Indiana Commercial Foreclosure Law

Always Consider An Environmental Liability Analysis

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 candersson@augustmack.com, and August Mack has a blog at http://blog.augustmack.com/blog/re-start-for-forecloseddistressed-properties.                  

New Marion County (Indianapolis) Sheriff's Sale Requirements

This post will supplement the following, prior posts related to Indiana sheriff's sales, including specifically sales in Indianapolis, Marion County:  "(Tax) Lessons Learned from Marion County, Indiana Sheriff's Sale" and "Recording Deeds in Indiana: Don't Forget the Sales Disclosure Form" (Part I and Part II.) 

Effective August 1, 2009, the Marion County Sheriff's Department has revised some of its sale requirements, which you can review by clicking here.  After speaking to the department's staff yesterday, in connection with a sale next week, the following appear to be the most significant changes:

1. County Fees:  The winning bidder must tender checks payable to the county auditor and recorder for the fees associated with filing the sheriff's deed and the sales disclosure form.  It appears that, going forward, the sheriff's office will take the lead with processing these documents through the various county offices.  Before August 1st, lender's counsel would receive the deed and the sales disclosure form from the sheriff, after the sale, and then process those documents themselves.
2. Taxes:  If the plaintiff/judgment holder (usually the senior mortgagee/lender) wants to bid, it must pay, in advance, any delinquent real estate taxes and submit written verification of such payment to the sheriff prior to bidding.  Before August 1st, bidders were only required to tender a check to the sheriff, which check would only be submitted to the treasurer if the bidder acquired the property.
3. Assignments:  If the bidder received an assignment of the judgment, then a file-marked copy of the assignment of judgment (a/k/a notice of assignment of judgment) must be tendered to the sheriff before the assignee can bid.  (We attach the notice as an exhibit to the written bid form that we submit to the sheriff's staff the day before the sale.)  Before August 1st, the sheriff did not routinely or expressly require this documentation.

If you have any questions about items 1-3, I recommend that you call the sheriff's department at either 317-327-2450 or 317-327-2459.  Pam and Tammy can be reached at those numbers, and they have always been very helpful, patient and cooperative.  For more about Marion County sheriff's sales, you can click on its website here.  The sale rules identified on that website can be accessed by clicking here. 

Recording Deeds In Indiana: Don't Forget The Sales Disclosure Form (Revised)

I have revised my January 23, 2009 post on sales disclosure forms to include these additional thoughts regarding signatures on the forms following sheriff's sales:

Signatures.  Based upon our experience, in the event of a sheriff's sale, the attorney for the "buyer" - usually the lender/mortgagee's attorney - has been able to execute the form for both the both buyer and seller (the sheriff).  This has avoided involving the sheriff's office in the past.  The better practice, however, is to submit the form for the sheriff's signature at the same time the sheriff's deed is tendered for execution.  That way, the sheriff's office can sign both documents at once.  We recently discovered that the Marion County Sheriff's Office provided this form signature page (.pdf) to the assessor's office for purposes of completing sales disclosure forms after sheriff's sales.  The assessor's office has instructed our office to attach this signature to future SDF's filed in Marion County.  

Upon further reflection and investigation, I believe this new information provides more clarity to the issue.  Thanks to my paralegal Mary Schroeder for her help with this subject.  Please email, post a comment or call with any questions or concerns, or different experiences, thanks.

Recording Deeds In Indiana: Don't Forget The Sales Disclosure Form (Revised)

I have revised this post effective 3-23-09:  see the bold text below.

The successful bidder at an Indiana sheriff's sale, following the foreclosure of a mortgage, will obtain a sheriff's deed to the real estate.  Or, mortgagees may obtain a deed-in-lieu of foreclosure.  As the new owner of the property, you, your counsel or your title insurance company must ensure that the deed is recorded in the county recorder's office to perfect title to the real estate.   

Disclosure Form.  Many parties either do not know or sometimes forget that, as a part of the recording process, Indiana law requires a sales disclosure form to be tendered with the deed.  The form can be accessed by clicking on this state website:  http://www.stats.indiana.edu/SDF/. 

On-line process.  In Marion County (Indianapolis), as noted by this press release, as of 11-1-08 all sales disclosure forms must be submitted on-line through the Indiana Department of Finance via the link above.  After submitting the form on-line, it must be printed, signed by the buyer and seller, and presented to the auditor as noted below.  It's my understanding that, over time, other counties will be utilizing this on-line procedure.

Signatures.  Based upon our experience, in the event of a sheriff's sale, the attorney for the "buyer" - usually the lender/mortgagee's attorney - has been able to execute the form for both the both buyer and seller (the sheriff).  This has avoided involving the sheriff's office in the past.  The better practice, however, is to submit the form for the sheriff's signature at the same time the sheriff's deed is tendered for execution.  That way, the sheriff's office can sign both documents at once.  We recently discovered that the Marion County Sheriff's Office provided this form signature page to the assessor's office for purposes of completing sales disclosure forms after sheriff's sales.  The assessor's office has instructed our office to attach this signature to future SDF's filed in Marion County.  

In cases of agreements for deeds-in-lieu of foreclosure, lenders and their counsel should have the mortgagor sign the sales disclosure form at the time the deed and related settlement documents are signed.   

Other steps.  Although the process can vary from county to county, generally a deed and a sales disclosure form make their way through three county offices:  first the assessor, second the auditor and third the recorder.  If the documents are hand delivered, one can go to each office in succession to complete the transaction.  The process can, however, be accomplished through the mail, and it's our experience that the package should be mailed directly to the recorder's office for handling.  A fee will need to be paid to the county recorder to record the deed.  We recommend that you contact the auditor in advance to determine whether there will be a fee for the filing of the sales disclosure form and, if so, a separate check, payable to the auditor, must be submitted.  Fees for sales disclosures vary depending upon the transaction and by county.  

As always, please call or email me with any questions or comments.

           

(Tax) Lessons Learned From Marion County, Indiana Sheriff's Sale

Back in April of this year, I wrote about Indiana Sheriff's Sales - Local Rules, Customs and Practices Control.  For secured lenders and their counsel preparing for a mortgage foreclosure sale in Marion County (Indianapolis), Indiana, I thought I'd expand upon my April post and convey a handful of things about which I was reminded during an experience I had last week.  I'm directing this post mainly to plaintiffs/first mortgagees, who hold a judgment/foreclosure decree and who are "first in line" to make a judgment bid (credit bid) at the sale.  Because this post discusses cash that bidders must bring to the sale, however, the information will also be relevant to junior lien holders seeking to bid.   

Pre-sale sheriff's notice.  About fifteen days before a sheriff's sale, the Civil Sheriff's Office will send to the lawyer for the plaintiff/first mortgagee a sheet outlining certain information about the sale.  Click here for an example notice.  The notice includes such data as the sale number, the court cause number, the names of the plaintiff and the plaintiff's attorney, the parcel number and, perhaps most importantly, the current judgment amount, including interest, upon which the plaintiff is entitled to make a credit bid.  Finally, the notice lists the sale fees/costs and, as in my case, any delinquent property taxes.

Deposit.  Pursuant to Marion County's custom and practice, in order to perfect a bid, the plaintiff/bidder must deposit with the sheriff a check for the user fee, sheriff fee and advertising cost, which in my client's case was $608.40.  Furthermore, the sheriff's office informed us before the sale that we also had to have on deposit funds (a cashier's check) to cover the delinquent taxes, which the sheriff listed to be $30,647.04.  Sale expenses and property taxes, by statute, are paid off the top of every foreclosure sale:  Statutory Disposition of Foreclosure Sale Proceeds.  (Remember that junior lien holders or third parties also must have on deposit with the sheriff’s personnel a certified check or cashiers check equal to or in excess of the amount of any bid submitted.)  

Two checks.  The sale fees/costs must be paid to the "Marion County Sheriff."  On the other hand, the delinquent property taxes, which by the way include delinquent sewer lien fees, must be paid to the "Marion County Treasurer."  This may not be the case in all counties, but last week's experience re-confirmed that separate checks are required in Marion County.

Source of delinquent tax figure.  Unfortunately in my case, and without boring you with the details, we learned after the sale that the figure on our notice (30k+) was inaccurate.  We had advised the client to send us a sizable cashier's check, only to learn upon delivery of payment that the true delinquent amount was only about $4,000.  As we sorted through the problem, we discovered that the tax figure quoted by the sheriff on its notice originates from a pre-sale communication with the treasurer's office.  For some unknown reason, there was a communication breakdown resulting in an inaccurate figure conveyed to us pre-sale.  (Incidentally, our case has been complicated by the fact that Marion County property tax payments are due tomorrow, December 16th.) 

Moral.  Based upon our recent experience, I would recommend that, in cases involving sizable delinquent taxes, you or your lawyer go directly to the county treasurer's office in order to confirm (in writing, if possible) the amount of any delinquent taxes or fees.  Fortunately, the civil sheriff's office has been extremely cooperative in sorting through this issue with us.  We were able to perfect our (winning) credit bid and, provided that we promptly submit payment for the delinquent taxes, we will be able to secure the sheriff's deed to the property in the ordinary course of business (two to three weeks).              

Indiana’s Judicial Foreclosure Requirement Not Applicable In Unique Case

Commercial mortgage lenders should remain mindful that Indiana is a judicial foreclosure state.  Essentially, this means that the foreclosure of a mortgage and corresponding sale of the real estate must occur within the court system, which includes the filing of a lawsuit, the rendering of a foreclosure decree by a judge and the auctioning of the property by a sheriff.  In Winforge v. Coachmen, 2008 U.S. Dist. LEXIS 66250 (S.D. Ind. 2008) (Winforge.pdf), an Indiana court permitted a non-judicial foreclosure.  How?  The mortgaged property was in Tennessee.

Improper foreclosure?  The Winforge suit surrounded “a botched business venture involving the development and construction of a hotel in Pigeon Forge, Tennessee.”  The borrower defaulted on a promissory note and a security agreement, so the lender declared the note to be immediately due and payable and sought to sell the Tennessee property.  The borrower filed suit in Indiana on a variety of claims, one of which was in essence to block the Tennessee foreclosure.  The borrower claimed that the lender failed to properly commence foreclosure proceedings in accordance with Indiana law “when it scheduled the real estate for public sale without first filing a complaint commencing a foreclosure proceeding.” 

Statutes.  By Indiana statute, including specifically Ind. Code § 32-29-7-3, a party must judicially foreclose on a mortgage executed on real estate.  The lender contended that it was not required to judicially foreclose on the property, despite I.C. § 32-29-7-3, because Tennessee law, not Indiana law, governed the foreclosure sale.  Tennessee permits non-judicial foreclosures.  T.C.A. § 35-5-501. 

Loan documents.  The loan documents stated that they were to be construed and enforced in accordance with Indiana law.  They contained a forum selection clause, which stated that “any action or proceeding concerning this Agreement or the other Loan Documents or the enforcement thereof shall be commenced in the United States District Court for the Southern District of Indiana, and such court shall have the sole and exclusive jurisdiction over any such proceeding.”  There was no question, therefore, that the case belonged in Indiana and that Indiana law applied to the litigation. 

Parties’ positions.  The borrower asserted that lender’s foreclosure was an “action or proceeding” as contemplated by the loan documents and therefore should have been pursued in Indiana.  The lender claimed it was clear that the term “action or proceeding” referred solely to a “lawsuit or judicial proceeding” and not to a foreclosure sale.  The lender argued it was not required to file any lawsuit or judicial proceeding in order to foreclose “because Tennessee law permits a non-judicial foreclosure.”  In further support of its position, the lender cited to case law holding that the method for foreclosure of mortgages “is governed by the local law where the real estate is located, regardless of mortgage provisions choosing foreign law.” 

Lender prevails.  Judge Barker sided with the lender, concluding:

It is clear to us from the context of the clause that [the terms “action or proceeding”] denote only that any lawsuit or judicial complaint brought needs to be brought in the courts of this district.  However, we do not, as [borrowers] do, read this language to create an obligation for [lender] to bring a complaint in this district prior to foreclosure if it is not otherwise required to bring such a complaint – and [borrowers] do not dispute that Tennessee law, which governs the foreclosure sale, does not so require.

While the lawsuit to litigate the terms and conditions of the loan documents had to be brought in Indiana, one of the remedies allowed by the loan documents (the foreclosure sale) was governed by Tennessee law.  The fact that the property was in Tennessee seemed to be critical to the outcome.  It makes sense to have Tennessee’s rules govern the conveyance of the property, not Indiana’s, so the rules and procedures could be enforced, as needed, by Tennessee officials.

Winforge limited.  One of the points of this post is to remind readers that Indiana is a judicial foreclosure state and to provide a link to I.C. § 32-29-7-3, which in part outlines Indiana’s judicial sale process.  The second point is to show that, with certain contract language and under very limited circumstances, an Indiana-based case could result in a non-judicial foreclosure sale in another state.  Having said that, in my view, Winforge does not mean that lenders can contractually circumvent Indiana’s judicial process concerning property located in Indiana.  I.C. § 32-29-7-3 should preempt any contract provision stating that a lender, upon default, can foreclose its mortgage on Indiana real estate outside of the court system.  When I see such provisions in loan documents, I tell my lender clients that we still must proceed to suit and follow the process through a sheriff’s sale. 

Full Judgment Bid = Zero Deficiency

On April 22, 2008, I posted the article “How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale?”  The title of today’s post could be “How Much Not To Bid At An Indiana Sheriff’s Sale.”  Recently, the Court of Appeals in Titan Loan Investment Fund v. Marion Hotel Partners, 2008 Ind. App. LEXIS 1608 (Ind. Ct. App. 2008) (Titan.pdf) concluded that a foreclosure judgment “was fully paid and satisfied by [lender/mortgagee’s full judgment] bid at the sheriff’s sale” so as to preclude it from recovering any alleged deficiency. 

Full credit bid.  Titan (lender/mortgagee) secured a judgment in its foreclosure action against Marion (borrower/mortgagor) in the amount of $3,084,758.49.  At the sheriff’s sale, Titan was the sole bidder by “paying” the sum of $3,085,362.49 for the real estate.  Titan did not actually pay cash but rather made a “judgment bid,” also known as a “credit bid,” of the entire amount of the judgment, plus interest and costs.  As noted by the Court, “where the judgment creditor bids the judgment instead of cash, such a credit bid is ‘as effective as payment in actual money would have been . . . inasmuch as there is no reason for going through the empty form and idle ceremony of handing the money over . . . and then receiving it back….’”   

Titan’s point.  After the sale, Titan filed a motion for proceedings supplemental claiming that its judgment had not been fully paid and that it was entitled to pursue other assets of Marion’s to satisfy the alleged deficiency.  Titan contended its bid was not representative of the fair market value of the property.  Presumably, the property was worth much less than the bid, although the Court did not discuss any evidence that may have been submitted concerning the property’s value. 

Satisfaction.  In Indiana, the payment of a bid at a sheriff’s sale “sufficient to satisfy the judgment extinguishes the judgment.”  In other words, as noted in the opinion, “the full amount of the judgment, interest and costs at a sale constitutes a complete satisfaction of the judgment.” 

No deficiency as a matter of law.  The Court relied upon an opinion from the California Supreme Court and held:

The resolution of this case turns on the operation and effect of a “full credit bid.”  The full credit bid rule precludes a lender, for purposes of collecting its debt, from making a full credit bid and subsequently claiming the property was actually worth less than the bid.  The rule applies here because Titan bid and paid the full amount of its judgment, interest, and costs at the sheriff’s sale.  Thus, we hold that the judgment was fully paid and satisfied and that Titan may not pursue a deficiency.

Despite the fact that Titan may have “paid” too much for the real estate, Titan had only itself to blame.  The critical point is that Titan wasn’t required to bid the full amount of its judgment.  Indeed lenders can and probably should bid less than the fair market value of the property, as previously explained in this blog.   

Proceedings supplemental dismissed.  In Indiana, “it is a condition precedent to proceedings supplemental that a valid judgment remains unsatisfied.”  See, Ind. Trial Rule 69(E).  If the judgment has been satisfied, then the judgment debt has been discharged.  As such, the plaintiff no longer owns a judgment against the defendant, and a motion for proceedings supplemental becomes insufficient as a matter of law.  The Court of Appeals affirmed the trial court’s dismissal of Titan’s motion for proceedings supplemental, stating:

Before Titan could recover on an alleged deficiency, it was Titan’s burden to show that its judgment had not been fully paid and satisfied and that its still owned a judgment against Marion.  But Titan could not make that showing because its full credit bid at the sheriff’s sale was conclusive.  The record here affirmatively shows satisfaction of the judgment.

Moral of the story.  If Marion (or a guarantor) had assets in addition to the subject real estate, and if the actual value of the real estate was substantially less than the judgment, then this was an unfortunate result for Titan.  The Titan opinion does not provide any insight into why Titan made a full judgment bid.  In all fairness, Titan may have had legitimate reasons for doing so.  For example, in the residential foreclosure context, a HUD-insured loan may require the lender/mortgagee to bid the full amount of the judgment as a prerequisite to reimbursement by the government.  So, I’m not going to second guess Titan or its lawyers.  My main point is that, barring a reversal by the Indiana Supreme Court, Titan definitively tells us that a full judgment (credit) bid at a foreclosure sale effectively negates any alleged deficiency.  Please see my April 28, 2008 post for more insight or contact me for assistance. 

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.

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. 

Indiana Sheriff's Sales - Local Rules, Customs and Practices Control

In Indiana, mortgage foreclosures must be judicial or, in other words, through the court system.  As a general proposition, real estate collateral must be sold, pursuant to a judge's decree, by the county sheriff's office. 

Although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific rules and procedures vary by county.  I presented at a foreclosure-related seminar last month, and one of my co-presenters accurately stated, in essence, that there are 92 counties in Indiana and therefore 92 different sets of rules applicable to sheriff's sales.  My advice is to call or visit the local civil sheriff's office to confirm the hoops through which you must jump, and when, to start and finish a successful sheriff's sale.

Many Indiana counties provide at least some guidance through the internet.  The "Indiana Courts" home page, for which I have a permanent link on the left side on my blog's home page, has an "information by county" menu on the left that allows you to surf through county websites to determine whether the local sheriff's office has any on-line sale information.

I'm located in Indianapolis, Marion County, Indiana, and our civil sheriff has a helpful site - click here - that also is permanently set up on my home page.  Here is information concerning links to sheriff's in the seven counties contiguous to Marion County:

• Hamilton County
• Hancock County
• Shelby County (None)
• Johnson County
• Morgan County
• Hendricks County
• Boone County 

Here is information with regard to links to sheriff's sites in some of the larger counties in Indiana:

• Allen County (Ft. Wayne)
• Tippecanoe County (Lafayette)
• Vanderburgh County (Evansville)
• Vigo County (Terre Haute)

As you'll see, some of the links provide more information and forms than others.  In addition, many Indiana counties outsource all or a portion of the sheriff's sale process through SRI, Inc.  Ultimately, talking to, and forming a working relationship with, the representative who will be handling your sale can be invaluable.

Sheriff’s Sales Of Separate Tracts: Principal’s Real Estate First, Surety’s Second

The Keesling v. T.E.K. Partners case has produced a second appellate court opinion.  I wrote about Keesling I on March 23, 2007.  That post dealt with the liability of sureties (or accommodation parties) when an original obligation is materially altered.  The latest opinion, decided March 6 (2008 Ind. App. LEXIS 431) (KeeslingII.pdf), discusses among other things the order (sequence) of the sheriff’s sales when there are multiple tracts to be sold.  So, Keesling I discusses liability issues, and Keesling II addresses judgment enforcement-related matters.  Commercial lenders may want to note Keesling II in the event they need guidance where there is more than one parcel of real estate subject to a foreclosure sale. 

Overview.  The Keeslings and Heritage Land were the defendants in the case and were deemed to be accommodation parties/sureties on the original note.  The collateral in question consisted of two separate tracts, a thirty-six-acre tract and a ten-acre tract.  The Court stated that the thirty-six-acre tract was the “property of the surety,” while the ten-acre tract was determined to be the principal collateral for the original note.  The specific issue in Keesling II was whether the thirty-six-acre tract or the ten-acre tract should be sold at a sheriff’s sale first.  The defendants clearly wanted to protect their interests in the thirty-six-acre tract.  The primary contention of the Keeslings/Heritage Land in the appeal was that, if the thirty-six-acre “surety collateral” was to be sold at all, then it should only be sold to satisfy any deficiency that remained on the original note after the ten-acre “primary collateral” posted by them had first been sold.

Legal principles.  An Indiana statute and an Indiana trial rule controlled the appellate court’s decision.  Ind. Code § 34-22-1 et seq. deals with the remedies of sureties against their principals.  Specifically, I.C. § 34-22-1-4 entitled “Order on levy upon property of principal and surety,” section (a), provides that where a court finds in favor of a surety on the question of a suretyship, the court shall make an order directing the sheriff to levy first upon the property of the principal and to exhaust the property of the principal before levying upon the property of the surety.  And, Ind. Trial Rule 69 generally governs sheriff’s sales.  The rule states “unless otherwise ordered by the court, the sheriff or person conducting the sale upon execution shall not be required to offer it for sale in any particular order.”  T.R. 69(A).  The Court stated that this rule applies to the foreclosure of mortgage liens “and in commercial transactions, it is not uncommon for the loan documents to provide that in the event of default the creditor shall have recourse to the collateral in any order, without priority.”  The Court focused on the “unless otherwise ordered by the court” language for its conclusion that, based upon the facts of this case, the order of sale and the allocation of proceeds must correlate with the liabilities of the parties and their collateral.

36 acres saved, perhaps.  A separate entity, Heritage/M.G., was the principal debtor on the original note, and the ten-acre tract was the principal collateral for that debt.  Heritage Land (a connected entity) and the Keeslings merely were accommodation parties, or sureties, on the original note, and the thirty-six-acre tract was the property of the sureties.  Thus the case apparently involved a fairly uncommon scenario where the accommodation parties/sureties pledged real estate collateral to secure the borrower’s note.  Given I.C. § 34-22-1-4(a), the Court concluded that the ten-acre tract must be sold first, and the thirty-six-acre tract was to be sold “only if the sale of the ten acres does not satisfy the debt on the original note.”  This result is consistent with the basic notion that an accommodation party’s liability is secondary to the liability of the principal. 

The Difference Between An Execution Sale And A Foreclosure Sale In Indiana

In Dempsey v. JP Morgan Chase Bank, 2007 U.S. Dist. LEXIS 58449 (S.D.Ind. 2007) (Dempsey.pdf), which involves litigation that also was the subject of my March 2, 2007 post about writs of assistance, Judge Tinder of the Southern District of Indiana issued another opinion concerning Dempsey’s disputes with his creditors.  Today’s post explains what an execution sale is and also touches upon lis pendens. 

Dempsey’s ongoing saga.  Many of Dempsey’s problems began when a state court entered a judgment against him and in favor of the Carters.  To satisfy the judgment, the state court ordered an execution sale on real estate owned by Dempsey on which Chase Bank held a mortgage.  At the execution sale, Chase Bank bid the amount of its mortgage and, with no other bids, took title to the property immediately.  This is when Chase obtained a writ of assistance to evict Dempsey and his tenants from the property.  (See, my March 2, 2007 post.) 

Judgment enforcement v. mortgage enforcement.  Dempsey continued to pursue relief associated with the loss of his real estate by asserting claims based upon language in his mortgage agreement.  But, as Judge Tinder observed, the mortgage-based equitable arguments were not applicable to Dempsey’s situation because “this was not a mortgage foreclosure.”  Id. at 6.  Dempsey believed, incorrectly, that the execution sale was like a mortgage foreclosure.  “However, these are distinct procedures in Indiana.”  Id.  For more background, compare I.C. § 32-30-10 “Mortgage Foreclosure Actions” with I.C. § 34-55-6 “Sale of Property on Execution”.  Judge Tinder pointed out perhaps the main distinction between the two types of sales.  “While mortgage foreclosure provides a right of redemption, execution on a judgment does not.”  Id.; I.C. § 32-30-10-11;Ind. Trial Rule 69(A).  In Dempsey, lender Chase Bank was not foreclosing its mortgage on Dempsey’s property.  Rather, Chase was a lien holder bidding at the sale of an asset of Dempsey’s, which sale was designed to satisfy the money judgment held by the Carters.  Judge Tinder rejected Dempsey’s theory that the execution sale should be undone, on page 6 of the opinion:

  There is nothing inherently inequitable about a lien holder
  bidding at an execution sale or, upon buying the property,
  refusing to give back the property to the previous owner
  who lacks a right of redemption.

An aside, lis pendens discussion.  One other point of interest in Judge Tinder’s opinion surrounds the validity of two lis pendens notices Dempsey filed on the property at issue.  Generally, “lis pendens is a way to give notice to the public, and in particular to potential buyers, that litigation is pending which may affect the rights in a piece of property.”  Id. at 12.  Rules applicable to lis pendens are statutory in Indiana, and a link to I.C. § 32-30-11 is permanently placed along the left side of my blog’s home page.  Dempsey had two related state court actions pending that, theoretically, could affect title to the property.  In the federal court case, Chase argued that it was entitled to have the lis pendens notices removed because a determination had been made that Dempsey has no interest in the subject property.  I.C. § 32-30-11-7.  Unfortunately for Chase, Judge Tinder, on a procedural technicality, had to punt the issue to state court for resolution.  Importantly, however, Judge Tinder did offer that “it appears that Dempsey had no right to use lis pendens in the manner that he did . . ..”  Id. at 13.  The Dempsey opinion illustrates that, generally, lis pendens notices are inappropriate encumbrances on title when the party filing the notice has no interest in the property or when litigation that may affect the rights in a piece of property has been concluded.

In sum.  In the unlikely event a commercial lender/mortgagee gets involved in another creditor’s judgment enforcement action seeking to execute on the borrower/mortgagor’s real estate, the lender, not unlike with mortgage foreclosure sale, can bid at the auction and ultimately may be able to acquire title to the property.  Unlike a mortgage foreclosure sale, however, the borrower/mortgagor does not have the right at the last minute to redeem (pay off) the mortgage and retain title to the property.  Certainly that could be negotiated, but the statutes applicable to execution sales do not require it.  Always make sure you are familiar with the rules pertinent to your type of sale.

IN AN INDIANA SHERIFF'S SALE, CONSIDER THE OPTION OF USING A PRIVATE AUCTIONEER

In Indiana, mortgage foreclosures must be judicial (through the court system).  As a general proposition, real estate collateral must be sold, pursuant to a judge's decree, by the county civil sheriff's office. 

An alternative.  Although not commonly utilized, Indiana has a statute giving parties the option, in mortgage foreclosure actions, to conduct sheriff's sales through a private auctioneer.  In other words, an outside auctioneer can hold the sheriff's sale on the sheriff's behalf.  The statute is Indiana Code 32-30-10-9(b), which states that either the debtor or a creditor may petition the court to require the property to be sold "by the sheriff through the services of an auctioneer" if: (1) the court determines a sale is economically feasible OR (2) all creditors agree to both the sale method and the auctioneer's compensation.  Even if you can't get all the creditors to consent to the method, I think most courts would permit the use of a private auctioneer absent unique, compelling reasons to the contrary. 

Costs.  The auctioneer's fee must be reasonable and stated in the court's order.  In the unlikely event such a sale occurs without the consent of all creditors, and if the sale price is less than the judgment, then the auctioneer only is entitled to $100 in fees plus any out-of-pocket advertising expenses.  Amounts due the auctioneer (fees and expenses) must be paid as a cost of the sale from the proceeds before the payment of any other payments.  So, as a practical matter, the auctioneer is paid by the senior lien holder.  This is perhaps the major, if not only, downside to a privately-conducted sale - the fees of the auctioneer.  So, be sure to explore the cost issue before even requesting such relief from the court.  Although civil sheriff's fees may vary from county to county, generally speaking an auction conducted by a sheriff is going to be cheaper than one conducted by a private auctioneer.  Needless to say, a lender's valuation of the collateral will play a significant factor in the decision to pursue the course of action afforded by I.C. 32-30-10-9. 

A potentially good thing.  I.C. 32-30-10-9(b) is a nice option for lenders foreclosing on commercial real estate collateral in Indiana.  Some Indiana counties may not hold regular sheriff's sales, or their civil sheriff's offices may not be well-equipped to, or particularly interested in, conducting sophisticated sales of commercial real estate.  Or, a private firm may be in a better position to market the collateral before the auction.  Indeed there are a multitude of factors that may go into a lender's decision to utilize a private auctioneer versus a civil sheriff.  The option should be analyzed on a case-by-case basis.  As a lender seeking to squeeze as much cash as possible out of an Indiana sheriff's sale of commercial property, you should be mindful of your right to choose a private auctioneer and conduct a cost/benefit analysis accordingly.      

STATUTORY DISPOSITION OF FORECLOSURE SALE PROCEEDS

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.  Property taxes.  Second, real estate taxes that are due and owing for the property being sold must be paid.  The sheriff is required to transfer the amounts collected to the county treasurer ten days after the sale.  This eliminates the need to name the county or the county treasurer in the foreclosure suit.  (If there are other tax-related liens on the property, the taxing authority must be named as a defendant so that it can answer as to its interests.)  When assessing what might be recovered after a sale, pay attention to what the title work says about delinquent real estate taxes. 

3.  The Debt.  The payment of the outstanding principal, interest and costs to the senior lien holder comes third.  This almost always will be the full, accelerated debt as articulated in the judgment.

4.  Junior Liens.  Any payments of amounts owed to any junior lien holders are next, in accordance with their legal priority.

5.  Borrower.  Lastly, if any sale proceeds remain, that surplus must be paid to the Clerk of the Court to be transferred as the Court directs, usually back to the borrower. 

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 and, in cases of a mortgage, any real estate taxes due and owing are paid.  Also, lenders never will receive a windfall from a sale because the debtor generally receives any surplus, which is a remote possibility anyway.