Before a secured lender decides to move forward with the filing of a lawsuit to foreclose its mortgage, a variety of matters should be considered. Generally, for example, the loan collateral should be analyzed. If the loan collateral is real estate, the analysis should include, among other things, a determination of value. More than likely, in Indiana the foreclosure suit will result in the lender/mortgagee taking title to the real estate at the post-judgment sheriff's sale. In other words, the lender will become the owner. This begs the question of whether the benefits of owning the property outweigh the costs.
Environmental liability. Since the Indiana commercial foreclosure process could transform the secured lender into the property owner, before the case is even filed some thought should be devoted to ordering an environmental liability analysis (aka a "Phase I"). An environmental assessment company can examine the property and the public environmental records relating to the property. While environmental issues and liabilities go beyond the scope of this blog, secured lenders and their counsel should be aware that there are federal and statue statutes pertaining to such liability, including CERCLA, 42 U.S.C. 9601, et. seq.
Subsequent owners. Generally, the law imposes liabilities on owners or operators of properties for the cost of remedial action when there is an actual or threatened release of hazardous substances. The key is that environmental liability exposure extends to subsequent owners of the real estate, so lenders need to be cognizant of any such liability exposure and to factor such exposure into the lender's workout decisions. The potential costs associated with any environmental issues should be measured against the ultimate benefits of repossessing the property at the sheriff's sale (or by deed-in-lieu). Depending upon the nature and scope of the environmental contamination, foreclosure may not be warranted.
Not required. Although we recommend that lenders consider a Phase I, environmental work is not a requirement to foreclose, and common sense should prevail. Phase I's are not cheap. Certainly not all properties or locations pose a significant risk for environmental problems. Moreover, depending upon the age of the loan, a recent environmental assessment conducted in connection with the funding of the loan may provide sufficient comfort going forward.
Assignment. One way to mitigate against liability exposure is for the lender to take title at the sheriff's sale through an entity that is different than the plaintiff/judgment creditor (the lender/mortgagee). This can be accomplished by a pre-sale assignment of the judgment and the loan documents. There are other business reasons why lenders may seek to hold title to real estate in the name of a separate entity, and some of our clients have set up such entities to own and control their "REO" (real estate owned) properties.
If you have questions about the nuances of environmental matters, as they relate to the acquisition of real estate, I can put you in touch with one of my real estate transactional partners. For more in-depth environmental questions, my partner Dale Eikenberry is experienced in this area and can assist. If you'd like to contact an environmental firm directly, August Mack Environmental is a nice regional environmental group, and Cassie Anderson can help you. Her email is firstname.lastname@example.org, and August Mack has a blog at http://blog.augustmack.com/blog/re-start-for-forecloseddistressed-properties.