Most lenders who make real estate loans are well aware of the importance of obtaining a mortgage on any of the real estate that serves as collateral for the real estate loan. By properly recording a mortgage, the lender (mortgagee) has put the world on notice that it is asserting an interest in that real estate.
Most lenders also are aware that in the event that the owner does not pay the real estate property taxes, the real estate to which those taxes apply can be sold by the county at a tax sale for purposes of satisfying those taxes. Under the Indiana law, anyone who is asserting an interest in the real estate must be provided notice of that tax sale. However, under the Indiana statutes, the county auditor is not required to send a notice to a mortgagee UNLESS the mortgagee requests that notice be sent to it of all tax sales. Otherwise, the auditor is only required to notify the mortgagee of its “redemption rights” months after the tax sale has already occurred.
The Indiana Supreme Court has routinely upheld the constitutionality of the Indiana statutes. Certain banks have argued that the auditor should have to search the records of the county to find out who may be asserting an interest in any real estate that is going to tax sale. The Indiana Supreme Court has rejected that requirement, and has even noted that even requiring the auditor to do so may not accurately determine all of the parties that have an interest in the real estate. In its most recent case on the issue, the Supreme Court referred to an earlier decision from the Supreme Indiana Court in a case in which Hopper Blackwell was involved and argued concerning a common mortgage practice that can lead to substantial confusion as to which lenders may have an interest in real estate.
In addition to perhaps not receiving notice prior to a tax sale, mortgagees should also be aware that their redemption rights may not be for as long as they believed. Specifically, most lenders generally operate under the assumption that they will have one year to redeem property following a tax sale, which means that the lender can pay the tax sale buyer the amount of the taxes plus 10-15% and in that way keep the tax sale purchaser from obtaining title to the property and stripping the mortgage from the property. If the mortgagee does not redeem the property, the tax sale buyer can then complete the process and obtain title to the real estate free and clear of all encumbrances, including the mortgage. As a result, the lender loses its collateral securing the real estate loan.
In certain circumstances, the redemption period may be far less than one year. Specifically, a redemption period can be as short as 120 days after the date of a “tax sale”, when that tax sale involves a sale of a “tax sale certificate”. A certificate sale occurs when the minimum bid (which is the amount of taxes due) is not received at the normal tax sale. At that point the county can issue a certificate and then sell that certificate for whatever price it desires. The redemption period is then 120 days after the date of the certificate sale, or 120 days after {00064046.DOC} the day of the original tax sale if the certificate is not sold.
After a certificate is issued, the mortgagee must be provided notice not later than 90 days after the issuance of that certificate, or not later than 90 days after that certificate is sold. Because of the 120 day deadline, it could therefore be as little as 30 days before the mortgagee must redeem in order to preserve its mortgage.
The practice pointer here is that a mortgagee should request, on an annual basis, that notice be sent to it from each of the Indiana county auditors in which the lender has recorded mortgages against real estate collateral securing its loans. Of note is the fact that it is as yet undecided what happens in the event that a lender requests that notice, and the auditor fails to provide notice before the tax sale occurs. Because that issue has not yet specifically been addressed by the court, it is unknown what the ultimate result would be. The Supreme Court has hinted that under those circumstances the tax sale may in fact be considered void for failure to follow the statutory requirements. Regardless, the lender should request that notice from the county auditors so that the lender can make an informed decision about what it wants to do before any tax sale occurs. This will also help the lender in realizing, if it does not already, that its real estate loan and borrower may be in trouble financially and the lender is therefore in a position to begin analyzing its remedies and strategies for addressing that troubled loan.
As with all situations, these types of matters are always very fact sensitive and therefore each situation is different. However, those holding a mortgage should be aware that their rights can be greatly affected, and possibly eliminated, if the holder does not follow the Indiana statutory requirements.
