Lesson. While perhaps counterintuitive, in a lien priority dispute between a mortgagee holding an unrecorded prior mortgage and a creditor holding a perfected subsequent judgment lien, the mortgagee will prevail.
Case cite. In Re Moss, 2015 Bankr. LEXIS 4413 (N.D. Ind. 2015) (.pdf).
Legal issue. Whether an unrecorded mortgage has priority over a subsequent judgment lien.
Vital facts. The facts were undisputed that the mortgage was not recorded. There also was no dispute that the judgment lien, which had been created after the execution of the mortgage, was perfected.
Procedural history. Moss arose out of a Chapter 7 bankruptcy case and specifically an adversary proceeding filed by the Trustee against various creditors. The opinion dealt with cross-motions for summary judgment filed by the Trustee and a lender/mortgagee. Without getting too far into the bankruptcy weeds, the opinion in part involved the Trustee’s 11 U.S.C. 544(a)(3) lien avoidance powers, as well as the Trustee’s section 547(b) and 551 powers to avoid preferential transfers.
- Very generally, section 544(a)(3) “empowers a bankruptcy trustee to avoid any transfer of property that is avoidable by a bona find purchaser of real property.” Indiana real estate law controls who would be a bona fide purchaser and “what constitutes constructive notice sufficient to defeat a bankruptcy trustee’s section 544(a)(3) power.”
- Mortgages in Indiana take priority according to the time of filing. Ind. Code 32-21-4-1(b). This statute’s purpose “is to protect subsequent purchasers, mortgagees, and lessees of real property.”
- Indiana judgments constitute a lien upon real estate when the judgment “has been duly entered and indexed in the judgment docket.” I.C. 34-55-9-2. However, “a prior equitable interest [in the land] will prevail over a judgment lien.” In other words, judgment liens are subordinate to prior “legal or equitable liens.”
- The Indiana Supreme Court has determined that “the [equitable] lien of an unrecorded mortgage has priority over that of a subsequent judgment.” As between the parties to a mortgage, the lack of recording does not affect its validity.
Holding. The Court granted summary judgment for the Trustee and held that the judgment lien was subordinate to the unrecorded mortgage because the judgment creditor could not be considered a BFP (bona fide purchaser for value). Again, the bankruptcy aspect of the opinion was somewhat complicated and beyond the scope of my blog. But, for the record, the Court concluded that the Trustee, itself a BFP as a matter of bankruptcy law, could “effectively recover [the mortgagee’s] priority status for the benefit of the bankruptcy estate” so as to render the interest of the judgment creditor secondary and subject to the Trustee’s “recovered [senior] interest.” Then, ironically, the Trustee was able to use that senior status to avoid the mortgage as a preferential transfer – read the opinion for a deeper dive into the BK issues.
Policy/rationale. The outcome in Moss turned on the purpose of the recording statute, which “operates to protect only subsequent good faith purchasers, lessees, or mortgagees for valuable consideration.” The statute could not be used as a sword by the judgment creditor. A judgment lien is not purchased for consideration, unlike deeds, leases or mortgages that are consensual in nature. Judicial liens are creatures of statute and are not granted “for value.” Thus the judgment creditor in Moss was not a BFP and, as such, could not defeat the mortgage. In the context of the bankruptcy, the Court reasoned that “not upholding the unrecorded mortgage … would work to provide a windfall to some creditors at the expense of others who had no part in the failure to record.”
- Judgment Lien Principles Courtesy Of The Indiana Supreme Court
- Indiana Judgment Liens Are Subordinate To Prior Liens, REVISITED
- Actual Knowledge Defeats Indiana’s Bona Fide Purchaser Defense Too
I frequently represent judgment creditors and lenders, as well as their mortgage loan servicers, that are entangled in lien priority and title claim disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.