In the

United States Court of Appeals

For the Seventh Circuit

No. 01-3384

United States of America,

Plaintiff-Appellee,

v.

William E. Tully, et al.,

Defendants,

Appeal of:

Travis V. Pherson, et al.,

Claimants.

Appeal from the United States District Court 

for the Northern District of Indiana, Hammond Division.

No. 95 CR 116--James T. Moody, Judge. 

Argued February 20, 2002--Decided April 30, 2002

 Before Bauer, Ripple, and Manion, Circuit

Judges.

 Manion, Circuit Judge. Donald L.

Vauters, Jr., was indicted for several

counts of mail fraud, securities

violations, and money laundering. In a

plea agreement with the government, he

acknowledged his involvement in a

conspiracy to commit mail fraud in

violation of 18 U.S.C. sec. 371, and

agreed that proceeds from the sale of

certain real estate, titled in his wife’s

name but under his direct control, would

be used to pay restitution to his

victims. When the government filed a

motion to disburse the proceeds from the

sale of the property to the restitution

victims, various individual claimants

objected. The district court overruled

the claimants’ objections, and granted

the government’s motion to disburse. The

claimants appeal the district court’s

decision. We affirm.

I.

 Between September 12, 1994 and March 6,

1995, Travis Van Matre Pherson, Bedelia
Weirick, Raymond Weirick (through his

widow, Bedelia Weirick), Virginia Siscoe,

Beryl Siscoe, Donald and Marjorie

Phillips, and Illene Burton ("claimants")

collectively invested $157,000 with

Mallard Marketing, Inc. In return for

their investments, Mallard’s president,

Donald L. Vauters, Jr., executed and

delivered promissory notes to the

claimants that referenced the

construction of a private residence and

promised to pay them back the principal

amount of their loans, with interest at

the rate of 10% per annum, by certain due

dates. The promissory notes provided that

if they were not paid in full by their

respective due dates, Mallard, the maker,

would execute and record mortgage liens

in favor of the claimants, as note

holders, on property commonly known as

4418 East 50 North, Lafayette, Indiana,

and more particularly described as: "Part

of lot 32 and lot 33 in Wildcat Valley

Estates Subdivision, Phase One, Fairfield

Township, as recorded in Document No. 94-

20581, in the Tippecanoe County

Recorder’s Office, Tippecanoe County,

Indiana" ("Lot 32/33").

 Unfortunately for the claimants, Mallard

never owned Lot 32/33. Baumco, Inc. or

Connie I. Vauters/1 was the title

holder of record for the real estate

during the time period the claimants

invested their money with Mallard. The

deed to Lot 32/33 was conveyed to Connie

Vauters, in her personal capacity, by

Baumco, Inc. on or about October 20,

1994, and was recorded in the Tippecanoe

County Recorder’s Office on October 24,

1994. Shortly thereafter, Mallard

constructed a two-story private residence

on Lot 32/33 with the money it received

from the claimants and additional funds

that Connie Vauters obtained by issuing a

mortgage on the property in favor of Sure

Foundation, Inc. Mallard subsequently

defaulted on each of the claimants’

promissory notes, none of which was ever

secured by a mortgage on Lot 32/33.

 On December 12, 1995, a criminal

indictment was returned against Donald

Vauters, among others, charging him with

numerous counts of mail fraud, securities

violations, and money laundering. That

same day, the district court issued a

protective order prohibiting the

disposition of Lot 32/33, in which Donald

Vauters had an interest. Lot 32/33 was
thereafter sold for $251,500 pursuant to

an Order of Sale and Stipulated Motion

for Sale ("Order of Sale") approved by

the district court on July 25, 1996./2

On or about August 9, 1996, the net

proceeds from the sale of Lot 32/33,

$229,349.29, were deposited into an

interest-bearing account with the

district court pursuant to Fed. R. Civ.

P. 67./3

 On April 21, 1998, Donald Vauters

pleaded guilty to conspiracy to commit

mail fraud, and in doing so acknowledged

that he was the true owner of Lot 32/33,

even though his wife was publicly listed

as the record title holder for the

property. As part of his plea agreement,

Vauters agreed that the proceeds from the

sale of Lot 32/33 would be used to pay

restitution to the numerous victims of

his criminal misconduct. On February 10,

1999, Vauters was sentenced by the

district court. His sentence provided,

among other things, that he pay

restitution to his victims in the amount

of $5,701,735.92.

 On October 29, 1999, the United States

filed a motion seeking an order

authorizing the clerk of court to

disburse the proceeds from the sale of

Lot 32/33 to the named restitution

victims. In that motion, the government

noted that "there are individuals [i.e.,

the claimants] who are not restitution

victims who may claim some right,

interest or title to the proceeds of the

sale of [Lot 32/33] . . . ." A copy of

the motion was mailed to each of the

claimants that same day.

 On or about February 14, 2000, the

claimants filed "Notices of Claims" in

response to the government’s motion to

disburse funds, objecting to the

disbursement of the proceeds from the

sale of Lot 32/33 to the restitution

victims. The claimants argued that

because the private residence on Lot

32/33 was primarily constructed with the

money they invested with Mallard, they

had equitable liens on the property that

now covered the sale proceeds. The

claimants further contended that their

respective interests were superior to

those of any other "claimants and parties

of interest." The basis of the claimants’

objections to the government’s motion to

disburse funds, both here and at trial,
is that Mallard’s promises to execute

mortgage liens on their behalf, in return

for the money they loaned the

corporation, created equitable liens on

Lot 32/33 that now cover the proceeds

obtained from the forced sale of the

property. The government argues that the

claimants did not have equitable liens on

Lot 32/33 at the time the property was

sold. Furthermore, the government

contends that even if such liens existed,

they would nevertheless be inferior to

the statutory lien the United States has

on the sale proceeds, pursuant to 18

U.S.C. sec. 3613(c),/4 as a result of

the district court’s restitution order.

The district court agreed with the

government’s position, and granted its

motion to disburse funds. The claimants

filed a timely appeal to the district

court’s decision.

II.

 The facts of this case are undisputed.

The questions before us are whether,

under Indiana law, the claimants

possessed equitable liens on Lot 32/33 at

the time the property was sold, and, if

so, whether those liens have priority

over the government’s sec. 3613(c) lien

with respect to the proceeds from the

sale of the property. We review these

issues de novo. See, e.g., Appeal of

Swartz, 18 F.3d 413, 415-16 (7th Cir.

1994).

 Because the real estate at issue is

located in Indiana, Indiana law is

controlling on the question of whether

the claimants have equitable liens on the

proceeds from the forced sale of Lot

32/33. See, e.g., United States v. Craft,

No. 00-1831, ___ U.S. ___, 2002 WL

561332, *3 (April 17, 2002) ("[a] common

idiom describes property as a ’bundle of

sticks’--a collection of individual

rights which, in certain combinations,

constitute property. State law determines

only which sticks are in a person’s

bundle. . . .") (internal citations

omitted). Under Indiana law, an equitable

lien on real property is created when a

property owner creates a written

agreement that sufficiently indicates an

intention to make his property, as

described in the agreement, a security

for a debt or other obligation. See,

e.g., Gretzinger v. Arehart, 193 N.E.

714, 716 (Ind. App. 1935). As with liens

at law, "where the existence of an
equitable lien depends on construction of

a written contract based on valuable

consideration, a lien may be declared

where the intent to secure an obligation

with the subject property is clear on the

face of the agreement." Noblesville

Redevelopment Comm’n v. Noblesville

Associates Ltd. P’ship, 674 N.E.2d 558,

562 (Ind. 1996). The intent to create a

lien "must be objectively clear [or] . .

. no lien exists at law or equity." Id.

 We need not, however, engage in the

exercise of determining whether the

claimants’ promissory notes provide a

basis for placing equitable liens on Lot

32/33 because Mallard, the maker of the

promissory notes, was never the record

title holder for the property. When

Donald Vauters, as president of Mallard,

executed each of the claimants’

promissory notes, either Baumco, Inc. or

Connie Vauters was the record title

holder for Lot 32/33. Obviously, "a

grantor cannot convey that which he does

not own." Downing v. Eubanks, 557 N.E.2d

1027, 1029 (Ind. Ct. App. 1990).

Therefore, notwithstanding its "promises"

to the claimants, Mallard had no

authority to record mortgage liens on Lot

32/33 when the corporation defaulted on

their promissory notes. The claimants,

therefore, have no legal basis for

claiming entitlement to equitable liens

on the property./5

 After his fraud was exposed, Vauters

pleaded guilty to being involved in a

conspiracy to commit mail fraud and

confessed that he was "the true owner of

[Lot 32/33], and that any other names

appearing as owners or joint owners

[were] only nominees." While it is true

that under Indiana law his statement

could serve as a basis for piercing the

corporate veil of Mallard, see Comm’r,

Dept. of Envtl. Mgmt. v. RLG, Inc., 755

N.E.2d 556, 563 (Ind. 2001), this belated

admission is of little assistance to the

claimants in this criminal proceeding. 

 The claimants’ Notices of Claims

requested that "their interests [i.e.,

alleged equitable liens] in this cause be

protected by the [district court]."

However, at the time they filed this

collective notice no such "interests" had

yet been established. Thus, while the

claimants might have, at one time,

possessed the ability to obtain equitable
liens on Lot 32/33 by filing civil

actions against Mallard and the Vauters,

they failed to do so. There is a

significant distinction between having

the right to seek an equitable lien on

real estate, and actually obtaining such

a lien. See Lakeshore Bank & Trust Co. v.

United Farm Bureau Mut. Ins. Co., Inc.,

474 N.E.2d 1024, 1027 (Ind. Ct. App.

1985) (holding that "by commencement of

the proceedings and service of the

summons the creditor acquires an

equitable lien on the credit or funds due

to the debtor."). In any event, this

criminal proceeding was not the proper

forum for the claimants to have their

claims of entitlement to equitable liens

considered. The purpose of the district

court’s hearing on the government’s

motion to disburse funds was to determine

whether the claimants’ current interests

in the proceeds from the sale of Lot

32/33 were superior to the interest the

government possessed as a result of its

statutory lien. See LTV Corp. v. Gulf

States Steel, Inc. of Ala., 969 F.2d

1050, 1063 (D.C. Cir. 1992) (holding that

the Rule 67 procedure "’provides a place

of safekeeping for disputed funds pending

the resolution of a legal dispute, but it

cannot be used as a means of altering the

contractual relationships and legal

duties [or rights] of the parties.’")

(citations omitted). The district court

correctly concluded that the claimants’

promissory notes only provided them with

unsecured interests in the property’s

sale proceeds.

 While we sympathize with the claimants,

their financial losses were certainly

preventable. Rather than simply accepting

promises from Mallard that it would

execute mortgages on Lot 32/33 in the

event the corporation defaulted on their

promissory notes, the claimants should

have insisted from the outset that the

corporation secure their loans with

mortgages on the property. Had they done

so, Vauters’ scheme would have most

likely been foiled. Donald Vauters was no

doubt aware that Mallard was not the

record title holder for Lot 32/33, and

that a title search would reveal this

fact to the claimants. It is, therefore,

quite unlikely that Vauters would have

succeeded in defrauding the claimants had

they been reasonably diligent in

protecting their respective investments.

Under Indiana law, a litigant may be
precluded from equitable relief if the

harm he suffers could have been prevented

by reasonable diligence on his part. See,

e.g., Mackiewicz v. Metzger, 750 N.E.2d

812, 821 (Ind. Ct. App. 2001); Wilshire

Servicing Corp. v. Timber Ridge P’ship,

743 N.E.2d 1173, 1178-80 (Ind. Ct. App.

2001); Lakeshore Bank, 474 N.E.2d at

1026.

 In fact, the very purpose of Indiana’s

recording statute is to "provide

protection to subsequent purchasers,

lessees, and mortgagees." Keybank Nat’l

Ass’n v. NBD Bank, 699 N.E.2d 322, 327

(Ind. Ct. App. 1998). Because the

identity of a property’s title holder of

record is a matter of public record,

Indiana law charges the claimants with

"constructive" notice that either Baumco,

Inc. or Connie Vauters was the title

holder of record for Lot 32/33 at the

time they invested their money with

Mallard. See id. (holding that

"[c]onstructive notice is provided when a

deed or mortgage is properly acknowledged

and placed on the record as required by

statute.").

 As previously noted, there is nothing in

the record indicating that the claimants

ever took any legal action to enforce

their rights under the respective

promissory notes. The due dates on the

promissory notes range from June 25, 1995

through December 5, 1995, and the courtordered sale of Lot 32/33 occurred on

July 25, 1996. More importantly, while

Donald Vauters was indicted on December

12, 1995, it was not until April 21,

1998, that the district court entered the

restitution order directing that the

proceeds from the sale of Lot 32/33 be

divided among all of Vauters’ victims. As

such, the claimants had ample time,

between the dates of Mallard’s defaults

and the date of the restitution order, to

file civil actions and have their

respective interests in Lot 32/33

considered and ruled upon by a court. It

is a well- known maxim of equity that

"equity aids the vigilant, not those who

sleep on their rights." Wagner v. Estate

of Fox, 717 N.E.2d 195, 201 (Ind. Ct.

App. 1999). Indiana courts have also held

that "[a] party will be relieved against

his own mistake or carelessness where no

rights of third persons have intervened,

but not where rights have been lost, or

money parted with, on the faith of the
apparent facts, without fault of any body

except the party seeking relief." Gray v.

Robinson, 90 Ind. 527, 533 (1883)

(emphasis added). The claimants’ failure

to obtain, prior to this proceeding,

judicial determinations granting them

equitable liens on Lot 32/33 leaves them

with nothing more than unsecured

interests in the property’s sale

proceeds. The government’s statutory lien

on the sale proceeds obviously takes

priority over such unsecured interests.

See 18 U.S.C. sec. 3613.

III.

 The claimants do not have equitable

liens on the proceeds from the sale of

Lot 32/33. As such, the district court

properly granted the government’s motion

to disburse funds. We, therefore, AFFIRM

the decision of the district court.

FOOTNOTES

/1 Connie Vauters was the incorporator, registered

agent, and secretary of Mallard, as well as

Donald Vauters’ wife.

/2 The Stipulated Motion for Sale provided that "[a]

contract for sale and purchase of [Lot 32/33] has

been entered into by Connie Vauters, the seller,

and a buyer . . . [and] Connie Vauters has

requested that this property be sold and is in

full agreement with the terms of the sale as

stated in this motion."

/3 Fed. R. Civ. P. 67 provides, in part, that "[i]n

an action in which any part of the relief sought

is a judgment for a sum of money or the disposition of a sum of money or the disposition of any

other thing capable of delivery, a party, upon

notice to every other party, and by leave of

court, may deposit with the court all or any part

of such sum or thing, whether or not that party

claims all or any part of the sum or thing."

/4 18 U.S.C. sec. 3613(c) provides that "[a] fine

imposed pursuant to the provisions of subchapter

C of chapter 227 of this title, or an order of

restitution made pursuant to sections 2248, 2259,

2264, 2327, 3663, 3663A, or 3664 of this title,

is a lien in favor of the United States on all

property and rights to property of the person

fined as if the liability of the person fined

were a liability for a tax assessed under the

Internal Revenue Code of 1986. The lien arises on

the entry of judgment and continues for 20 years

or until the liability is satisfied, remitted,

set aside, or is terminated under subsection
(b)."

/5 The district court came to this same conclusion,

noting "because Mallard Marketing, Inc. never

owned the property in question, Mallard’s promise

to encumber the property is without effect."