What Is “Constructive Notice” In The Context Of Indiana Real Estate Law?

I’m sometimes asked by clients and new associates about the idea of “constructive notice” in the context of real estate litigation generally and commercial foreclosures specifically. The concept of constructive notice is a recurring theme on my blog. Indeed the doctrine is important to many things in the real estate world, including:

• The enforceability and priority of mortgages
• Lis pendens law
• The bona fide purchaser doctrine
• The enforceability and priority of judgment liens
• Quiet title and deed-related actions
• Title insurance

A recent opinion by the Indiana Court of Appeals discussed the issue, and I thought it might be worthwhile to quote the Court as a reminder of the rule:

A "purchaser of real estate is presumed to have examined the records of such deeds as constitute the chain of title thereto under which he claims, and is charged with notice, actual or constructive, of all facts recited in such records showing encumbrances, or the non-payment of purchase-money." Crown Coin Meter v. Park P, LLC, 934 N.E.2d 142, 147 (Ind. Ct. App. 2010). The recording of an instrument in its proper book is fundamental to the scheme of providing constructive notice through the records. Id. Constructive notice is provided when a valid instrument is properly acknowledged and placed on the record as required by statute. Id.

Gregory v. Koltz 204 N.E.3d 256 (Ind. Ct. App. 2023)

The mention of the “record” in the above quote refers to the index maintained in each county recorder’s office. (I wrote about “chain of title” here.)  In Gregory, the Court found that the recording of a default judgment to quiet title to the subject property “served as constructive notice to the world” and “bound all successors in interest, regardless of whether the successor was a party to the litigation." The judgment was recorded within the chain of title, which is key.

Constructive notice is tantamount to actual notice in the eyes of the law. Stated differently, even if you didn’t know about the recorded interest, you should have.
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I represent parties involved in real estate and loan-related 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.

7th Circuit Opinion Captures The Essence Of An Indiana Lis Pendens Notice

The recent Seventh Circuit Court of Appeals case in Nat'l Asset Consultants LLC v. Midwest Holdings-Indianapolis LLC 2022 U.S. App. LEXIS 16689 (7th Cir. June 16 2022) did not litigate a lis pendens issue per se. The opinion did, however, comment on the practical impact of an Indiana lis pendens filing.

The dispute began with the filing of a state court case in which the plaintiffs [Sellers] sought to require the defendant [Purchaser] “to perform what [Sellers] described as a contract for the sale of a parcel of land.” Sellers filed a lis pendens notice in connection with the suit. Purchaser later alleged that Sellers attached an altered exhibit to their state court complaint. In an effort to combat that wrong, Purchaser filed a federal court action against the Sellers for fraud and counterfeiting.

In the federal court case, the district judge granted summary judgment for Sellers on the basis that the alleged fraud/counterfeiting had not caused any damage. Sellers thus convinced the district court that there was an absence of injury arising out of the bogus exhibit. Purchaser appealed.

At the 7th Circuit, Purchaser asserted that it had been injured by the very existence of the state court litigation, which made the subject real estate unmarketable by greatly diminishing the potential selling price. The Court rejected the theory, noting that “one page of one exhibit to a complaint” did not affect the value or marketability of the real estate. Rather:

it is the complaint itself, accompanied—as Indiana law requires—by a lis pendens in the real-estate property records. The lis pendens notifies potential buyers that the interests a seller can convey may be subject to the suit's outcome…. [A] lis pendens would have been filed whether or not the page had been altered, so any injury would have been the same.

The Court stated that Purchaser could have asked the state court judge to withdraw the lis pendens notice, but Purchaser apparently had not done so. Thus, the “altered page did not injure anyone, which knocks out any claim for damages” under the statute at issue.

A couple takeaways: (1) an Indiana lis pendens notice is a powerful tool that effectively renders the subject real estate unmarketable during the pendency of the underlying lawsuit and (2) if an owner has an objection to a lis pendens notice, the owner should seek an order lifting the notice.

For more on lis pendens, I have a separate category devoted to the subject.
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Part of my practice involves representing parties in real estate-related 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.

Judgment Requiring Payment Of Sum Certain Through Monthly Installments Until Paid Or “Until Death” Does Not Create Judgment Lien

Lesson. If the amount of a money judgment is contingent, then the judgment will not give rise to a statutory lien on the real estate of the obligor (or borrower).

Case cite. Harris v. Copas, 165 N.E.3d 611 (Ind. Ct. App. 2021)

Legal issue. Whether a divorce decree providing that Husband would pay Wife $75,000 in $500 monthly installments until paid in full or until Wife’s death constituted a money judgment entitling Wife to a lien against the marital home.

Vital facts. Husband and Wife divorced, and the decree provided, among other things, that Husband would become the sole owner of the marital home and that "[Husband] will pay [Wife] the sum of $75,000.00 at $500.00 a month starting June 15th 2017 until paid or death of [Wife].” The situation later became complicated for a variety of reasons, but for purposes of today’s post Wife contended that the divorce decree created a judgment lien on Husband’s real estate. She recorded a lis pendens notice against the marital home as part of her efforts to collect.

Procedural history. Husband filed a petition for, among other things, an order to dismiss the lis pendens notice. The trial court granted the petition and ruled that the contingent nature of the judgment “took it out of the purview of the judgment lien statute.” Wife appealed.

Key rules.

Indiana’s judgment lien statute (I.C. § 34-55-9-2) provides in relevant part:

All final judgments for the recovery of money or costs in the circuit court and other courts of record of general original jurisdiction in Indiana, whether state or federal, constitute a lien upon real estate and chattels real liable to execution in the county where the judgment has been duly entered and indexed in the judgment docket as provided by law[.]

Harris expressed that a “judgment for money is a prerequisite for the application of the judgment lien statute. A 'money judgment' is ‘any order that requires the payment of a sum of money and states the specific amount due, whether labeled as a mandate or a civil money judgment.’" Under Indiana law: "A money judgment must be certain and definite. It must name the amount due."

Holding. The Indiana Court of Appeals affirmed the trial court and held that Wife did not hold a statutory judgment lien on the marital home.  The holding necessarily included the dismissal of the lis pendens notice.  

Policy/rationale. Wife asserted that she held a $75,000 lien based upon the idea that the divorce decree constituted a money judgment against Husband that automatically created such lien. The Court disagreed, reasoning:

If the parties had simply agreed that [Husband] would pay [Wife] $75,000 in monthly $500 installments, there would be no dispute that [Wife] held a money judgment against [Husband]. However, the inclusion of the term "until paid or death of [Wife]" made the amount ultimately due to [Wife] unknowable and unascertainable because it could not be predicted when [Wife] would die. This is the antithesis of a statement of a "specific amount due" required of a money judgment.

The Court took the view that the divorce decree was not, in fact, a money judgment. It appears that the Court viewed the decree simply as a form of payment plan that, while enforceable, did not operate as the kind of judgment that could become a lien.

Related posts.

• Your Source For Indiana Lis Pendens Law
• Indiana Court Finds That Ex-Wife Held A Judgment Lien, Not A Security Interest, On Ex-Husband’s Farm
• Judgment Lien Principles Courtesy Of The Indiana Supreme Court

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I represent judgment creditors and lenders, as well as their mortgage loan servicers and title insurers, entangled in lien priority 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.

Properly Filed Lis Pendens Notices Do Not Slander Title

Lesson. The filing of a lis pendens notice to protect one’s unrecorded interest in real estate will not give rise to liability for slander of title provided there was a basis for filing the notice.

Case cite. RCM v. 2007 East Meadows, 118 N.E.3d 756 (Ind. Ct. 2019)

Legal issue. Whether a lis pendens notice, filed by the buyer during litigation about a real estate purchase agreement, constituted slander of title.

Vital facts. The dispute in RCM involved a purchase agreement for a $9MM apartment complex located in Indianapolis. Lawsuits in both Texas and Indiana were filed relating to an alleged breach of the agreement, alleged fraud and an earnest money claim. The buyer filed lis pendens notices in Indiana for the pending Texas and Indiana lawsuits. Following the dismissal of the Texas case, and while the seller was negotiating with a third party for the sale of the property, the seller in the Indiana action asserted a slander of title claim against the buyer for not releasing the lis pendens notice.

Procedural history. After a bench trial, the seller prevailed on the underlying claims associated with the purchase agreement and the earnest money, but the trial court found in favor of the buyer on seller’s slander of title claim. Seller appealed.

Key rules. Ind. Code 32-30-11-3 spells out the requirements for a lis pendens notice in Indiana.

Parties with a claim to title of real estate under a contract for the real estate’s purchase “ha[ve] the kind of interest that requires filing a lis pendens notice under the statute to protect third parties.”

Indiana law is settled that “statements made in a properly-filed lis pendens notice are absolutely privileged … and defendants who file such a notice may not be held liable for slander of title.”

Holding. The Indiana Court of Appeals affirmed the trial court.

Policy/rationale. Seller contended that buyer slandered seller’s title to the real estate by filing a lis pendens notice when buyer knew it would not be able to perform under the purchase agreement. (Seller also claimed that buyer had waived the privilege defense, but the Court rejected the claim on procedural grounds.)

Lis pendens notices “provide machinery whereby a person with an in rem claim to property which is not otherwise recorded [like a purchase agreement] may put his claim upon the public records, so that third persons dealing with the [seller] … will have constructive notice of it.”

The Court reasoned that, since both parties had filed lawsuits regarding their interests in the real estate subject to the purchase agreement, buyer was actually “required” by law to file a lis pendens notice. It follows that the buyer’s notice was proper and therefore absolutely privileged.

Related posts.  Your Source For Indiana Lis Pendens Law
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I represent parties in real estate-related 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.

Your Source For Indiana Lis Pendens Law

I've been tied up with my day job of late but wanted to post some material this weekend.  The links below should answer most basic questions about Indiana's lis pendens rules:

1. For Indiana's lis pendens statute, Indiana Code 32-30-11, click here.
2. Lis Pendens Lessons is a post from 2007.
3. In 2015, I wrote Indiana Lis Pendens Notices:  What and When.
4. Indiana Supreme Court Tackles Lis Pendens Law is from 2016.   
5. My most recent article on this subject was last year, Indiana Lis Pendens Notice Deemed Discharged Despite Pending Appeal Of The Discharge Order. 

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I have represented 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 [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.

Indiana Lis Pendens Notice Deemed Discharged Despite Pending Appeal Of The Discharge Order

Lesson. If a trial court discharges (releases) a lis pendens notice in a final appealable order, an appeal of the underlying decision does not resurrect the notice or extend the filer’s lis pendens rights pending the outcome of the appeal.

Case cite. Knapp v. Wright, 76 N.E.3d 900 (Ind. Ct. App. 2017).

Legal issue. Whether the release of the lis pendens notice was premature because the court’s order was subject to an appeal.

Vital facts. Knapp was a dispute between the Wrights and the Knapps surrounding the enforceability of a land contract. The trial court entered a preliminary order granting the Wrights possession of the subject real estate. The Knapps responded by filing a lis pendens notice (LPN) asserting an ownership interest in a portion of the real estate based upon the land contract.

Procedural history. The Wrights filed an emergency motion to discharge the LPN because the trial court had already determined that the Knapps had no rights to the property under the land contract. The trial court wen on to hold an evidentiary hearing on the matter of damages and awarded the Wrights monetary relief. In the second order, the trial court stated that its ruling was a final, appealable judgment with respect to the real estate. The court’s order also granted the Wrights’ emergency motion to discharge the LPN and expressly authorized them to sell the real estate free and clear of the LPN. The Knapps appealed.

Key rules. The Indiana Supreme Court has described the doctrine of lis pendens as being:

fundamentally about notice. The term lis pendens itself means “pending suit,” and it refers specifically to “the jurisdiction, power, or control which a court acquires over property” involved in a pending real estate action. Any successor in interest to real estate is deemed to take notice of a pending action involving title to that real estate and is subject to its outcome. The judgment in the pending lawsuit binds all successors in interest, regardless of whether a successor was a party to the litigation. The doctrine’s purpose is to protect the finality of court judgments by discouraging purchases of contested real estate.

Ind. Code 32-30-11 is Indiana’s lis pendens statute. Section 7 states in pertinent part:

Upon the final determination of any suit brought:

(1) for the purposes described in section 2 or 3 of this chapter; and
(2) adversely to the party seeking to enforce a lien upon, right to, or interest in the real estate;

the court rendering the judgment shall order the proper clerk to enter in the lis pendens record a satisfaction of the lien, right, or interest sought to be enforced against the real estate. When the entry is made, the real estate is forever discharged from the lien, right, or interest.

Holding. The Knapps essentially claimed that the LPN should not have been removed pending the outcome of their appeal. The Indiana Court of Appeals disagreed and affirmed the trial court.

Policy/rationale. The trial court’s final appealable judgment disposed of all issues concerning title to the subject real estate. The Court of Appeals reasoned that the judgment constituted a “final determination” under the above statute that mandated the clerk to enter in the lis pendens record a satisfaction of the defendants’ interests they sought to enforce. The fact that the Knapps “intended to appeal … did not render the … final appealable judgment any less of a ‘final determination’ of their suit within the meaning of the statute.” Based upon the language in the statute and a 2003 case interpreting the operative words “final determination,” the Court concluded that the LPN was extinguished regardless of pending appellate rights. While I understand the Knapps’ position (what if the land contract ruling was reversed on appeal?), the language in the statute handcuffed the courts from extending the lis pendens in this instance.

Related posts.

• Indiana Supreme Court Tackles Lis Pendens Law
• Indiana Lis Pendens Notices:  What and When

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I frequently 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 [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.

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

Indiana Lis Pendens Notices: What And When

If you’re wondering what an Indiana lis pendens notice is, Clarkson v. Neff, 878 N.E.2d 240 (Ind. Ct. App. 2007) provides some good insight.  The opinion articulates the history, addresses common law rules and discusses our lis pendens statute, I.C. § 32-30-11.  Although lis pendens matters don’t often arise in commercial foreclosure actions, it is important to be familiar with the tool, especially if you deal with real estate-related litigation. 

Real estate dispute.  Clarkson centered on a residential construction contract between a builder, who owned the real estate, and Clarkson, who contracted to build a home on the property.  A lawsuit arose.  During the pendency of the litigation between the builder and Clarkson, a third party (Neff) purchased the home from the builder.  The issue was whether Neff acquired the property free and clear of any interest of Clarkson, who had filed a lis pendens notice.

The statute.  I.C. § § 32-30-11-3 and 32-30-11-9 specifically applied to the Clarkson case.  Note that lis pendens notices are not filed with the county recorder’s office.  Rather, by statute, they must be filed with the clerk’s office.  I.C. § 32-30-11-3(b). 

Common law.  Clarkson said that the purpose of a lis pendens notice is:

to provide machinery whereby a person with an in rem claim to property, which is not otherwise recorded or perfected, may put his claim upon the public records so that third persons dealing with the defendant . . . will have constructive notice of it.

Indiana’s lis pendens rules require that a separate, written notice of a pending suit be filed with the clerk of the county where the real estate is located in order for the lawsuit to affect the interests of third-party purchasers.  The Court in Clarkson stated:  “if a lis pendens notice is properly filed on the public records, a subsequent purchaser will take the property subject to a judgment in the pending claim.”  Further:  “to protect an interest in the property, the subsequent purchaser may either ensure that the grantor does not harm his rights or intervene in the action.”  See also, Dempsey v. JP Morgan Chase Bank, 2007 U.S. Dist. LEXIS 58449 (S.D. Ind. 2007) (“Lis pendens is a way to give notice to the public, and in particular to potential buyers, that litigation is pending which may affect the rights in a piece of property.”) 

Outcome.  Clarkson filed a lis pendens notice with the appropriate county clerk’s office thirteen days before Neff closed on the purchase of the property.  The Indiana Court of Appeals found that “clearly, Neff had constructive notice of the Circuit Court lawsuit when he purchased the property, as provided by the lis pendens statutes, because Clarkson correctly filed a lis pendens notice in Hancock County.”  Neff thus was deemed to be bound by any judgment entered in the suit.  Since the suit was not yet resolved, Neff “[did] not at [the] time own the property in question free of any and all claims of Clarkson as a matter of law.”  

But, be careful.  Clarkson highlights that the validity of a lis pendens notice hinges upon whether there is a pending lawsuit.  The Dempsey opinion cited above illustrates that lis pendens notices generally are inappropriate encumbrances on title (1) when the party filing the notice has no interest in the real estate or (2) when litigation that may affect one’s rights in real estate has been concluded.  The point is that a bogus lis pendens notice could subject the filer to a claim for slander of title. 

Notice mechanism.  A lis pendens filing provides constructive notice (implied knowledge) that a piece of real estate is embroiled in litigation.  The law is designed for the notice—the document filed with the clerk—to lead third parties such as title searchers to the pleadings filed in the pending lawsuit that will describe the nature of the legal dispute, including its potential impact upon title.  If the I’s are dotted and the T’s are crossed, a lis pendens notice will demonstrate to any party undertaking due diligence that the real estate is or may be encumbered.  As a result, the notice effectively ties up the real estate until the litigation is resolved or the notice is released. 

Despite Lis Pendens, Onus Generally On Plaintiffs (Mortgagees), Not Tenants, To Deal With Leasehold Interests In Mortgage Foreclosure Actions

This follows-up my June 28th post about Myers v. Leedy, “To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions.”  What actions must the tenant take if it knows or should know about a pending foreclosure action? 

Seller’s contention.  One of the arguments of the land contract seller on appeal of the Myers case was that the tenant had both constructive and actual knowledge of the pending breach of contract action at the time the tenant entered into the lease for the 2006 crop season.  The seller claimed it should not have been forced to name the tenant as a defendant in the action; rather, the tenant should himself have intervened in that action in order to protect his interests. 

Lis pendens, generally.  The seller’s argument triggered the Court’s analysis of Indiana lis pendens law.  See, Ind. Code §§ 32-30-11-1 to 10 and Indiana T. R. 63.1.  “Lis pendens” is Latin for “pending suit.”  The Court outlined that, historically, lis pendens provided that one who acquires an interest in real estate during the pendency of a lawsuit concerning the title to that real estate takes notice of such lawsuit and has to take its interest in the real estate subject to any subsequent judgment.  Ind. Code § 32-30-11-2 modified the common law and requires that the plaintiff file a separate, written notice with the county clerk’s office to perfect the lis pendens protections.  (I also wrote about lis pendens on 12-27-07 and 9-20-07.) 

Lis pendens, exception.  Statutory written notice is not required if the suit is founded upon a written instrument executed by the party having title to the real estate (like a mortgage) as appears from the properly-filed county records.  Thus the filing of the mortgage foreclosure complaint itself will provide the requisite constructive notice to post-suit claimants.  From the Court: 

We have no quarrel with the general proposition that the commencement of a foreclosure action standing alone provides third parties with constructive notice of a pending lawsuit. 

Constructive notice, but . . ..  In Myers, the seller retained legal title to the subject real estate, which interest was reflected by the memorandum of contract recorded in the county recorder’s office.  Under Indiana lis pendens law, therefore, the tenant was deemed to have constructive notice of the suit on the land contract against the buyer commenced two years before the subject lease.  But the Court did not adopt the seller’s lis pendens-related argument, reasoning that it “makes no sense” to say that a lis pendens notice of a foreclosure proceeding should bind a tenant already in possession.  To hold otherwise, a tenant in possession “must regularly check the records of the County Recorder’s office to determine whether a foreclosure action has been filed.” 

Actual notice side-stepped.  The Court also addressed the issue of the tenant’s alleged actual notice of the underlying lawsuit.  Should the tenant have intervened in the pending litigation of which he was aware?  In the final analysis, it appears that the Court may have simply concluded that the evidence was not altogether clear on whether, or to what extent, the tenant knew of the suit as it may have related to the real estate and his rights.  The Court ultimately affirmed the trial court’s finding that, among other things, the tenant should have been allowed to finish planting and harvesting his crop in 2006.  The Court had to choose a side, and it did.

“Should have known.”  As noted in my June 28th post, one of the critical factors in the Court’s decision was that the seller had actual knowledge that the tenant was farming the property at the time seller filed suit.  Thus the Court did not expand on the “upon reasonable diligence should have known” part of the test.  The Court appears to be deliberate in its requirement of notice of a tenant’s “possession” of the property.  The Court’s charge seems to be that lenders must undertake reasonable measures to determine whether there is a tenant in possession of the property.  To me, this implies observing the real estate.  Perhaps a site visit or property inspection may need to occur.  Having said that, we must remember that Myers was not a mortgage foreclosure case and dealt with the unique situation of a single tenant (farmer) on the property.  Ultimately, a secured lender’s “reasonable diligence” will need to be evaluated on a case-by-case basis. 

Business decision.  As a practical matter, in most commercial mortgage foreclosure actions the lender/mortgagee will not want to terminate any of the existing leases.  The leases generate income and thus increase the value of the property.  There are, however, instances where one or more tenants of a subject property may be undesirable and thus the target of termination.  If a business decision is made to terminate such post-mortgage leasehold interests, I recommend that you and your counsel ensure that those tenants are named as defendants in the foreclosure action. 

Lis Pendens Lessons

If you’re wondering what an Indiana lis pendens notice is, look no further than the December 12, 2007 Indiana Court of Appeals opinion in Clarkson v. Neff, 2007 Ind. App. LEXIS 2752 (ClarksonOpinion.pdf).  The opinion provides some history, addresses common law rules and discusses Indiana’s lis pendens statute, I.C. § 32-30-11.  (I previously touched upon a lis pendens issue in my September 20, 2007 post.)

The Clarkson case surrounded a residential construction contract dispute, including an effort to secure a Court order requiring the purchase of a home.  During the pendency of the litigation between the builder and the original buyers (the Clarksons), a third party (Neff) purchased the home from the builder.  The question was whether Neff acquired the property free and clear of any interest of the Clarksons, who had filed a lis pendens notice.

Common laws tidbits.  Indiana’s lis pendens rules require that a separate, written notice of a pending suit be filed with the Clerk of the Court of the county where the real estate is located in order for the lawsuit to affect the interests of third-party purchasers.  Clarkson at 5-6.  The purpose of a lis pendens notice is:

to provide machinery whereby a person with an in rem claim to property, which is not otherwise recorded or perfected, may put his claim upon the public records so that third persons dealing with the defendant . . . will have constructive notice of it.

Id. at 6.  “If a lis pendens notice is properly filed on the public records, a subsequent purchaser will take the property subject to a judgment in the pending claim.”  Id.  “To protect an interest in the property, the subsequent purchaser may either ensure that the grantor does not harm his rights or intervene in the action.”  Id. 

The statute.  I.C. § § 32-30-11-3 and 32-30-11-9 specifically applied to the Clarkson case.  Lis pendens notices are not filed with the County Recorder’s office.  Rather, by statute, they must be filed with the Clerk’s office.  I.C. § 32-30-11-3(b).  Clarkson also illustrates that the validity of a lis pendens notice hinges upon whether there exists a pending lawsuit. 

In Clarkson, a lis pendens notice was properly filed with the appropriate County Clerk’s office thirteen days before third-party Neff closed on the purchase of the property.  The Indiana Court of Appeals concluded that “clearly, Neff had constructive notice of the Circuit Court lawsuit when he purchased the property, as provided by the lis pendens statutes, because the Clarksons correctly filed a lis pendens notice in Hancock County.  Id. at 8.  Neff thus was deemed to be bound by any judgment entered in the suit.  The suit was not yet resolved, so the Court concluded that Neff “does not at this time own the property in question free of any and all claims of the Clarksons as a matter of law.”  Id. at 11. 

Practical application.  A lis pendens filing will provide constructive notice (implied knowledge) that a piece of property is embroiled in litigation.  The notice—the document filed with the Clerk—will lead the researcher to the particular pleadings filed in the pending lawsuit, which pleadings will describe the nature of the legal dispute, including its potential impact upon title to the property.  If the I’s are dotted and the T’s are crossed, a lis pendens notice will demonstrate to a party doing due diligence that the property is or may be encumbered.  Although lis pendens-related matters rarely arise in a commercial foreclosure case, it is important for representatives of commercial lending institutions to be familiar with the concept.  In certain cases, a lis pendens notice could affect a lender’s priority.