In one case in particular, a father was in possession of real estate that arguably had been conveyed to his son.  However, the father had disputed the title and had filed a quiet title action to determine actual ownership.  The father at all times remained in possession of the ground.  However, the failed to file in the public record a lis pendens notice.  This is a notice that alerts all other parties that there is a dispute relative to real estate title and cautions them that any action that they take with the real estate will be subject to that dispute.

The son borrowed money against the property.  The lender did a title search and did not see any evidence of the quiet title action.  However, the lender also did not inspect the property which the court indicates would have revealed that the father was in possession.

The son subsequently went bankrupt.  However, when the lender went to foreclose on the real estate, the father defended on the basis of its prior ownership claim.  The court ultimately found in favor of the father and that his ownership claim was superior to the son’s.  Then the court went on to invalidate the mortgage to the lender because the lender failed to make the inspection of the property.

Most lenders do not undertake an inspection of the property to ascertain whether they are parties in possession.  As this and other cases have illustrated this year, the failure to make this inspection and determine what parties might be in possession exposes the bank to risk and that its mortgage will be behind the prior rights of other parties.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

In a recent case, subdivision improvements were constructed.  However, there were two important factors that impacted the analysis.  First, no houses whatsoever had been built in the subdivision.  Therefore, the court found that the exceptions for houses and improvements auxiliary to houses could not apply.  Second, the utilities that had been constructed had not yet been accepted by the relevant public utilities.  Since ownership of utilities does not transfer until the time of acceptance, the third exception did not apply.

Thus, in this case, the mechanic’s lienholders were junior to the debt of the construction lender.  Given the depressed real estate values, it is doubtful that the mechanic’s lienholders received any payment because of a lack of equity to support their lien position.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

When the parties had a falling out, the employee attempted to defend the mortgage foreclosure based on the verbal promise to release.  The Court of Appeals held that a mortgage release is a document effecting title to real estate which must, as a matter of law, be done in writing and signed by the party against whom enforcement is sought.  In this case, since the employer did not reduce the release to writing and did not sign the document, the verbal release is not enforceable.

The processing of lien releases seems like a small matter but has a big impact on title issues.  Loans that are paid in full but not released wind up being a problem years down the road when there is no one left to know whether or not a release can be signed.  As the owner of property, it is advisable to make sure that lenders who agree to release (either because they had been paid in full or otherwise) actually do sign the appropriate paperwork and record it in a timely manner.  Failure to do so on a timely basis can cause serious problems for the owner down the road which may be very expensive and time consuming to correct.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

Indiana law provides that if a commercial mortgage grants the creditor the right to have a receiver appointed, the court must do so upon request of the lender.  However, there is not a tremendous amount of guidance as to what the receiver can do with the property other than collect rents and generally try to protect it during the pendency of the case. 

Receivership law applies not only to foreclosures but also to other situations where receivers may be appointed.  Under some of the language of the statute, it appears that the receiver has the right to sell property.  However, the Indiana Court of Appeals recently clarified that receivers in foreclosure actions do not have the authority to sell property absent the consent of the owner. 

As lenders struggle to find more effective ways to dispose of properties than traditional sheriff’s sales, many have tried to craft remedies where a receiver could market and sell property for (hopefully) a higher amount than could be received at a sheriff’s sale.  However, this recent ruling by the Court of Appeals makes it abundantly clear that this is not a right that receivers have absent concurrence from the owner.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

In one case in particular, a father was in possession of real estate that arguably had been conveyed to his son.  However, the father had disputed the title and had filed a quiet title action to determine actual ownership.  The father at all times remained in possession of the ground.  However, the failed to file in the public record a lis pendens notice.  This is a notice that alerts all other parties that there is a dispute relative to real estate title and cautions them that any action that they take with the real estate will be subject to that dispute. 

The son borrowed money against the property.  The lender did a title search and did not see any evidence of the quiet title action.  However, the lender also did not inspect the property which the court indicates would have revealed that the father was in possession.

The son subsequently went bankrupt.  However, when the lender went to foreclose on the real estate, the father defended on the basis of its prior ownership claim.  The court ultimately found in favor of the father and that his ownership claim was superior to the son’s.  Then the court went on to invalidate the mortgage to the lender because the lender failed to make the inspection of the property.

Most lenders do not undertake an inspection of the property to ascertain whether they are parties in possession.  As this and other cases have illustrated this year, the failure to make this inspection and determine what parties might be in possession exposes the bank to risk and that its mortgage will be behind the prior rights of other parties.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

In a recent case, subdivision improvements were constructed.  However, there were two important factors that impacted the analysis.  First, no houses whatsoever had been built in the subdivision.  Therefore, the court found that the exceptions for houses and improvements auxiliary to houses could not apply.  Second, the utilities that had been constructed had not yet been accepted by the relevant public utilities.  Since ownership of utilities does not transfer until the time of acceptance, the third exception did not apply. 

Thus, in this case, the mechanic’s lienholders were junior to the debt of the construction lender.  Given the depressed real estate values, it is doubtful that the mechanic’s lienholders received any payment because of a lack of equity to support their lien position. 

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

What do you get with a Negative Pledge?  A negative pledge is not a pledge of assets and does not give a lender any rights in the assets being “negatively pledged.”

A lender should keep in mind that a negative pledge is only a contractual obligation of the party signing the negative pledge.  Therefore, third parties who may place a lien on the assets are not bound by the agreement.  In most circumstances the lender would have no cause of action against a third party who places a lien on the assets which have been “negatively pledged.”

It is possible that a lender could have a claim under the legal theory known as “tortious interference” against the third party who places a lien on negatively pledged assets.  For a lender to have a possibility of being successful on such a claim, a third party would need to have actual notice of the negative pledge.  This is why it is recommended that a negative pledge on real estate be recorded in the real estate records of the county in which the subject real estate is located.  Though the recording of the negative pledge does not provide actual notice to a third party, it provides the possibility that a third party will find the negative pledge in a title search.  Negative pledges may be useful to lenders in controlling actions of borrowers.  However, they should not be overvalued by lenders by considering them to be any type of lien on assets or a guarantee of a claim against any third party that violates the negative pledge.

Author: Lori Young (bio)
Phone: 812.452.3560
email: lyoung@bamberger.com