Indiana Supreme Court Affirms Denial Of Owner's Motion To Set Aside Tax Deed

Ind. Land Tr. Co. v. XL Inv. Props., LLC, 155 N.E.3d 1177 (Ind. 2020) is a thorough and definitive opinion by our state's highest court regarding whether a county auditor provided adequate notice to a landowner of an Indiana tax sale.  As is typical, these tax sale cases are fact sensitive and legally complicated, and frankly are difficult to summarize in a standard-size blog post.  Please read the entire opinion if you're confronted with a similar problem.  For purposes of today's post, I'll simply quote Justice David's introduction, which really says it all: 

Before the State sells a delinquent property, the Due Process Clause of the Fourteenth Amendment requires that the owner of the property be given adequate notice reasonably calculated to inform him or her of the impending tax sale. While actual notice is not required, the government must attempt notice in a way desirous of actually informing the property owner that a tax sale is looming. If the government becomes aware that its notice attempt was unsuccessful—such as through the return of certified mail—it must take additional reasonable steps to notify the owner of the property if practical to do so.

In this case, property taxes went unpaid on a vacant property from 2009 to 2015 resulting in over $230,000 in outstanding tax liability. The county auditor—through a third-party service—sent simultaneous notice of an impending tax sale via certified letter and first-class mail to the tax sale notice address listed on the deed for the property. The owner of the property, however, had moved from its original address several times and never updated its tax address for the property with the county auditor. The certified letter came back as undeliverable, but the first-class mail was never returned. After a skip-trace search was performed for a better address and notice was published in the local newspaper, the property eventually sold and a tax deed was issued to the purchaser. The original owner was ultimately notified of the sale when the purchaser filed a quiet title action and searched for a registered agent. The original owner then moved to set aside the tax deed due to insufficient notice.

The central question before our Court today is whether the LaPorte County Auditor gave adequate notice reasonably calculated to inform Indiana Land Trust Company of the impending tax sale of the property. As a corollary question, we also confront whether the Auditor was required under the circumstances of this case to search its own records for a better tax sale notice address when the notice sent via certified mail was returned as undeliverable. We find the Auditor provided adequate notice and was not required to search its internal records. We therefore affirm the trial court's denial of Indiana Land Trust's motion to set aside the tax deed.

The Court held that, under the facts of the case, the auditor "provided notice reasonably calculated, under all the circumstances, to apprise [the owner] of the pendency of the action and afforded them an opportunity to present their objections."  

See also:

• Indiana Supreme Court Upholds Tax Sale Notice Statute Applicable To Mortgagees
• Court Rejects Property Owner’s Plea To Set Aside Tax Sale

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My practice includes representing parties in connection with contested tax sales. 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.

Tax Deed Denied Because Redemption Notice Suggested The Amount To Redeem Included Surplus Funds

Lesson. A tax sale purchaser may not obtain a tax deed if the statutory redemption notice inflates the redemption amount. Such notices should not include any overbid/surplus funds as being required for redemption.

Case cite. Pinch-N-Post, LLC v. McIntosh, 132 N.E.3d 14 (Ind. Ct. App. 2019)

Legal issue. Whether tax sale purchaser’s post-sale statutory redemption notice substantially complied with Indiana law despite erroneously including purchaser’s overbid amount.

Vital facts. Tax sale purchaser (“Purchaser”) timely sent the post-sale statutory redemption notice to the owner/tax payer (“Owner”). This is sometimes referred to as the “4.5 Notice” based upon the relevant statute. Owner did not redeem the property from the tax sale.  The contents of the 4.5 Notice were at issue in McIntosh. Purchaser bought the tax sale certificate for $8752.00, which included an overbid (surplus) amount of $4679.29. The 4.5 Notice erroneously listed the overbid as a component of the redemption amount.

Procedural history. Purchaser filed a petition for tax deed, and Owner objected. After a hearing, the trial court denied the petition, and Purchaser appealed.

Key rules. The Indiana Court of Appeals summarized the tax sale process:

the sale proceeds first satisfy the property tax obligation for the property, then satisfy certain other qualifying tax obligations of the property owner, with any surplus going into the Surplus Fund. In other words, the Surplus Fund is comprised of the overbid. The Surplus Fund may also be used to satisfy taxes or assessments that become due during the redemption period. Finally, if the property is redeemed, the tax-sale purchaser has a claim on whatever is in the Surplus Fund, and, if a tax deed is issued, the original owner does.

A 4.5 Notice arises out of Indiana Code 6-1.1-25-4.5. The notice must include, among other things, “the components of the amount required to redeem” the property from the sale. Indiana Code 6-1.1-24-6.1(b) details those components. The overbid/surplus is not one of the components.

Holding. The Court affirmed the denial of the petition for tax deed but remanded the case with instructions for the trial court to order a new 120-day redemption period with a new 4.5 Notice.

Policy/rationale. The trial court found that the 4.5 Notice “greatly overstated” the redemption amount. The Court of Appeals agreed that the notice “would have led a reasonable person to conclude that the total redemption amount was far greater than it actually was….” The Purchaser made a number of arguments in support of its theory that the 4.5 Notice substantially complied with the applicable statutes and was not inaccurate. However, the Court rejected the Purchaser’s position and reasoned that the notice “asked [Owner] to jump through too many hoops to discover the true redemption amount, a situation that only existed because [Purchaser] - misleadingly and without justification – included the overbid in the first place.”

Related posts.

• Court Rejects Property Owner’s Plea To Set Aside Tax Sale
• Indiana Tax Sales, Part II: Redemption

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I sometimes am engaged by mortgage loan servicers or title companies to represent lenders/mortgagees 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.

IBJ.com: Marion County reschedules canceled tax sale for early 2020

The Indianapolis Business Journal is reporting that Marion County (Indianapolis) has canceled its fall real estate tax sales (with a combined value of at least $6MM) due to a clerical error.  The 2019 sales will occur 2/14/20.  Here is the story.  Click here for a post of mine from earlier this year talking about Indiana tax sales and notice-related issues.  The "clerical error" leading to the postponement of the sales appears to be related to perfecting the statutory notice required for the sales to be valid.  Better to have a do over now instead of dealing with potentially hundreds of tainted sales later.    

County Sale Agent SRI Not Liable To Tax Sale Purchaser In Wake Of Overturned Sale

Lesson. A chagrined tax sale purchaser, whose tax deed is set aside for notice-related deficiencies, cannot sue the county’s sale contractor for alleged lost profits.

Case cite. M Jewell v. Bainbridge 113 N.E.3d 685 (Ind. Ct. App. 2018)

Legal issues. Whether a tax sale purchaser can sue the county’s sale agent for breach of a contract that the agent had with the county; whether the tax sale purchaser was fully compensated for its alleged losses.

Vital facts. Plaintiff tax sale purchaser (Purchaser) bought a property at a county real estate tax sale, which was later overturned by the court based upon notice-related failures in the sale process. Purchaser received a statutory refund of the amount it paid for the property plus some interest and other items totaling about $7,000.

Defendant SRI is a company that contracted with the county to perform certain services related to tax sales. Those services included preparing and mailing notices to owners with delinquent real estate taxes. One of the reasons this particular sale was overturned was that “the [county] auditor and SRI failed to perform the additional research” necessary to substantially comply with the statutory notice requirements under Indiana’s tax sale laws. Purchaser sued SRI claiming that it suffered nearly $800,000 in damages for lost profits from the failed sale.

Procedural history. The trial court granted summary judgment for SRI. Purchaser appealed.

Key rules. Generally, only parties to a contract have rights under the contract. The Jewell opinion outlines many of Indiana’s rules that govern when so-called “third-party beneficiaries” can sue under a contract. Purchaser claimed it was a third-party beneficiary under the SRI/county contract.

Tax sale purchasers in Indiana buy at their own risk. “There is no warranty in tax sales.”

“The remedy for purchasers at invalid tax sales or holders of invalid tax deeds is wholly statutory.” Ind. Code 6-1.1-25-10 and 11 detail the refund procedure.

Holding. The Indiana Court of Appeals affirmed the trial court and held that (a) Purchaser was not a third-party beneficiary of the SRI/county agreement and thus had no standing to sue SRI for breach of contract and (b) regardless, Purchaser had been fully compensated for its losses under the applicable statute.

Policy/rationale. Regarding the third-party beneficiary issue, the Court reasoned that the county and SRI did not intend to protect tax sale purchasers under their agreement. “It is not enough that the performance of the contract would be of an incidental benefit to [Purchaser].” Regardless, Purchaser’s remedy was statutory, and the Court concluded that Purchaser had been made whole. Purchaser identified “no statutory or common law authority that it [was] entitled to lost profits rather than the statutory refund amount.”

Related posts.

• Tax Sale Set Aside: Inadequate Notices To Property Owner
• Indiana Tax Sale Notices To Mortgagees

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I am sometimes engaged to represent parties in connection with contested tax sales. 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.

Who Owes The Taxes After An Indiana Tax Sale, And When?

Lesson. As a tax sale buyer, be prepared to pay the real estate taxes that accrue in the year of the sale.

Case cite. Picket Fence v. Davis, 109 N.E.3d 1021 (Ind. Ct. App. 2018) (pdf)

Legal issue. Whether a tax sale buyer owes real estate taxes that accrue in the year of the sale.

Vital facts. The following chronology is important:

10/26/15: Treasurer’s Tax Sale
(The subject property did not sell because there was no “minimum bid.” Thus, the County acquired a lien on the property.)

4/8/16: County Commissioners’ Certificate Sale
(The property “sold,” meaning that the buyer purchased a “certificate” for the property.)

8/22/16: Petition for Tax Deed
(Following the submission of the required statutory notices, the buyer sought a court order for the issuance of a tax deed.)

9/26/16: Order for Deed
(The trial court directed the County to execute and deliver a tax deed to the buyer.)

Procedural history. Following the order for deed, a dispute arose between the buyer and the County regarding whether the buyer was responsible for real estate taxes accruing on or after January 2015, the year of the Treasurer’s Tax Sale. The trial court ruled in favor of the County. The buyer appealed.

Key rules. Indiana counties assess taxes each year, but those taxes do not become due and payable until May and November of the following year. For example, if in 2019 the Boone County Assessor determines that my wife and I owe $1000 in taxes for our home, the Boone County Treasurer will not collect the $1000 until 2020 (May, $500 and November, $500).

Another Indiana tax sale feature illustrated by Picket Fence is that, if a property does not initially sell for a statutory minimum amount, then the property slides to the county for a second tax sale, which does not require a minimum bid. The Court’s opinion describes this process in detail and includes summaries of the testimony of two experts that testified in the case.

The Indiana Court of Appeals rightly focused on the provisions in the tax sale statute [Indiana Code 6-1.1-25-4(f) and 4(j)] that specifically dealt with the payment of taxes by a sale purchaser. The Court explained why the “sale” referenced in those subsections refers to the Treasurer’s Tax Sale, and not the County Commissioners’ Certificate Sale, as it relates to when taxes should be payable by the new owner.

Holding. The Court of Appeals affirmed the trial court’s decision and concluded that the buyer must pay the real estate taxes that accrued the year of the Treasurer’s Tax Sale, including the taxes that accrued before the date of the County Commissioners’ Certificate Sale.

Policy/rationale. The buyer in Picket Fence argued that he should not be on the hook for the 2015 taxes due in 2016 or the first installment of the 2016 taxes due in 2017. The rationale for the buyer’s argument was that he did not actually become the owner until 2016. The County, on the other hand, asserted that the operative “sale” was the Treasurer’s Tax Sale in October of 2015 and that the buyer was thus obligated to pay the taxes that accrued in 2015. While I’m not entirely sure what’s ultimately fair here, the Court properly zeroed in on the key statutory sections and logically followed the language as written by the legislature. Of perhaps some solace to the buyer was that he did not owe any taxes due and payable in 2015 (the 2014 taxes). He only owed taxes that accrued in 2015, payable in 2016.

Related posts.

• Indiana Tax Sale Notices To Mortgagees
• Indiana Tax Sales, Part II: Redemption

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Mortgage loan servicers and title insurance companies sometimes engage me to handle tax sale-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.

Mortgagor/Owner Compelled To Turnover Tax Sale Surplus Funds To Mortgagee/Judgment Creditor

Lesson. Indiana law may obligate an owner/mortgagor to turnover real estate tax sale surplus funds to his judgment lien creditor or mortgagee.

Case cite. 2444 Acquisitions v. Fish, 84 N.E.3d 1211 (Ind. Ct. App. 2017).

Legal issue. Whether a lender/mortgagee could compel his borrower/mortgagor to turnover previously-refunded surplus funds arising out of a county’s tax sale of the mortgaged real estate.

Vital facts. This case involved a private loan from Plaintiff to Defendant that was secured by a mortgage on Defendant’s real estate. Following a loan default, Plaintiff obtained a judgment and foreclosure decree against Defendant in state court. Before the sheriff’s sale, Defendant filed a Chapter 11 bankruptcy case. In connection with that proceeding, the bankruptcy court ordered the County to turnover surplus funds, from a prior real estate tax sale, to counsel for Defendant to be held in trust. The bankruptcy case later was dismissed, and Defendant’s counsel transferred the tax sale surplus to his client.

Procedural history. Plaintiff filed a motion in the state court case for the Defendant to turnover the tax sale surplus funds. The trial court granted Plaintiff’s motion, and Defendant appealed.

Key rules. Ind. Code 6-1.1-24-7(c) authorizes who can make a claim for a refund in the event of a tax sale surplus. Although that statute does not expressly authorize a mortgagee or judgment creditor to obtain a surplus, Indiana courts have held that persons “with an interest in the real estate, including those who did not own the real estate at the time of the tax sale or who did not purchase the real estate at the tax sale, may assert a claim for a tax sale surplus directly with the trial court.” Indiana case law provides that a mortgagee qualifies as a person with a substantial property interest of public record.

Holding. The Indiana Court of Appeals affirmed the trial court’s order granting Plaintiff’s motion for turnover.

Policy/rationale. One of Defendant’s challenges was that Plaintiff could not file a motion against Defendant to recover the surplus but that Plaintiff instead was limited to proceedings supplemental for any relief. The nuance here is that prior Indiana case law (see post below) dealt with a mortgagee’s pursuit of funds still held by the County, not funds already refunded to the owner. The Court rejected the Defendant’s contention because the statute does not specify the procedural conduit to file the claim, which essentially is one for an equitable declaratory judgment. The Court reasoned that, because Plaintiff held a lien against the real estate subject to the tax sale, Plaintiff’s interest in the real estate had priority over the interest of the property’s owner, Defendant. The Court concluded that, since Plaintiff “has a more substantial interest in the tax sale surplus funds than [Defendant], we find that equity requires the disbursement of the funds to [Plaintiff].” The Defendant asserted other technical bases for a reversal, all of which the Court rejected.

Related post. Mortgagee Prevails In Claim For Indiana Tax Sale Surplus 
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I represent lenders, as well as their mortgage loan servicers, entangled in tax sale disputes and contested foreclosures. 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.

Hybrid Tax Sale/Mortgage Foreclosure Case Goes Off The Rails For Lender

Lesson. If a mortgagee acquires title to the mortgaged property via tax deed, the mortgage lien will be extinguished. For lenders and their servicers, be careful when making deals with tax sale purchasers while also negotiating loan modifications with borrowers. Best to include everyone in a global negotiation.

Case cite. Bayview v. Golden Foods, 59 N.E.3d 1056 (Ind. Ct. App. 2016).

Legal issues. Whether the lender’s mortgage merged with a tax deed, which the lender acquired from the tax sale purchaser. Also, whether the lender committed conversion of the mortgaged property.

Vital facts. The Bayview facts and procedural history are quite involved and unique. The borrower and the lender had a commercial mortgage loan secured by the borrower’s restaurant property. The borrower became delinquent in the real estate taxes, and the property later was sold at a tax sale. The lender sought to capitalize the delinquent taxes and enter into a loan modification with the borrower. Under the terms of the deal with the borrower, the lender agreed to redeem the property from the tax sale. However, the lender failed to do so and never told the borrower. When the tax sale purchaser petitioned for the issuance for a tax deed, the lender contested the proceeding on the basis that the purchaser failed to give certain required notices. The lender and the tax sale purchaser then entered their own settlement negotiations, without involving the borrower, that ultimately resulted in an agreed order. The Bayview opinion is a little unclear as to whether the lender got the tax deed directly from the auditor or from the tax sale purchaser through a quitclaim deed. Either way, the lender settled with the purchaser and got title. The lender then filed an action to quiet title to the property, which included a count to foreclose the mortgage, alleging that its interest in and title to the property was “superior to all persons who have an interest therein.” Adding to the confusion was the fact that the borrower made a series of loan mod payments to the lender after the lender became the owner of the property. Whew.

Procedural history. The trial court held a bench trial that included the lender’s mortgage foreclosure claim and the borrower’s counterclaim for conversion. The court ruled in favor of the borrower.

Key rules.

• A mortgage involves two entities: (1) the mortgagee, which holds the mortgage that serves as a lien on the property and (2) the mortgagor, who holds title to the property with the right of redemption.

• When one of the parties to a mortgage acquires both the mortgage lien and the legal title to the property, “the two interests are said to merge.” This means that the mortgage lien is extinguished.

• The key factor in deciding whether a merger has occurred is “determining what the parties, primarily the mortgagee, intended.” For more on Indiana’s anti-merger rule, click on the posts below, which discuss the key cases in detail.

• Ind. Code 35-43-4-3 states that a “person who knowingly or intentionally exerts unauthorized control over the property of another commits criminal conversion.”

Holding. The Indiana Court of Appeals held that the evidence supported the trial court’s conclusions. As such, the Court affirmed the trial court’s ruling that the mortgage had been extinguished and that the lender committed conversion.

Policy/rationale.

The lender in Bayview asserted that it did not intend to merge its mortgage with the tax deed. The borrower responded that the lender “clearly intended to take title and extinguish the underlying mortgage and note when it surreptitiously acquired title.” The Court of Appeals pointed to evidence at the trial showing that the lender viewed the transaction similar to a deed in lieu of foreclosure “with no residual obligation for the borrower.”

The Bayview opinion also addressed in detail the borrower’s conversion claims against the lender. In a nutshell, the trial court found that the lender converted (stole) the subject real estate from the borrower. The court awarded the borrower treble damages for criminal conversion based on the amount of equity in the property, plus reimbursement for the loan mod payments made by the borrower.

Although not expressly spelled out in the opinion, the practical outcome of the case seemed to be that, on the one hand, the lender (holding a tax deed) remained the owner of the property while, on the other hand, the borrower’s debt was extinguished. On top of that, the lender had to pay the borrower substantial damages.

Related posts.

• Does A Deed-In-Lieu Of Foreclosure Automatically Release A Borrower From Personal Liability?
• Secured Lender Loses Mortgage Due to Indiana Tax Sale
• Indiana Tax Sales, Part II:  Redemption
• Indiana Supreme Court Speaks To The Doctrine Of Merger And The Remedy Of Strict Foreclosure

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in loan-related litigation, including disputes arising out of tax sales. If you need assistance with such a 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 to your left.

Computing Time Deadlines In Indiana: Tax Sale Notice Not 1 Day Late

Lesson. For tax sale notice deadlines, count backwards from the date of the sale to determine when the notice mailing is due.

Case cite. Schafer v. Borchert, 55 N.E.3d 914 (Ind. Ct. App. 2016).

Legal issue. Whether the county timely mailed its notice of tax sale to the owner.

Vital facts. The date of the tax sale was October 3rd. The county mailed the notice of tax sale on September 12th.

Procedural history. Buyer purchased the subject property at the tax sale and filed an action to quiet title following the receipt of the tax deed from the county. The former owner contested the action and sought to set aside the tax deed. The owner’s theory was that the county mailed the notice one day late – twenty days before the sale instead of twenty-one. After a bench trial, the court entered judgment for the buyer and found that, although the notice was one day late, it “substantially complied” with the statutory requirements.

Key rules.

Ind. Code 6-1.1-24-4(a) controlled the notice issue. At the time, the statute provided that the county auditor “shall send a notice of the sale by certified mail to the owner or owners of the real property … at least twenty-one (21) days before the day of the sale….” The current statute – link here – basically says the same thing.

Indiana Trial Rule 6(A) generally controls, in part, how parties determine deadlines in connection with litigation. In Schafer, the Indiana Court of Appeals applied the rule in the context of a tax sale. Rule 6(A) says:

In computing any period of time prescribed or allowed by these rules, by order of the court, or by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed is to be included unless it is:
(1) a Saturday,
(2) a Sunday,
(3) a legal holiday as defined by state statute, or
(4) a day the office in which the act is to be done is closed during regular business hours.
In any event, the period runs until the end of the next day that is not a Saturday, a Sunday, a legal holiday, or a day on which the office is closed….

Holding. The Court of Appeals affirmed the trial court but on different grounds. “It was not necessary for the trial court to reach the issue of substantial compliance….” The notice was in fact timely.

Policy/rationale. Schafer is a counting lesson. The trial court (and the former owner) mistakenly concluded that the clock began to run when the county mailed the notice. However, the statute “places a requirement on the auditor concerning the timing of notice, not the timing of when the tax sale must be held after notice is provided.” In other words, as explained by the Court, the statute does not mandate the sale to be held no fewer than twenty-one days after notice is mailed. Instead, the “act or event” for Rule 6(A) is the date of the sale. As such, “the days should be counted backwards to the date notice is mailed.” Since the sale date was October 3rd, the first day to be counted for the deadline was October 2nd. (See the italics section in the rule above.) Counting backwards from the sale, instead of forwards from the mailing, twenty-one days was September 12th, which is when the county mailed the subject notice.

Related posts.

Court Rejects Property Owner’s Plea To Set Aside Tax Sale

Tax Sale Set Aside: Inadequate Notices To Property Owner

Tax Sale Bullet Strikes Property Owner

Indiana Tax Sale Notices To Mortgagees

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales
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I sometimes represent lenders, as well as their mortgage loan servicers, entangled in disputes arising out of tax sales. 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.

Mortgagee Prevails In Claim For Indiana Tax Sale Surplus

What happens if a lender’s real estate collateral is sold at a tax sale, which nets a surplus (funds remaining over and above payment of the tax lien)?  Does the money go back to the owner, or can the lender/mortgagee recover it?  Beneficial Indiana v. Joy Properties, 942 N.E.2d 889 (Ind. Ct. App. 2011) helps answer these questions.

Course of events.  In 2003, lender made a mortgage loan to borrowers.  In 2008, following the failure by the borrowers to pay real estate taxes, the county held a tax sale that resulted in a $42,000 surplus.  No party redeemed within the one-year period, so the county issued a tax deed in November of 2009.  However, the tax sale purchaser did not immediately record it.  In December of 2009, lender filed a motion in the county trial court for the auditor to hold the surplus.  At the hearing on the motion, the lender established a default under the mortgage loan and losses of approximately $100,000.  Shortly after the hearing, borrowers, who did not participate in the hearing, deeded the real estate to a third party, which recorded the deed in January of 2010.  In February of 2010, lender filed a motion to compel the auditor to turn over the surplus, and then the the tax sale purchaser recorded its tax deed.

The problem.  Who should have received the $42,000 tax sale surplus - the lender or the third party (subsequent owner)?

Statute.  I.C. § 6-1.1-24-7 is the provision within Indiana’s tax sale statutory scheme that speaks to the surplus issue, and subsection (b) authorizes a claim by the:

 (1) owner of record of the real property at the time the tax deed is issued who is divested of ownership by the issuance of a tax deed; or
 (2) tax sale purchaser or purchaser’s assignee, upon redemption of the tract or item of real property.

Since there was no redemption, subsection (b)(2) did not apply.  Beneficial Indiana focused on subsection (b)(1), which seems to suggest that the borrowers would be entitled to the funds because they were the owners of record at the time the tax deed was issued.  Since they had conveyed their interests to a third party by the time the matter came before the trial court, the third party essentially stepped into their shoes and claimed subsection (b)(1) mandated the turnover of the surplus to it.

Statutory work around.  In Indiana, persons with “an interest in the real estate, including those who did not own the real estate at the time of the tax sale or who did not purchase the real estate at the tax sale, may assert a claim for a tax sale surplus directly with the trial court.”  The lender asserted that it was entitled to the surplus because its mortgage lien attached to the surplus.  Indiana law indeed provides that, even though the lender’s lien against the real estate was extinguished by the tax sale deed, its lien “attached to the tax sale surplus, and has priority over the interest conveyed to [the third party].”

More substantial interest.  The Court’s rationale rested upon the following test:  “which claimant has the more substantial interest in the real estate?”  The Court’s ruling in favor of the lender was, in my view, fair and sensible:

It is undisputed that [lender’s] mortgage was duly recorded on April 21, 2003.  It is further undisputed that the [borrowers] not only failed to pay their property taxes but also were in default on their mortgage, owing a balance that greatly exceeded the tax sale surplus held by the auditor.  Hence, [lender] had a substantial interest in the real estate prior to the issuance of the tax sale deed.  [Third party] acquired its interest in the real estate by a quitclaim deed executed by the [borrowers] after they had failed to make mortgage payments to [lender’s] for more than a year; and they had failed to redeem the real estate during the statutory one-year period following Allen County’s tax sale of real property due to the owners’ failure to pay real estate taxes.  Thus, at the time of the conveyance to [the third party] by the [borrowers], the interest conveyed was subject to the issuance of a tax deed to [the tax sale purchaser] and to [lender’s] recorded security interest.  In other words, the interest conveyed to [the third party] by the [borrowers] is significantly less substantial than and inferior to the interest of [lender].

Favorable to lenders.  As suggested here before on November 16, 2010 and most recently on March 19, 2012, delinquent real estate taxes and resulting tax sales can be a minefield for lenders in Indiana.  In Beneficial Indiana, the lender lost its loan collateral and incurred damages of about $100,000.00.  Luckily, the somewhat unique set of circumstances opened the door for the lender’s recovery of the surplus that mitigated its losses.

Even Though Loan Was Non-Recourse, Court Awards Lender Real Estate Tax Refund Due To Borrower

Lesson.  Depending of course upon the language in a particular mortgage, lenders generally hold a security interest in real estate tax refunds owed to borrowers – even in cases of non-recourse loans.

Case cite.  2513-2515 South Holt Road Holdings v. Holt Road, 40 N.E.3d 859 (Ind. Ct. App. 2015). 

Legal issue.  Whether, in the context of a non-recourse loan, the foreclosing lender could recover a $307,193.76 refund paid to the borrower following a successful appeal of a real estate tax assessment.

Vital facts.  Holt Road was a commercial foreclosure case concerning a non-recourse loan.  Black’s defines such a loan as a “type of security loan which bars the lender from action against the borrower if the security value falls below the amount required to repay the loan.”  In the commercial real estate context, this means that the lender’s recovery of the debt is limited to the mortgaged property.  If there is a deficiency, the borrower, personally, is not on the hook.  What made Holt Road unique was that, during the foreclosure case, the borrower received a sizable refund of real estate taxes (aka property taxes) from the county as a result of a tax appeal.  Since the sheriff’s sale of the mortgaged real estate resulted in a deficiency, the lender sought recovery of the refund paid by the county in further satisfaction of the judgment/debt. 

Procedural history.  The trial court entered judgment in the borrower’s favor on the tax refund question, and the lender appealed.  The Holt Road opinion is from the Court of Appeals.  Following the opinion, the Indiana Supreme Court granted transfer, which automatically vacated the opinion.  However, the Supreme Court later reinstated the Court of Appeals opinion, which today is good law. 

Key rules.  Holt Road is not rule heavy.  The opinion slices and dices language in the mortgage.  The Court cites to dictionaries more than law. 

Holding.  The Court reversed the trial court and bought the lender’s argument that the tax refund fell within its security interest, as articulated in Paragraph (K) of the mortgage dealing with “funds,” “claims,” and “general intangibles.”  The Court awarded the refund, which was being held in escrow, to the lender. 

Policy/rationale.  The borrower asserted that the refund was a personal asset that was protected by the non-recourse nature of the deal – sort of like income.  Arguably the outcome was contrary to the essence of a non-recourse loan.  But the lender’s winning argument was that the funds were connected to the real estate, over which the lender held a broadly-defined security interest.  The Court examined in detail the language in the mortgage and found the tax refund to fall within the scope of the applicable lien provisions.  Close call.     

Related posts. 

• Indiana Deficiency Judgments: Separate Action Not Applicable
• Mortgagee Prevails In Claim For Indiana Tax Sale Surplus

Indianapolis Star Series: Blight Inc. - Examining Indiana's Tax Sale System

The Indianapolis Star recently ran a series entitled "Blight Inc." that tackled the issue of "how our government helps investors profit from neighborhood decay."  The series has eight separate in-depth articles written by reporter Brian Eason.  All of the work can be accessed via IndyStar.com at this link: Bright Inc.  Mr. Eason and I’m sure others at the Star clearly worked hard in putting together a thorough investigation and analysis of Indiana’s real estate tax enforcement system.

Because I sometimes write about tax sales (see Category to right), I thought my readers and other surfers might want to know about the series.  Lots to read.  It’s impossible for me to comment in any detail on such a big project as Blight Inc. other than to point out that the series, in part, highlights a county’s struggle with, on the one hand, the need to collect delinquent real estate taxes and, on the other hand, the need to rehabilitate (or raze) abandoned properties.  Here is a quote from the last article in the series that summarizes the problem, according to the Star:

The Star’s investigation into abandoned housing revealed how Indiana’s tax sale system is undermining both public and private efforts to rehab distressed neighborhoods. The Star found that county treasurers across the state repeatedly sold run-down houses to investors who did not want them, and later let them go back to tax sale. Meanwhile, the system allowed a handful of large investors to amass hundreds of houses from county sales. But in the absence of any requirements that they rehab the homes, many have fallen further into disrepair, costing the city millions of dollars in code enforcement, maintenance and emergency runs.

As an aside, interestingly, the Star quoted state Sen. Jim Merritt, R-Indianapolis who suggested blight could curtailed by making Indiana a non-judicial foreclosure state:

Merritt pointed to another culprit [of blight] — the length of the state’s mortgage foreclosure process, which he thinks contributed to the huge number of vacant properties following the housing crisis. He wants to move Indiana away from its judicial foreclosure process toward a [faster] non-judicial system, as is used in both California and Texas.

Due in part to the Star’s work, Indiana lawmakers will be looking at reforming Indiana’s tax sale system.  The nature of the reforms is not altogether clear or settled.  If and to the extent changes to Indiana’s tax sale or foreclosure systems are made, particularly if they effect commercial real estate, I’ll write about them here.

What remains unclear to me is how a county can collect delinquent taxes without publicly auctioning off the subject real estate to the highest bidder, whoever that may be.  While I agree that abandoned housing and blight (even commercial property blight) are serious problems, I’m not fully convinced that the tax sale system is to blame.

 

Indiana Supreme Court Upholds Tax Sale Notice Statute Applicable To Mortgagees

 

When real estate taxes become delinquent, the real estate becomes eligible for a tax sale.  The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale.  In M&M Investment Group v. Ahlemeyer Farms, 994 N.E.2d 1108 (Ind. 2013), a lender, to no avail, challenged the constitutionality of this scheme. 

Trump.  I post about tax sales because they terminate mortgage liens on the real estate.  Best practices for secured lenders are to monitor tax payments and ensure tax sales do not occur without your knowledge.  Since a lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important to monitor the status of the real estate taxes and take action (read:  advance the taxes), if warranted.  Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place.

3 Notices.  In Indiana, there are three statutory tax sale-related notices.  The first relates to the sale itself and is controlled by Ind. Code § 6-1.1-24-4(a).  This initial sale notice, from the county auditor, only goes to the property owner.  The second notice is from the party that purchases the property at the tax sale and is the notice of the right of redemption pursuant to I.C. § 6-1.1-25-4.5.  The third notice again is from the tax sale purchaser and is the notice of filing of a petition for tax deed per I.C. § 6-1.1-25-4.6(a).  Mortgagees (secured lenders) generally only get the second and third notices.

Written request.  Lenders can receive the first notice, however, if, on an annual basis, they send a letter to the county auditor pursuant to I.C. 6-1.1-24-3(b) and/or 1(d).  Upon request, the lender should then automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself.  The burden is on the lender to cover this, and my sense is that the option is rarely exercised.

Constitutional.  The M&M opinion addressed the issue of whether this statutory procedure is permissible under the Due Process Clause of the Fourteenth Amendment.  In M&M, the bank failed to submit the required form to the county auditor and therefore was not notified that its mortgaged property was tax-delinquent until after it had been sold and the buyer had a tax deed.  The operative question was whether it is constitutionally permissible for the statute to condition the first-class mailing of actual notice on a requirement that the lender first affirmatively request such notice by way of a form.  The Indiana Supreme Court thought so, reasoning: 

In short, the only reasonably certain way for an auditor to know who has a viable mortgage on a property so that adequate notice may be sent to the proper party is for the mortgagee to complete a simple form and submit it to the auditor. Whether mortgagees do this on their own, or an entity similar to MERS steps in and performs the task as an agent, this is hardly an onerous burden in light of the benefit obtained; and is far less onerous than the burdens the alternative would place on the State in exchange for a far lower degree of benefit.

The Court held that the requirement does not violate the Constitution. 

Heads up.  Whether the benefits of requesting the statutory notices exceed the costs of sending the annual letters is unknown to me and may depend upon the size and nature of a lender’s portfolio.  The important point is that the option is available.  Otherwise, lenders need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is will be.  Indiana simply does not deem it reasonable or necessary for counties to incur the time and expense of notifying lenders of tax sales.  On the other hand, lenders ultimately are protected because they are entitled to the second and third notices and thus can redeem the property from a sale, thereby avoiding mortgage lien termination. 

Court Rejects Property Owner’s Plea To Set Aside Tax Sale

This is my third post dealing with an owner’s effort to set aside a tax sale.  My 08/31/13 post involved a case where the owner won.  My 12/14/12 post addressed a case where the owner lost.  Prince v. Marion Co. Auditor, 992 N.E.2d 214 (Ind. Ct. App. 2013) is another case where the owner lost.  The issue in all these cases surrounds notice. 

Notice particulars.  Cases attacking the validity of a tax sale necessarily are fact sensitive as they relate to whether, or to what extent, the owner (or the mortgagee) received adequate notice of the tax sale proceedings.  Prince is no different.  The owner in Prince held title to an Indiana apartment building.  He moved to California and provided the county auditor with a post office box address for receipt of correspondence.  The first of the three statutorily-required notices to the owner went to the California post office box by both first class and certified mail.  The owner received a copy of the notice sent to the post office box by certified mail and signed for the package.  (He claimed this notice was stolen out of his car before he opened it.)  The notice sent by first class mail was not returned to the auditor.  The auditor also sent notice to the common address for the apartment building, which notice came back to the auditor “return to sender, vacant, unable to forward.” 

Notice rules.  The owner alleged that the county failed to provide him with adequate notice so as to deprive him of constitutional due process, which I discussed in my 12/14/12 post about the Indiana Supreme Court’s decision in Sawmill.  Importantly, due process does not require actual notice, but rather notice “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”  Further, Indiana law merely provides that notices must be in “substantial compliance” with statutory requirements - not perfect compliance. 

Notice acceptable.  In Prince, the Indiana Court of Appeals examined the county’s notices, which the county sent three different ways:  (1) to the apartment building, (2) to the owner’s California post office box via certified mail and (3) to the owner’s California post office box via first class mail.  Moreover, following the tax sale, but before the issuance of a tax deed, the county obtained a title search on the owner’s Indiana parcels and was unable to locate any additional addresses for him – meaning the county found nowhere else to mail the notices.  The Court affirmed the trial court’s denial of the owner’s motion to set aside the tax deed:

In the current case, none of the notices that the Auditor sent to [the owner’s] post office box via first class mail were returned.  Furthermore, [the owner] had signed the certified mail receipt for the notice of tax sale, which was also sent to the post office box.  Thus, the Auditor knew that service had been accomplished.  Furthermore, after the tax sale the Auditor obtained a title search to locate other addresses for [the owner]. 

The Court reasoned that the county acted “with far more diligence” than in other cases where sales were set aside. 

Notice posting?  One of the owner’s arguments was that the county should have posted notice at the apartment building, where the owner’s on-site property manager would have seen it.  The manager occupied an office in a unit within the apartment building, but the county did not have a specific address or unit number for such office.  In rejecting the owner’s position, the Court found that, since all of the notices the auditor had sent to the building had come back indicating that the property was vacant, “it would not be reasonable to require the Auditor to post notice at what was, to the best of the Auditor’s knowledge, vacant property.” 

As suggested in my other posts about tax sales, owners need to pay real estate taxes, or face losing title.  Owners should ensure that the county has a valid address for tax bills and tax sale notices.  Similarly, lenders would be wise to monitor the status of their borrowers' real estate taxes, or face losing their mortgages.  Ideally, lenders/mortgagees should ensure that the county has on record the name and address of the mortgage lien holder.  See my 12/30/11 post for more on this issue.

Secured Lender Loses Mortgage Due to Indiana Tax Sale

I previously addressed the pitfalls facing mortgage lenders when their borrowers fail to pay real estate taxes:  see, 11/16/10 and 12/30/11.  Iemma v. JPMorgan, 992 N.E.2d 732 (Ind. Ct. App. 2013) is a recent Court of Appeals decision that upheld a tax sale and thus terminated a lender’s mortgage. 

The dispute.  The fundamental question in Iemma was whether the tax deed issued to the tax sale purchaser (“LRB”) should have been set aside due to LRB’s failure to properly notify the senior mortgagee, Chase, who was the successor-by-merger to Bank One-Merrillville (“BO-M”), the mortgagee identified on the recorded mortgage.  Chase filed an action to set aside the tax deed.  LRB’s defense to Chase’s case was two-fold:  (1) Chase was not entitled to statutory notice because its status as a mortgagee was not of record and (2) LRB’s mailing of notice to BO-M complied with the relevant notice statutes. 

Notice statutes.  The Court first examined whether LRB complied with the tax sale notice statutes.  In connection with LRB’s proceedings for a tax deed, its title search found an unreleased mortgage for the subject real estate in favor of BO-M at an address in Merrillville.  By law, BO-M was entitled to notice of the sale.  But LRB’s notices sent to BO-M at that address were returned as undeliverable.  LRB’s title search also disclosed Chase’s interests in the real estate by virtue of a separate foreclosure suit it had filed.  LRB sent the tax sale notices to Chase’s counsel in the foreclosure action, and the notices were delivered and received by Chase’s counsel, who in turn communicated the notices to their client, Chase.  The Court basically held that this method of notice complied with the Indiana statutes.  Candidly, and respectfully, I do not fully understand the bases of the Court’s conclusion on this particular point because LRB did not, in my view, comply with the technical requirements of the notice statutes.  Neither BO-M (non-existent) nor Chase received any direct notice.  The real rationale behind the Court’s decision, in my opinion, follows.

Due process.  The Court next examined whether LRB complied with constitutional due process, and the opinion turned upon an interpretation of Sawmill, about which I wrote on 12/14/12.  Again, LRB sent tax sale notices to Chase through its counsel actively engaged in an existing foreclosure suit that dealt with the subject real estate.  The Court felt this was enough:  “LRB gave notice to Chase Bank’s counsel, counsel received the notice and passed it along to Chase Bank, and Chase Bank thereafter sat on its rights until after the tax deeds were issued.”  The Court went on to state that notice, in tax sale matters, is required by statute, not Indiana’s trial rules, meaning that service of process/summons rules are not applicable:

Such notice can be achieved by yard signs, newspaper notices, and notices on doors; certainly, notice through counsel representing Chase’s property rights on the property is sufficient.  More importantly, the issue is not Chase’s actual knowledge; rather, the issue is whether LRB gave notice under the circumstances of this case in a manner reasonably calculated to inform Chase of the pending loss of its interest in the two lots . . ..  Under the particularities and peculiarities of this case, LRB has done so.

This was a tough decision for the lender and seemingly a close call.  The compelling factor was that Chase, through its lawyers, received actual notice of the tax sale.  If, as a mortgagee or foreclosure counsel, you receive tax sale notices, you need to take action.  If you don’t, your mortgage could be extinguished.

Tax Sale Set Aside: Inadequate Notices To Property Owner

The Indiana Court of Appeals opinion in City of Elkhart v. SFS, LLC, 968 N.E.2d 812 (Ind. Ct. App. 2012) is a nice contrast to the Sawmill Creek case discussed in my prior post Tax Sale Bullet Strikes Property Owner.  In Sawmill Creek, the Indiana Supreme Court denied a property owner’s motion to set aside a tax sale.  In SFS, the Court of Appeals reached the opposite conclusion.  At issue is the nature and extent of the notice that must be given to a property owner before the owner loses title.  (For rules on notices to mortgagees, please click here for my prior post on that subject.)

Background.  SFS involved two tax sales regarding the same property.  The dispute was between the first tax sale purchaser and the second tax sale purchaser.  The first purchaser alleged that it did not receive notice of the second tax sale, which occurred before the first purchaser recorded its tax deed.  For the facts and circumstances surrounding the nature of the notice and its alleged deficiencies, please read the opinion. 

Fundamentals.  Importantly, Indiana law provides that title conveyed by a tax deed may be defeated if the three required notices were not issued in “substantial compliance” with the statutes.  One element that the Court really sliced and diced related to Ind. Code § 6-1.1-25-4.5 and the “ordinary means” requirement for notice.  SFS discussed the application of the notice requirements when there are alleged defects in the means used to provide notice. 

3 notices.  The SFS opinion succinctly outlined the three notices that must be given to property owners in connection with an Indiana tax sale:

1. First, the county auditor must provide notice of the tax sale per I.C. § 6-1.1-24-4.

2. Second, the party that purchases the property at the tax sale must send the notice of the right of redemption pursuant to I.C. § 6-1.1-25-4.5.

3. Third, the party that purchases the property at the tax sale must send the notice of filing of a petition for tax deed per I.C. § 6-1.1-25-4.6(a).

The first tax sale purchaser in SFS did not receive notice #2 from the second purchaser even though the first purchaser had recorded its tax deed from the first sale before the redemption period expired. 

Defective notice.  In SFS, an employee of the second tax sale purchaser had actual knowledge of the recorded tax deed for the first sale.  Accordingly, the second purchaser was on “inquiry notice” of the first purchaser’s correct address more than two months before the redemption period had expired and well before the issuance of the third notice.  The second purchaser disregarded such information and resorted to alternative measures to satisfy the statutory notice, which measures were deemed by the Court to be improper and ultimately unconstitutional:

It would not be ordinary but, rather, extraordinary to permit the [second purchaser] to obtain a tax deed after it had failed to send notice to the [first purchaser’s/the owner’s] address as it appears on the public records when it had the means of knowledge at hand two months before the redemption had expired.

As mentioned here before, I periodically write about tax sales for the simple reason that such sales terminate any mortgage liens on the property.  Best practices for secured lenders are to monitor tax payments and ensure tax sales do not occur without your knowledge.

Tax Sale Bullet Strikes Property Owner

This follows up my earlier post Property Owner May Dodge Tax Sale Bullet dealing with Marion County Auditor v. Sawmill Creek and tax sales, specifically the notice requirements surrounding petitions for tax deeds.  The Indiana Supreme Court, in an opinion filed on March 21, 2012, reversed the lower courts’ decisions and denied an owner’s motion to set aside a tax deed, which divested the owner of title to its property. Why does this blog address tax sales?  Tax sales wipe out mortgage liens. 

Constitutional law.  In Indiana, when an owner of real estate fails to pay real estate taxes, the real estate may be subject to sale in settlement of the delinquent taxes.  Such action by the government, however, conflicts with the rights of property owners.  The Sawmill opinion explains that the Constitution, specifically the Due Process Clause of the Fourteenth Amendment, dictates how the government may take property and sell it for unpaid taxes.  Generally, the law requires the government to provide the owner with notice and an opportunity for hearing “appropriate to the nature of the case.” 

Different test.  It was undisputed in Sawmill that the Auditor complied with the notice statutes in effect in Indiana at the time.  The owner’s position was that the notice scheme did not pass the standard set by the U.S. Supreme Court in Jones v. Flowers.  The Court of Appeals hung its hat on Jones.  The Indiana Supreme Court’s opinion rested instead on a different U.S. Supreme Court case, Mullane v. Cent. Hanover Bank, from 1950.  The Mullane test is slightly different than Jones and permits courts to look more broadly at all the circumstances.  The Indiana Supreme Court said: 

The Auditor was presented with a situation in which the Property was unimproved, bare land, and the owner could not be found.  The notices mailed to the address provided by [the owner] were returned with no information as to a new forwarding address.  And a search of the chain of title, the records of the Indiana Secretary of State, and the phonebook could not locate a new or alternative address.  In fact, the search returned no results, other than the Property, for [a differently-spelled owner].  [A title company] thus provided the Auditor with the known addresses for the previous owner of record.  Concluding that [the owner] may have existed in name only for the purpose of holding the Property for [the previous owner], the Auditor then sent notice to [the previous owner] as well as continuing the attempt to send notice to [the owner].

The owner’s position.  The owner did not quarrel with the facts, nor did it dispute that the Auditor followed Indiana’s statutory notice scheme in place at the time.  (The subject statutes have since been changed as it relates to various notice requirements.)  Instead, the owner contended:  “the only reasonable step was to post notice on the [subject property].” 

Negated.  While putting a sign on the real estate may seem sensible, the Indiana Supreme Court rejected the owner’s argument.  Under the circumstances in Sawmill, due process did not require the government to do more than it did.  There was evidence that notices for approximately 1,800 properties were returned as undeliverable to the Auditor in 2005 alone and that the notice posting argued for by the owner was cost-prohibitive.  The Court felt that the burden of posting notice on that many properties, particularly in a county as populated as Marion, was significant.  The Indiana Supreme Court therefore took a pragmatic approach (and issued a pro-government ruling).  In the end, the break given to the owner at the trial court and Court of Appeals levels was not given by the Indiana Supreme Court. 

Beware.  This is another in a series of posts crying out to lenders/mortgagees to be cognizant of the status of the real estate taxes on real estate collateral.  Best practices dictate policies and procedures for monitoring tax payments, assuming of course that real estate taxes are not escrowed.  Mortgagees can and do receive some pre-sale notice in Indiana, but not always.  Don’t rely solely on counties or mortgagors to keep you up to speed on such an important part of your business. 

Mortgagee Prevails In Claim For Indiana Tax Sale Surplus

What happens if a lender’s real estate collateral is sold at a tax sale, which nets a surplus (funds remaining over and above payment of the tax lien)?  Does the money go back to the owner, or can the lender/mortgagee recover it?  Beneficial Indiana v. Joy Properties, 942 N.E.2d 889 (Ind. Ct. App. 2011) helps answer these questions.

Course of events.  In 2003, lender made a mortgage loan to borrowers.  In 2008, following the failure by the borrowers to pay real estate taxes, the county held a tax sale that resulted in a $42,000 surplus.  No party redeemed within the one-year period, so the county issued a tax deed in November of 2009.  However, the tax sale purchaser did not immediately record it.  In December of 2009, lender filed a motion in the county trial court for the auditor to hold the surplus.  At the hearing on the motion, the lender established a default under the mortgage loan and losses of approximately $100,000.  Shortly after the hearing, borrowers, who did not participate in the hearing, deeded the real estate to a third party, which recorded the deed in January of 2010.  In February of 2010, lender filed a motion to compel the auditor to turn over the surplus, and then the the tax sale purchaser recorded its tax deed.

The problem.  Who should have received the $42,000 tax sale surplus - the lender or the third party (subsequent owner)?

Statute.  I.C. § 6-1.1-24-7 is the provision within Indiana’s tax sale statutory scheme that speaks to the surplus issue, and subsection (b) authorizes a claim by the:

 (1) owner of record of the real property at the time the tax deed is issued who is divested of ownership by the issuance of a tax deed; or
 (2) tax sale purchaser or purchaser’s assignee, upon redemption of the tract or item of real property.

Since there was no redemption, subsection (b)(2) did not apply.  Beneficial Indiana focused on subsection (b)(1), which seems to suggest that the borrowers would be entitled to the funds because they were the owners of record at the time the tax deed was issued.  Since they had conveyed their interests to a third party by the time the matter came before the trial court, the third party essentially stepped into their shoes and claimed subsection (b)(1) mandated the turnover of the surplus to it.

Statutory work around.  In Indiana, persons with “an interest in the real estate, including those who did not own the real estate at the time of the tax sale or who did not purchase the real estate at the tax sale, may assert a claim for a tax sale surplus directly with the trial court.”  The lender asserted that it was entitled to the surplus because its mortgage lien attached to the surplus.  Indiana law indeed provides that, even though the lender’s lien against the real estate was extinguished by the tax sale deed, its lien “attached to the tax sale surplus, and has priority over the interest conveyed to [the third party].”

More substantial interest.  The Court’s rationale rested upon the following test:  “which claimant has the more substantial interest in the real estate?”  The Court’s ruling in favor of the lender was, in my view, fair and sensible:

It is undisputed that [lender’s] mortgage was duly recorded on April 21, 2003.  It is further undisputed that the [borrowers] not only failed to pay their property taxes but also were in default on their mortgage, owing a balance that greatly exceeded the tax sale surplus held by the auditor.  Hence, [lender] had a substantial interest in the real estate prior to the issuance of the tax sale deed.  [Third party] acquired its interest in the real estate by a quitclaim deed executed by the [borrowers] after they had failed to make mortgage payments to [lender’s] for more than a year; and they had failed to redeem the real estate during the statutory one-year period following Allen County’s tax sale of real property due to the owners’ failure to pay real estate taxes.  Thus, at the time of the conveyance to [the third party] by the [borrowers], the interest conveyed was subject to the issuance of a tax deed to [the tax sale purchaser] and to [lender’s] recorded security interest.  In other words, the interest conveyed to [the third party] by the [borrowers] is significantly less substantial than and inferior to the interest of [lender].

Favorable to lenders.  As suggested here before on November 16, 2010 and most recently on March 19, 2012, delinquent real estate taxes and resulting tax sales can be a minefield for lenders in Indiana.  In Beneficial Indiana, the lender lost its loan collateral and incurred damages of about $100,000.00.  Luckily, the somewhat unique set of circumstances opened the door for the lender’s recovery of the surplus that mitigated its losses.

Property Owner May Dodge Tax Sale Bullet

This is my fourth post regarding Indiana tax sales, which is the method by which Indiana counties foreclose on real estate in order to collect delinquent real estate taxes. Once again, these issues are relevant to lenders because tax sales terminate mortgages. McCord Investments v. Sawmill Creek, 210 Ind. App. LEXIS 2250 (Ind. Ct. App. 2010) is another recent Indiana decision dealing with the tax sale notice requirements. (Also see my posts of November 16, 2010 [pre-sale notice] and December 30, 2011 [post-sale notice].) In McCord, the property owner received quite a break, in my opinion, but the case isn’t over. The Indiana Supreme Court has granted transfer and vacated the Court of Appeal’s decision. Once the Supreme Court issues its opinion, I’ll update this post.

Procedural history. In McCord, County appealed an order granting owner’s motion to set aside a tax deed. The opinion centered upon the adequacy of County’s attempts to provide notice of the sale. Even though the County followed Indiana’s statutory scheme at the time, the Court found the notice to be constitutionally inadequate.

Comedy of errors. The Court of Appeals recognized that:

this entire controversy could have been avoided had [the owner] shown even a modicum of responsibility himself. He could have made certain that the Lot was deeded to Sawmill Creek instead of “Saw Creek.” Had he properly ensured that his current address for the taxation of the Lot was on file with the Auditor, and if he had simply noticed that he had not been paying the taxes due on the Lot, all of the current controversy could have been avoided.

Nevertheless, the trial court and the Court of Appeals ruled in favor of the owner.

Indiana’s statutory tax sale scheme. The McCord case arose out of pre-2006 events, and Indiana’s tax sale statutes have been amended since then. The tax sale scheme in Indiana requires three notices to be sent to the property owner in connection with the sale. The first is a pre-sale notice. The second is the right of redemption notice. And the third is the notice of the petition for a tax deed. In McCord, “it appears to be undisputed that [County] complied with the applicable versions of the relevant statutes.”

Constitutional due process. Despite compliance with the statutory scheme, the Court turned to the United States Supreme Court’s opinion in Jones v. Flowers, which analyzed the notice requirements of a pending tax sale. Jones established the following notice sufficiency test: while actual notice is not required, notice must be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” In the wake of Jones, Indiana’s General Assembly amended the pre-sale notice statute to deal with notice attempts via certified mail when certified mail is not returned or signed. The new language in Ind. Code § 6-1.1-24-4 requires a duplicate notice to be sent by first class mail.

McCord, the particulars. The problem in McCord was that County was aware that the owner of the lot had not received any of the three required notices, all of which were sent via certified mail and returned as unclaimed. Again, the question was not what would have been best to ensure the owner did, in fact, receive notice. Instead, the issue was “what additional reasonable steps the County could have taken that were reasonably calculated under the circumstances to apprise interested parties of the pendency of the action after the initial attempts at notice were returned as unclaimed.” The Court concluded that the County could have resent the notice by first class mail – even though the statutes did not require it at the time. Had the County done that, it appears that the outcome of the litigation would have been different. It remains to be seen what the Indiana Supreme Court will do.

Lender claim? The question I’m left to ponder is whether a mortgagee would have standing to set aside a tax deed if there was evidence the mortgagor did not receive the appropriate notices. In other words, could a lender make an owner’s case so as to preserve title and, in turn, the mortgage lien? Lenders may not be able to avail themselves of the constitutional protections afforded to owners, which is to say that a lender may not catch the break the owner got in McCord.

NOTE:  The Indiana Supreme Court has reversed the Court of Appeals.  Click here for my post.

Indiana Tax Sale Notices To Mortgagees

This follows up my two posts from last year concerning pre-sale notices of Indiana tax sales, which counties hold to satisfy delinquent real estate taxes: (1) Mortgagees Beware: Only Owners Receive Notices of Tax Sale and (2) Indiana Tax Sales, Part II: Redemption. A recent Indiana Court of Appeals opinion – Wells Fargo Bank v. Allen County, 955 N.E.2d 849 (Ind. Ct. App. 2011) –addressed post-sale notice requirements, including where the notices must be sent. These matters are important to lenders/mortgagees because a tax sale can terminate a mortgage lien.

Pre-sale notices. The Court’s opinion teaches us that there are three statutory notices issued by the county. The first relates to the sale itself and was the subject of post (1) above. I.C. § 6-1.1-24-4(a) controls that notice requirement, and it is clear that the initial sale notice only goes to the property owner. In Badawi, the parties did not dispute that the county properly issued the § 24-4(a) notice.

Post-sale notices. Badawi focused upon the post-sale statutory notices required by I.C. § 6-1.1-25-4.5(d) and I.C. § 6-1.1-25-4.6(a), for the right of redemption and for the petition for tax deed, respectively. In addition to the owner, those two notices must be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest,” which includes a mortgagee. I.C. § 6-1.1-25-4.5(d)(2).

Where? In Badawi, the county sent the required post-sale notices to the mortgagee at its local business office and at the address identified on the recorded mortgage. The mortgagee failed to redeem. In an effort to avoid having its mortgage lien extinguished, the mortgagee objected to the county’s petition for issuance of a tax deed, contending that it should have received notice pursuant to the service of process requirements found in Indiana’s trial rules. (See, Service of Process Fundamentals for the Plaintiff Lender.) The mortgagee claimed that the notices should have been served upon an executive officer or a designated resident agent. The Court rejected the mortgagee’s argument:

The sending of tax sale notices is governed by statute, and the fact that the Indiana Supreme Court has set out a different procedure in the trial rules for service of process upon organizations is of no moment. Under both Indiana Code § 6-1.1-25-4.5(d) and § 6-1.1-25-4.6(a)(2), tax sale notices are required to be sent to “any person with a substantial property interest of public record at the address for the person included in the public record that indicates the interest.” Nowhere in the statute does it require compliance with Trial Rule 4.6 when sending tax sale notices.

Practical problem. Badawi is a fairly scary result for secured lenders holding mortgage liens in Indiana. Forbes contributor Peter Reilly noted as much in his November 28 piece. The county sent the notices, and it appears the mortgagee received them. But, from experience, I know that addresses identified in loan documents typically are not addresses of corporate legal departments or of resident agents, which in Indiana are persons or entities specifically designated to process important legal papers and help meet critical deadlines. Evidently, the notices in Badawi slipped through the cracks, and the lender’s mortgage lien was extinguished.

Fixes. My November 16, 2010 post cited to I.C. § 6-1.1-24-3(b), which provides a mechanism for mortgagees to receive pre-sale notices upon submission of written, annual requests to the county auditor. Perhaps every mortgagee doing business in Indiana should make it their New Year’s resolution to send these letter requests. The other solution is to set out, in the mortgage instrument, a contact address designed to deal with legal matters. Also, if you’re an assignee, ensure that you promptly record the mortgage assignment and identify your address on the assignment document. Whatever it takes, mortgagees should be vigilant about real estate tax reconnaissance.

FORBES/Reilly On Indiana Property Tax Collection, Part II

In follow-up to the article cited in my October 21st post, Mr. Reilly's cleverly-titled article Indiana Property Tax Collection - We Need Jimmy Stewart is worth a look.  (I was flatterred that he mentioned my blog in his piece.)  Whether you're an owner/mortgagor or a lender/mortgagee, make sure real estate taxes are paid timely, paid before any tax sale or, at the very latest, paid before the tax sale redemption period.  Otherwise, the consequences could be severe.    

FORBES Columnist Critical Of Indiana Tax Sale/Redemption Scheme

On October 19th, Forbes contributor Peter J. Reilly wrote a column about the potential hardships on Indiana property owners under the State's delinquent real estate tax redemption scheme.  He titled his piece How To Sell Your Home To A Stranger For A Fraction Of Its Value.  The September 28th Indiana Court of Appeals opinion in M Jewell, LLC v. Powell formed the basis of Mr. Reilly's column.  Here is his conclusion:   

I find that when I talk to a lot of people about different issues, many of them will reflexively indicate that either government or greedy business is the problem, depending on their ideological perspective.  Other times people will trumpet the virtues of public/private partnerships.  The collection of real estate taxes by auctioning off liens and tax deeds appears to have the potential of being a toxic mixture of the worst aspects of government and business. Clearly it helps local governments keep overhead down, which is a good thing, but at least in Indiana, it appears that there needs to be some greater protection for hapless homeowners.

Jewell is an interesting and educational case for mortgagees, mortgagors, tax sale purchasers and real estate lawyers.  For more background on the law and related issues regarding Indiana tax sales, and how they affect secured lenders, please review my two posts on the subject from last November. 

Indiana Tax Sales, Part II: Redemption

My November 16, 2010 post discussed how lenders can and should be proactive in monitoring their commercial real estate loan collateral for delinquent taxes and tax sale status.  Today’s post addresses what to do upon the “oh no!” moment when the lender learns, after the fact, that a tax sale occurred.  Assuming the lender wants to keep its collateral in tact, the lender should exercise the statutory option to redeem as quickly as possible. 

Time to redeem.  Buyers at Indiana tax sales acquire a super-priority lien on the property for the amount paid.  Ind. Code § 6-1.1-24-9.  Buyers do not immediately receive a deed.  They simply receive a certificate from the County Auditor.  The lien trumps any and all other liens, including a lender’s mortgage lien.  The lien converts to a deed (title/ownership) after a statutory redemption period.  Depending upon the nature of the property and whether the County or a third party was the purchaser, the period can be 120 days or up to a year.  Generally, improved commercial property can be redeemed, with a 10% penalty, for up to six months, or for up to a year with a 15% penalty.  (I recommend that mortgagees and their counsel study the applicable tax sale statutes, I.C. § 6-1.1-24 and 6-1.1-25, for any specific questions.  The statutes are intricate and can be challenging to interpret.  I could never address every issue or nuance in one or two blog posts.) 

Redemption amount.  The amount required for redemption is covered by I.C. § 6-1.1-25-2.  Property sold at a tax sale can be redeemed for:  the “minimum bid” (meaning the pre-sale delinquent taxes, interest, penalties and sale fees) + a 10% penalty based upon the “minimum bid” + 10% per annum interest on any surplus paid (any amount paid over the “minimum bid”).  The 10% penalty becomes a 15% penalty after six months.  Note there will be a per diem interest amount if there was a surplus payment, so you’ll need that number to ensure the redemption check is correct.  On the other hand, if there was no surplus (a/k/a overbid), then there will be no per diem.

Redemption payee.  Redemption checks must be made payable to the County Treasurer and should be certified funds.  Upon receipt of the redemption payment, the Treasurer will provide a payment receipt and another official-looking document, sometimes labeled a “Quietus,” that documents the tax sale redemption.

Marion County (Indianapolis) information/guidelines.  Marion County’s website, http:\\www.indy.gov, has the following information , written in "plain English," that help explain the statutory procedure with regard to tax sales in Indianapolis:   

• Treasurer’s introduction
• Information for current owners of property
• Information for purchasers of tax sale certificates

Again, Indiana statutes applicable to tax sales are clouded and complicated, and I understand that they have been subject to revision fairly regularly over the years.  Secured lenders are advised to consult with their Indiana foreclosure counsel in the event they learn that their real estate collateral was unexpectedly sold at a tax sale.  Even though there is a grace period to redeem, the clock begins ticking immediately.  Ultimately, the lien from the sale can and will result in the issuance of a tax deed (title/ownership), at which point any prior mortgage lien is terminated. 

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales

Typically, an owner of commercial real estate that has failed to make its mortgage payments to its lender also has failed to make its real estate tax payments to the county treasurer (assuming no escrow).  When the taxes become delinquent, the real estate can become eligible for a tax sale.  (The statutory scheme for Indiana tax sales is located at Ind. Code 6-1.1-24.)  Tax sales are not good, and I’ll expand on that point another day.  Today’s post provides a tip to mortgagees on how to learn about, and avoid, their real estate collateral from being sold out from under them. 

Super-priority.  Because a secured lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important for lenders/mortgagees to monitor the status of the real estate taxes on their loan collateral and take action (read:  advance the taxes), if warranted.  Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place. 

Owners only.  The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale.  See, I.C. 6-1.1-24-4.  This makes monitoring the status of the real estate tax situation challenging for lenders, particularly when dealing with uncooperative borrowers. 

Written request.  The Indiana Code does, however, provide a mechanism for mortgagees to receive certain notices.  I.C. 6-1.1-24-3(b) deals with notices of the sale:

At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice.

I.C. 6-1.1-24-1(d) similarly provides for the mailing of a list of properties eligible for sale: 

Not later than fifteen (15) days after the date of the county treasurer's certification under subsection (a), the county auditor shall mail by certified mail a copy of the list described in subsection (b) to each mortgagee who requests from the county auditor by certified mail a copy of the list.   

So, if the mortgagee, on an annual basis, sends the required letter to the county auditor requesting tax sale information, the mortgagee should automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself. 

No guarantee.  Please note that both sections 3(b) and 1(d) contain language stating that the auditor’s failure to provide the requested notice will not invalidate an otherwise valid sale.  

Cost/benefit analysis?  Whether the benefits of receiving the statutory notices exceed the costs (time and expense) of sending the annual letters is unknown to me.  The important point is that the option is available should mortgagees choose to utilize it.  Otherwise, lenders will need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is scheduled.  I welcome comments or emails from anyone who has had experiences with the statutory letter requests, particularly any comments on how effective they’ve been in monitoring for tax sales.