Indiana Commercial Foreclosure Law

Indiana Foreclosure Sale Terminates The Right Of Redemption

Recently, an out-of-state client asked whether the defendant borrower, in an Indiana commercial foreclosure case we're handling, will have the right to redeem the mortgage after the sheriff's sale.  The client was pleased to learn that, even though some states may permit redemption post-sale, Indiana is not one of them. 

Indiana redemption rights.  Indiana does provide a pre-sale right of redemption.  Please see my February 1, 2008 post for details.

Mortgages.  Ind. Code 32-29-7-13 states:  "There may not be a redemption from the foreclosure of a mortgage executed after June 30, 1931, on real estate except as provided in this chapter."  Thus the general statutory rule is that there is no right of redemption.  (My 2-1-08 post addresses the "before the sale" statutory exception, Ind. Code 32-29-7-7.)  Well-settled Indiana case law provides that "a foreclosure sale cuts off a mortgagor's rights of redemption."  Patterson v. Grace, 661 N.E.2d 580, 585 (Ind. Ct. App. 1996); Overmyer v. Meeker, 661 N.E.2d 1271, 1275 (Ind. Ct. App. 1996); Vanjani v. Federal Land Bank of Louisville, 451 N.E.2d 667, 672, n.1 (Ind. Ct. App. 1983).

UCC Security Interests.  Similarly, Indiana's UCC, at Ind. Code 26-1-9.1-623, also covered in my prior post, calls for redemption rights to be terminated upon disposition of the collateral.  The "Official Comment" to the section states that "the debtor or another secured party may redeem collateral as long as the secured party has not collected, disposed of or contracted for the disposition of, or accepted the collateral."  The "Indiana Comment" states that Section 623 "recognizes the right of the debtor and other secured parties to redeem any time after default before disposal of the collateral or rescission under Section 502(2), unless otherwise agreed in writing after default."

When the fat lady sings.  Lenders enforcing mortgage liens or security interests in Indiana can rest assured that, once there is a sheriff's sale or a disposition of personal property collateral, the borrower's/debtor's right of redemption is terminated.  The borrower/debtor no longer owns the property, and no longer has any rights in or to the property.  If warranted, deficiency collection, among other things, can commence.

Indiana Mortgage Foreclosure Sales: Buyers Beware

Do junior lenders/mortgagees need to disclose, in the statutory notice of sheriff’s sale, that the real estate is being sold subject to a senior mortgage?  On April 22, 2008, the Indiana Court of Appeals in Indi Investments v. Credit Union 1, 2008 Ind. App. LEXIS 793 (Ind. Ct. App. 2008) said no (Indi.pdf).  Indiana law generally places the onus on buyers at sheriff’s sales to bid with their eyes wide open. 

Those involved.  Indi Investments, LLC purchased the property at a sheriff’s sale following a mortgage foreclosure action brought by Credit Union 1, which held a second mortgage.  Waterfield Mortgage held the first mortgage on the property but did not foreclose.

Procedural background.  Indi filed suit to foreclose its second mortgage and ultimately obtained a judgment, which ordered a sheriff’s sale of the property subject to Waterfield’s first mortgage.  Indi purchased the property and obtained a sheriff’s deed that Indi recorded on August 18, 2006.  Despite the fact that the sheriff’s deed contained language indicating the property had been acquired subject to Westfield’s mortgage, it was not until June, 2007 that Indi filed a petition to set aside the sheriff’s sale.  Indi generally claimed it didn’t know about Waterfield’s mortgage and wanted to unwind the sale.  The trial court and the Court of Appeals refused to set aside the sale, however. 

Ignorance is not bliss.  Indi asserted a number of arguments, all of which centered on its claim that it lacked knowledge of the Waterfield mortgage when it purchased the property.  Indiana requires the publication of a notice of sale in advance of sheriff’s sales.  In this case, the notice did not mention Waterfield or its senior mortgage.  At the sale itself, nothing was disclosed with regard to the Waterfield mortgage.  Although the language in the sheriff’s deed identified the Waterfield mortgage, Indi claimed that it “was not immediately aware of the content of the Sheriff’s Deed or the legal impact of the statement.”  The Waterfield mortgage, however, had been properly recorded and was in title.  What's more, the trial court’s judgment stated that the property was to be sold subject to Waterfield’s interests.  In other words, there were at least two places for Indi to have discovered, pre-sale, that Waterfield held a mortgage on the property:  the county recorder’s office and the trial court.

Technical arguments rejected.  Should Credit Union 1 have disclosed in the notice of sale that the property was being sold subject to the Waterfield mortgage?  No.  Ind. Code § 32-29-7-3 governs notices of mortgage foreclosure sales and does not require the notice to contain information concerning senior mortgages.  Did the judgment mandate that information related to Waterfield’s mortgage be included in the notice?  No.  The judgment only required the property to be sold subject to the mortgage and did not require any such language in the notice of sale.  Should the sale have been set aside because Indi was unaware of the Waterfield mortgage?  Not in this case.  Generally, there is no warranty in judicial sales in Indiana.  The doctrine of caveat emptor (buyer beware) applies “with all its force” to sales made by virtue of an execution.

Indi not a bona fide purchaser.  Indiana has an exception to the caveat emptor rule, however.  Indiana cases have held that buyers in good faith and without notice are protected as bona fide purchasers for valuable consideration against prior equities and unrecorded deeds.  Indiana defines a “bona fide purchaser” as “one who is given value and acted in good faith without actual or constructive notice.”  Constructive notice is provided when a mortgage is properly acknowledged and placed in the record as required by statute.  Actual notice is when notice has been directly and personally given to the person to be notified, and actual notice may be implied or inferred “from the fact that the person charged had means of obtaining knowledge which he did not use.”  The Court of Appeals concluded that Indi had the means of obtaining information regarding the Waterfield mortgage.  First, it could have performed a title search.  Second, it could have reviewed the trial court’s file.  Indi evidently did neither.  As such, “Indi Investments is charged with actual notice of the Waterfield mortgage and, consequently, is not a bona fide purchaser.” 

Lender protected.  While it may not be feasible or cost effective for a third party to order a title insurance policy commitment before bidding at a sheriff’s sale, a title search would have informed Indi of the Waterfield mortgage.  An easier and cheaper method for Indi to protect itself would have been to visit the court and review the judgment.  By doing neither, Indi assumed the risk of acquiring the property subject to any liens that were not wiped out in the foreclosure action.  Junior mortgagees that struggle with the decision of whether to publicize, in the notice of sheriff’s sale, that the property is being sold subject to a senior mortgage can take comfort in the Indi decision.  The Court of Appeals, based largely upon I.C. § 32-29-7-3, confirms that such notice need not be given.  Lenders generally are protected by the procedures applicable to this scenario.  Sheriff’s sale buyers are not.

S&P: Defaults In U.S. To Accelerate Through 2008

Click here for a news piece from monitordaily.com.  "The pace of corporate defaults in the first quarter of 2008 equaled the total for all of 2007, according to a new report from Standard & Poor's...."

Seventh Circuit: Indiana Writs of Assistance Do Not Need To Be Executed In A Commercially-Reasonable Manner

This supplements my March 2, 2007 post:  The execution of a writ of assistance need not be "commercially reasonable."  Please click here for that post, which in part dealt with the federal district court's February 16, 2007 conclusion that Indiana Trial Rule 70(A) writs of assistance should be executed by the county sheriff immediately and without regard to commercially-reasonable standards.  The Seventh Circuit agreed with the opinion of Judge Tinder (who is, incidentally, now a Seventh Circuit Judge).

Affirmed.  At issue was the timing of an eviction of a property owner after after an execution sale of the real estate.  The owner, Mr. Dempsey, cried foul because JP Morgan Chase refused to delay the eviction to allow Mr. Dempsey to attend a funeral.  Here's what the Seventh Circuit said regarding the appeal of that issue: 

We likewise agree with the district court that there is no merit to Dempsey’s claim that the writ of assistance was executed unfairly because Chase refused to delay the eviction to allow Dempsey to attend a funeral. Dempsey has provided no support whatsoever for his contention that the writ must be executed in a commercially reasonable manner. “A writ of assistance is an equitable remedy used to transfer real property, the title of which has been previously adjudicated, as a means of enforcing the court’s own decree” where the party that the writ is issued against has refused to obey that decree—like Dempsey did here. See TeWalt v. TeWalt, 421 N.E.2d 415, 418 (Ind. Ct. App. 1981); see also IND. R. TRIAL P. 70(A). Thus, it is not surprising that the sheriff has the “right and duty” to execute the writ immediately upon receiving it. 7 C.J.S. Writ of Assistance § 14. As the district court noted, “Dempsey could have avoided his trouble by moving out voluntarily and promptly when Chase obtained title to the property as opposed to forcing Chase to utilize the sheriff’s department to enforce the court’s decision.”

For a .pdf of the entire March 31, 2008 decision in Dempsey v. JP Morgan Chase, 2008 U.S. App. LEXIS 7707 (7th Cir. 2008) click here.pdf.

Tool for creditors.  Again, if you acquired title to real estate at a sheriff's sale and if the owner will not vacate voluntarily, your remedy is a writ of assistance.  Dempsey provides powerful legal precedent, favorable to creditors, associated with how Indiana writs of assistance can and should be executed.

The Ongoing Saga Of Indianapolis Real Estate Development Company Premier Properties USA, And Owner Christopher P. White

Click here for an article about the continued financial struggles of local real estate developer Premier Properties and its owner, Chris White.  Embedded in the article are links to two prior stories regarding the matter.  (Originally posted March 10.) 

Bridgewater Falls put in receivership - story from March 11.

April 7 update from IBJ:  click here .  Mr. White is keeping many lender workout departments and creditor's rights lawyers busy (including me, by the way). 

April 9's breaking news:  click here for latest IBJ story.

April 10 story from The Indianapolis Star:  click here.

April 12 article on front page of Star:  Lawsuits show free-spending CEO in grip of soaring debt.

April 17, post-auction reports:  IBJ and Star.

April 24, post-bankruptcy (Chapter 11) filing by Premier Properties:  IBJ and Star.  It does not appear Mr. White, personally, has filed for bankruptcy protection to this point.  Click - .pdf - for a copy of the April 23 bankruptcy petition in Case No. 08-04607-BHL-11.

April 25, IBJ: Emergency hearing scheduled in bankruptcy court.

April 26, IBJ:  Criminal charges possible in Premier blowup - Bankruptcy puts slew of creditors' lawsuits on hold. 

May 7, Star:  Judge orders "exam" of Premier books

May 12, IBJ:  Trustee to intervene in Premier bankruptcy

May 15, Star:  Colts want Premier Properties decision on stadium suite - looks like there will be another suite available for the new Lucas Oil Stadium....

How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale?

I first wrote about this topic on August 15, 2007, but I've decided to delete that post.  Today's post provides a revision of my prior research and analysis, and I believe more accurately articulates the answer to the question.  I'd like to thank my partners Tom Dinwiddie and Tom Hanahan for their input.

_______________

Your lending institution has an Indiana decree of foreclosure related to commercial real estate.  You have reason to believe the judgment amount exceeds the value of the collateral, so you want to preserve the right to collect the deficiency from the borrower or a guarantor.  If you’re wondering how low the mortgage foreclosure sale price can be without rendering the sale defective, keep reading.

An extreme example.  Conceivably, a lender/senior mortgagee, as the sole bidder, could acquire the property at a sheriff’s sale for a small fraction of the fair market value by submitting a credit bid that expends only a portion of the judgment amount.  This would allow the lender to resell the property at a profit and to pursue collection of the deficiency, potentially resulting in a double recovery.  The lower the sale price is, the higher the deficiency judgment will be.   

No statutes.  There are no Indiana statutes regulating the price that parties must bid at a mortgage foreclosure sale.  Unlike an execution sale, in which a judgment debtor can demand an appraisal under the so-called “valuation and appraisement laws,” mortgage foreclosure sales are exempted from this rule.  See, Ind. Code § 32-29-7-9(b); Trial Rule 69(C); Arnold v. Melvin R. Hall, Inc., 496 N.E.2d 63, 65 (Ind. 1986).

The shock test.  Indiana appellate court opinions do not articulate a formula for a lawful sale price.  They merely provide guidelines.  The Indiana Supreme Court’s decision in Arnold is the definitive case on this subject.  A borrower/mortgagor, whose interest in property has been sold at a sheriff’s sale, need not accept the results of the sale without question and has the right to file a motion seeking that the sale be set aside.  Indiana law presumes that the sheriff’s sale “provides a decent method by which value can be fixed . . ..”  Arnold, 496 N.E.2d at 65.  “Thus, it is manifest that the purpose of the sale is not to afford some stranger an opportunity to make off with the debtor’s property to his own great advantage and to the great disadvantage of the debtors or creditors.”  Id.  Where it appears that the results of a sale are such that the entry of a deficiency judgment “is shocking to the court’s sense of conscience and justice,” the sale may be set aside.  Id.  The burden of proof is on the borrower or guarantor to establish that “the disparity between the value of the property sold, and the price paid, [was] so great as to shock the sense of justice and right.”  Id.  See also, Newhouse v. Farmers National, 532 N.E.2d 26 (Ind. Ct. App. 1989).    

Fair market value not the issue.  The United States Supreme Court in BFP v. Resolution Trust, et al., 511 U.S. 531 (1994) addressed the question of whether the consideration received from a sheriff’s sale satisfied the Bankruptcy Code’s requirement that transfers of property by insolvent debtors within one year of the filing of a bankruptcy petition be in exchange for “a reasonably equivalent value.”  Id. at 533; 11 U.S.C. § 548(a)(2).  BFP dispels the notion that the price paid at a sheriff’s sale must equate to fair market value.  “Market value, as it is commonly understood, has no applicability in the forced-sale context; indeed, it is the very antithesis of forced-sale value . . ..  In short, ‘fair market value’ presumes market conditions that, by definition, simply do not obtain in the context of a forced sale.’”  Id. at 537-38. 

  An appraiser’s reconstruction of “fair market value” could show
  what similar property would be worth if it did not have to be sold
  within the time and manner strictures of state-prescribed foreclosure.
  But property that must be sold within those strictures is simply worth
  less.  No one would pay as much to own such property as he would
  pay to own real estate that could be sold at leisure and pursuant to
  normal marketing techniques.

Id. at 539.  The Supreme Court deemed that a fair and proper price, or a reasonably equivalent value, for foreclosed property “is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.”  Id. at 545.      

What to bid?  Arnold, coupled with BFP, establish an extremely high evidentiary burden for a borrower or guarantor to set aside a sheriff’s sale.  Certainly the most conservative approach for a lender would be to submit a bid based upon fair market value, but Arnold specifically, and BFP generally, reject the proposition that sheriff’s sales must be set aside if the property sells for less than the appraised value.  Again, the only question is whether the difference between the price paid and the property’s value will shock the judge’s sense of justice and right.  What does that mean?  Who knows.  This is one of those gray areas in Indiana law.   

The best bet is to analyze the facts and circumstances of the specific case, and then formulate a logical and fair number.  Be prepared to offer evidence (documents and witness testimony) to support the price in the event a party challenges it.  Use common sense.  There are a multitude of factors that could justify a bid, including a prior appraisal, market conditions, current cash flow, or lack thereof, as well as future fees and expenses associated with resale, taxes, insurance premiums, repairs, maintenance, etc.  Be creative, but don’t take extreme or overly-arbitrary positions. 

Move on.  Lenders/senior mortgagees should avoid tendering an absurdly low bid, which would only serve to invite a motion to set aside the sheriff’s sale.  Such a motion would result in the loss of valuable time and money in connection with defending the motion and/or holding another sale.  A balance should be struck between maximizing the deficiency judgment and preventing court proceedings to set the sale aside.  The ultimate goal should be to get the sale and the litigation behind you, so your institution can move forward with liquidation and any post-sale collection proceedings.