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Indiana Court Finds That Ex-Wife Held A Judgment Lien, Not A Security Interest, On Ex-Husband’s Farm

Lesson. Property settlement agreements in divorce cases can create judgment liens on real estate owned by the spouse holding title to the real estate post-dissolution. If an owner intendeds for the ex-spouse only to be a secured creditor, then the divorce court must specifically eliminate the application of Indiana’s judgment lien statute in connection with any approved settlement agreement.

Case cite. Kobold v. Kobold, 121 N.E.3d 564 (Ind. Ct. App. 2019)

Legal issue. Whether, post-divorce, wife held a judgment lien on the marital farm as opposed to a secured interest.

Vital facts. The marital property of the spouses included a farm. The couple got divorced and entered into a property settlement agreement (PSA), which provided that husband would keep the farm while making “equalization payments” to wife for her pro rata share of the farm’s value. Husband signed a promissory note for the full amount of the equalization payments. The note, which did not have an acceleration clause, granted husband the right to sell the marital assets. On the other hand, the PSA stipulated that wife could sell the farm to satisfy the debt if husband defaulted under the note. Husband failed to make any equalization payments, so wife obtained a court order permitting her to sell the farm – which she did over husband’s objection. Husband wanted to go a different direction with the farm’s liquidation. As you might suspect, there is more to the story, so read the opinion for a full report.

Procedural history. The trial court approved the sale of the farm to a third party to satisfy various secured creditors and ordered the net proceeds to be paid to each spouse pursuant to the PSA. The court based its ruling on the premise that wife held a judgment lien on the farm. For a variety of reasons, husband appealed.

Key rules. The outcome in Kobold turned on whether wife held a judgment lien under Ind. Code 34-55-9-2 versus a secured interest under the dissolution security statute at Ind. Code 31-15-7-8.

In divorce cases, when one receives a money judgment against another, the judgment lien statute creates an automatic lien on the indebted party’s real estate. This is so even when one spouse agrees to pay the other in installments, which was the case in Kobold.

A trial court can overcome the presumption of a judgment lien, however, if the trial court “specifically eliminates” application of the judgment lien statute and finds that a settlement agreement creates a security interest under Ind. Code 31-15-7-8.

Holding. The Indiana Court of Appeals affirmed the trial court’s finding that wife held a judgment lien against the farm. This gave wife “the right to attach the judgment to the debtor’s property [the farm].” In turn, that lien “empowered [wife] to sell the farm to procure the full amount of the equalization payments.”

Policy/rationale. Husband contended that the trial court impermissibly modified the PSA by permitting wife to sell the farm. More specifically, husband argued that the trial court erred in concluding “that the dissolution decree gave [wife] a judgment lien … [granting wife] the right to refuse to release the judgment lien unless she was paid in full on the promissory note.” The Court of Appeals concluded that, although the record was not crystal clear, the trial court did not specifically eliminate the application of the judgment lien statute so as to overcome the wife’s presumptive judgment lien arising out of the PSA. As the holder of a judgment lien, wife, not husband, “had the right to negotiate a sale of the real estate.”

While I’m no divorce lawyer, and don’t pretend to understand fully how a settlement agreement with a promissory note constitutes a judgment lien, I see the justice in the Kobold's result. The Court stated that wife’s sale of the farm for $1.63MM, which was more than the appraised value of $1.56MM, “appears to have made the best of a bad situation” by paying off husband’s creditors, including the wife, and paying husband $500,000.

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I represent judgment creditors and lenders, as well as their mortgage loan servicers, 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 john.waller@woodenlawyers.com. 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.

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