discussed the enforceability of the HOA’s unrecorded judgment lien, which I will address in a separate blog post.) 

Holding.  The HOA’s lis pendens notice, filed when the HOA initiated its foreclosure suit, was valid and thus provided constructive notice of such suit.  Once the HOA filed the lis pendens notice, the HOA in effect notified Mortgagee of the pending foreclosure suit.  As such, Mortgagee’s effort to intervene and undo the HOA’s foreclosure was untimely. 

Policy/rationale.  The Court found that the lis pendens notice was valid for two key reasons:  (1)  because the notice arose out of an unrecorded, albeit proper, judgment lien and (2) the purpose of the HOA’s action was to enforce an in rem interest in the real estate.  Mortgagee argued that the nature of the HOA’s foreclosure action was to enforce a personal judgment against the Mortgagor, as opposed to a claim for title to the subject real estate.  The Court disagreed and reasoned that the HOA’s action was indeed a claim against the real estate itself.  As the Court pointed out, “the very defect [an unperfected judgment lien] that [Mortgagee] believes disqualifies the lis pendens filing is the very characteristic that permits it.”  The bottom line was that the HOA’s judgment, in the Court’s view, was a lien, right to and/or interest in the real estate. 

Related posts. 

• Indiana Lis Pendens Notices: What And When
• Despite Lis Pendens, Onus Generally On Plaintiffs (Mortgagees), Not Tenants, To Deal With Leasehold Interests In Mortgage Foreclosure Actions
• Lis Pendens Lessons
• Priority Of HOA Liens In Indiana

An Indiana Deficiency Judgment Arises Out Of The Foreclosure Judgment Itself, Not A Separate Action

I am sometimes asked by out-of-state lawyers or clients whether Indiana has a separate process for the entry of a deficiency judgment.  The answer is no. 

My definition.  The terminology “deficiency judgment” refers to the amount of the money judgment remaining after deducting the price paid at the sheriff’s sale.  More generically, the word "deficiency" describes the difference between the debt amount and the value of the collateral securing the debt.  Think of it as negative equity.   

Indiana’s process.  It’s my understanding that some states require a post-sale action to obtain a deficiency judgment.  Not in Indiana.  Here, a judgment entered in a mortgage foreclosure action typically is comprised of two elements.  The first is a money judgment on the promissory note and/or guaranty, and the second is a decree of foreclosure based on the mortgage.  The deficiency is a product of the sheriff’s sale.  In Indiana, a deficiency judgment isn’t a technical or statutory term.  The label simply describes the net amount owed by a borrower or guarantor following a sheriff’s sale.

One judgment.  So, as to Indiana, unlike some other states, personal liability for a judgment (against a borrower or a guarantor) for any post-sale deficiency effectively occurs immediately upon the entry of the foreclosure judgment itself - before the sheriff’s sale even takes place.  There is no second procedural step or subsequent process to establish a deficiency judgment. 

For more on this topic, see the following posts:

Full Judgment Bid = Zero Deficiency

How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sherriff’s Sale?

Full Credit (Judgment) Bid in Michigan Extinguishes Debt and Mortgage in Indiana

Guarantor Wins Res Judicata Battle, Loses Deficiency War

Employee/Guarantor Of Equipment Supply Contract Pays Price For Bankrupt Employer’s Default

Lesson.  If you are an employee signing a contract for your company, be wary of any kind of personal guarantee provision built into the paperwork.  You might get stuck with your employer’s debt.

Case cite.  Smith v. M&M Pump, 41 N.E.3d 1026 (Ind. Ct. App. 2015). 

Legal issues.  Was Smith a valid guarantor, even though he did not personally benefit from the contract?  Did his company’s pending bankruptcy insulate Smith from liability?  Was Smith on the hook for collection costs, too?

Vital facts.  While Smith was employed as a superintendent for Lily, a coal mining company, he signed a credit agreement with M&M to supply mining equipment to Lily.  The agreement had a paragraph stating that Smith would act as a guarantor in the event of a breach of contract by Lily.  (The provision is quoted in the opinion.)  Lily later defaulted and ultimately filed for bankruptcy protection.  M&M pursued Smith individually for the company’s debt.   

Procedural history.  The trial court entered summary judgment in favor of M&M and against Smith, who appealed. 

Key rules. 

• If a guarantee is made contemporaneously with the underlying contract, then “consideration” sufficient to create the contract is sufficient to support the guarantee.  In other words, it is not necessary for a guarantor to derive any benefit from the principal contract for legal consideration to exist. 
• In Indiana, a person is presumed to understand the document he signs and cannot be released due to his failure to read it. 
• Creditors are not required to wait until completion of a debtor’s bankruptcy to pursue a guarantor. 
• Generally, guarantors are liable for attorney fees and collection costs where the underlying contract contemplates such damages, regardless of any specific reference to such costs in the guarantee provision. 

Holding.  The Indiana Court of Appeals affirmed the summary judgment.  A proper yet harsh result for Smith, no doubt.

Policy/rationale.  Even if Smith did not know what he was signing, his mistake would not preclude summary judgment.  The Court concluded that Smith signed an “[unambiguous] personal guarantee clause.”  The fact that Smith claimed he got nothing from the deal was immaterial under the law.  Further, guarantors owe the debts of their principals regardless of whether the principal can or cannot pay.  Creditors “are not required to wait” on the outcome of any claim against the principal.  Finally, because the credit agreement awarded collection costs to M&M, Smith guaranteed payment of such costs, even though the guarantee clause did not specifically reference them.  The bottom line is that Smith promised in writing to pay the debt of his employer/company.  There was no way around it.

Related posts.

• Fried Tomato Grower, Part II: Lack of Consideration
• Attorney Fee Awards in Indiana
• Indiana Only Requires The Guarantor To Sign A Guaranty