When foreclosing on a borrower’s loan collateral, it’s no secret that banks and commercial lending institutions ultimately are seeking money. Normally, they hope to dispose of the collateral and, ideally, become whole from the proceeds of the sale. A senior lien holder will obtain most, but not all, of any such proceeds. In Indiana, statutes govern specifically who gets the cash.
Mortgages. Ind. Code § 32-30-10 outlines the procedures for mortgage foreclosure actions. The distribution of proceeds from a judicial sale are statutorily mandated. First Federal Savings Bank v. Hartley, 799 N.E.2d 36, 40 (Ind. Ct. App. 2003). According to I.C. § 32-30-10-14, which should be used as a template when preparing the section of any proposed foreclosure decree/order dealing with the disposition of sheriff’s sale proceeds, the money must be applied as follows:
1. Sale expenses. The first payout is to the civil sheriff for its fees and notice/advertising costs. A sheriff’s sale in Indiana costs a few hundred dollars. Under certain circumstances, Indiana law allows a mortgage foreclosure sale to be conducted by a private auctioneer, and the fees of the auctioneer would be a part of this payout.
2. Senior mortgage debt. The payment of the outstanding principal, interest and costs to the senior lien holder comes second. This almost always will be the full, accelerated debt as articulated in the judgment. (2010 statutory revisions did away with post-sale payment of taxes. If the senior mortgagee prepaid any delinquent real estate taxes, its counsel should attempt to build those losses into the judgment.)
3. Junior liens. Any payments of amounts owed to any junior lien holders are next, in accordance with their legal priority and as articulated in the court's decree.
4. Surplus to mortgagor. Lastly, if any sale proceeds remain, that "surplus must be paid to the clerk of the court to be transferred, as the court directs, to the mortgage debtor, mortgage debtor's heirs, or other persons assigned by the mortgage debtor."
Security Interests. The disposition of collateral under Indiana’s UCC, Article 9.1 (Secured Transactions), is slightly different and will depend upon the nature of the collateral. Article 9.1 should be reviewed in detail for each specific case and the particular collateral in question, because there are many different rules that could apply. With certain collateral (accounts receivable, for instance), disposition by sale normally will not occur. On the other hand, sales of tangible personal property collateral, like inventory or equipment, are common. I.C. § 26-1-9.1-610 speaks to disposing of collateral after default. Unlike with mortgages, in Indiana a judicial sale of personal property collateral is not required. Lenders may choose to conduct the sale privately, although it may make sense to group the personal property with any real estate that is being sold at a sheriff’s sale. I.C. § 26-1-9.1-615 governs how to apply the proceeds:
1. Sale Expenses. First, proceeds are applied to the reasonable expenses of retaking, holding, preparing for disposition and reasonable attorney’s fees and expenses incurred by the secured party. This would include payment of the sheriff’s fees if the civil sheriff is conducting the sale, or to private auctioneers upon a private sale.
2. The Debt. Second, payment goes to the satisfaction of the obligation secured by the security interest.
3. Junior Liens. The third payment, if any, would be for the satisfaction of the obligation secured by any subordinate security interest.
4. Debtor. Finally, any remaining proceeds go to the debtor.
So, if and to the extent there are cash proceeds from an Indiana foreclosure sale of loan collateral, the debt of the plaintiff lender will not be satisfied until after the sale-related expenses are reimbursed. Also, lenders should not receive a windfall from a sale because the borrower generally receives any surplus, but that normally is a very remote possibility.
(This revises/updates my 1-9-07 post.)