Indiana Commercial Foreclosure Law

Will Mysterious Post-Sale Redemption Statute Be Clarified ... And What About The Treatment Of MERS?

I've learned that, on April 10th, the Indiana Supreme Court granted transfer in the CitiMortgage v. Barabas case about which I've written on four prior occasions, most recently on March 29th:  Indiana Legislation, 2012:  Part 2 of 3 - Obscure Redemption Language Remains.  In Indiana, a decision to grant transfer automatically vacates opinions of the Court of Appeals or, in other words, negates the prior case law.  So, perhaps later this year we'll hear from Indiana's highest court on some important foreclosure-related topics, including post-sale redemption rights and the treatment of MERS.  Interestingly, the opinion will be rendered after the 2012 legislation that amended the operative statute, Ind. Code Section 32-29-8.  It's unclear to me whether or to what extent the Court will take into account or otherwise touch upon the amended statute.  I'll be on the lookout for the Court's decision and will post about it accordingly.    

Indiana Legislation, 2012: Part 3 Of 3 – Sheriff’s Sale Buyers And Omitted Junior Lien Holders Impacted By Creation Of Strict Foreclosure Statute

Senate Bill 298, which amends Ind. Code § 32-29-8, creates a new section: 4. The legislation responds to the Indiana Supreme Court’s opinion in Citizens State Bank of New Castle v. Countrywide Home Loans, Inc. and the Court of Appeals’ holding in Deutche Bank v. Mark Dill Plumbing. The amendments hit on technical subjects related to Indiana’s strict foreclosure remedy and doctrine of merger. The practical effect is a solution to problems associated with junior liens missed during the foreclosure process.

Citizens and Deutche revised. These are dense topics tough to cover in a single post. For background, please read my 10-07-11 and 07-20-09 posts on Citizens and Deutche, respectively. In Citizens, the Supreme Court applied the doctrine of merger and permitted the omitted junior lien holder to leap frog into a senior priority position. In Deutche, the Court of Appeals concluded there was no merger (leap frog) and discussed remedies for the post-sale title defect. With the new Section 4, it appears that the Citizens merger (and leap frog) would not have occurred. The result in Deutche also would have been different because courts now have a statutory road map for dealing with the aftermath of a foreclosure suit that improperly excluded a junior lien holder.

Section 4. The new statute appears to be effective immediately and can be found at this link: Section 4. Here are the highlights as I read them:

A. Applicable parties: Section 4 applies to two groups, defined as “interested persons” and “omitted parties.” An “interested person,” which I’ll label a “Buyer,” basically includes (1) plaintiff mortgagees, (2) purchasers at a sheriff’s sale or (3) assignees of (1) or (2). An “omitted party,” which I’ll call a “Junior Lienor,” essentially is a junior lien holder improperly omitted from foreclosure proceedings .

B. New cause of action: “At any time” after the entry of a foreclosure judgment, either the Buyer or the Junior Lienor can file an action, the purposes of which are (1) to determine the extent of a Junior Lienor’s lien and (2) to terminate such lien on the mortgaged property sold at a sheriff’s sale. Generally, the action – a lawsuit – is a statutory strict foreclosure case, though the statute does not use that terminology.

C. Junior Lienor’s right to payment: If a Junior Lienor had a right to receive any proceeds from the sheriff’s sale, its lien cannot be terminated until the Junior Lienor is paid for such losses. (The statute does not spell out who must pay. For now, I’ll simply note that sheriff’s sale surpluses are incredibly rare due to the absence of equity in most foreclosed-upon real estate.)

D. Junior Lienor’s right to purchase: There are three key factors a court must consider when determining a Junior Lienor’s right of redemption in the strict foreclosure action. (The “redemption” language used in Section 4 refers to a Junior Lienor’s right to pay off the Buyer and thus acquire title to the property.) Here are the factors: (1) whether the Junior Lienor had actual knowledge of the foreclosure proceedings and an opportunity to intervene, (2) the value of any post-sale improvements made by the Buyer to the property and (3) the amount of the post-sale taxes and interest paid by the Buyer. Factor (1) seems to provide a basis for the right of redemption to be terminated outright, and factors (2) and (3) help make the Buyer whole for any ownership-related carrying costs incurred.

E. Junior lien terminated: If the court concludes the Junior Lienor was entitled to redeem, then the amount the Junior Lienor must pay for redemption cannot be less than the sheriff’s sale price plus statutory interest (8%). (The court also must consider the factors in (D) when determining the amount the Junior Lienor must pay.) The Junior Lienor has ninety days to submit the payoff. If the Junior Lienor does not submit such payment, then the Junior Lienor’s rights will be terminated without compensation, just as they would have been in the foreclosure process.

F. Anti-merger statute: Section 4 specifically provides that there is no merger of the senior lien and title to the property until a Junior Lienor’s interest is terminated. This new legislation appears to resolve many uncertainties surrounding Indiana’s common law doctrine of merger. Thus the Buyer, which presumes that it’s acquiring title free and clear, has protections it did not previously have.

G. Other Buyer safeguards: Section 4 also states that the Buyer’s senior interest in the property cannot be denied even if the Buyer had (1) had actual or constructive notice of the Junior Lienor’s interest, (2) been negligent in examining county title records, (3) been engaged in the business of lending or (4) obtained a title insurance policy commitment. This language constitutes a preemptive strike against any defenses to the strict foreclosure action, and without these carve outs Section 4 would be meaningless.

I’m planning a follow-up post to identify some holes in SB 298. For today, it’s important for secured lenders and other lien holders to know that Indiana now has a statutory method to clear up title when a buyer learns that a junior lien survived a sheriff’s sale. While Section 4 is not perfect, I agree with my partner Tom Dinwiddie that this was a necessary and fair bill that protects both buyers and junior lien holders.

Indiana Legislation, 2012: Part 2 Of 3 – Obscure Redemption Language Remains

The second noteworthy issue arising out of the General Assembly’s 2012 session surrounds Senate Bill 298, which amends Indiana Code § 32-29-8 “Parties to Foreclosure Suit; Redemption,” including Section 3. This post revisits CitiMortgage v. Barabas, including the mystery that is I.C. § 32-29-8-3, about which I wrote last year: Post 1, Post 2 and Post 3. Unfortunately, even though the legislature amended Section 3, the 2012 session didn’t directly tackle Section 3’s obscure redemption provision. Questions arising out of CitiMorgage linger.

New Section 3. Here is Section 3 of I.C. § 32-29-8, as amended by the italicized language, effective July 1, 2012:

A person who:

(1) purchases a mortgaged premises or any part of a mortgaged premises under the court’s judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and

(2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
(A) an assignment that is not of record; or
(B) the transfer of a note, the holder of which is not a party to the action;

holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court’s decree in the action.

Redemption/strict foreclosure tweak. The underlined portion above is the source of some uncertainty and was not modified by the General Assembly this year. The critical purpose of the amendment to I.C. § 32-29-8 surrounds section 4 and what amounts to a brand new statutory strict foreclosure action. I.C. § 32-29-7-13 has been amended to state “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 and in IC 32-29-8.” The new “and in IC 32-29-8” language refers to Section 4, which is momentous legislation related to Indiana mortgage foreclosure law that I will discuss in my next post.

Status. One interpretation of Section 3 and CitiMortgage, which dealt with a rare set of facts, is that a buyer at a sheriff’s sale could acquire the property, only to learn within a year after the sale that a senior mortgagee, by virtue of a previously-unrecorded assignment, could surface and assert an interest in the property. I do not believe that the 2012 statutory amendments directly impact, or help clarify, the CitiMortgage holding. Even with the new Section 4, I.C. § 32-29-8, Section 3, needs a little more attention from the General Assembly. I’m afraid Section 3 unwittingly opens the door to litigation concerning post-sale rights of redemption in Indiana.  (Note:  On 4-10-12, the Supreme Court granted transfer in CitiMortgage.)

Borrowers unaffected. The General Assembly’s amendments do not (should not) affect a mortgagor’s (owner’s) right of redemption. Such parties still need to redeem before the sheriff’s sale. If not, Indiana law provides that a mortgagor’s right to or interest in the subject real estate will be fully and finally terminated – even though, interestingly, there is no specific statute stating as much. The rule is inferred from the totality of I.C. § 32-29-7 and confirmed by case law.

Indiana Notices Of Sheriff’s Sale Must Identify All Property Being Offered

What must be included in a statutory notice of sheriff’s sale? If you, as a secured lender, intend to sell both the real estate and any business personal property on the premises, the notice must identify both the business personal property and the real estate. Property excluded from any notice is in jeopardy of being excluded from the sheriff’s sale. The recent Indiana Court of Appeals opinion in Surrisi v. Bremner explains why.

The judgment. Surrisi involved a $100,000 loan secured by, among other things, (1) real estate upon which the borrower operated a restaurant and (2) business personal property on site. The borrower defaulted on the loan, and the parties entered into an agreed judgment that granted the lender a money judgment, together with the right to sell the real estate and the business personal property to satisfy the debt.

The problem. After the entry of judgment, the lender filed a praecipe for sheriff’s sale – a simple filing – but the praecipe identified only the real estate. More importantly, the notice of sheriff’s sale – another fairly straightforward form – failed to mention the personal property. (These omissions are somewhat understandable, given that the vast majority of praecipes and sale notices involve only real estate. Sheriff’s sales in mortgage foreclosure cases typically deal only with real estate and fixtures. Indeed, overall, the statutory framework is geared to real estate, and specifics regarding personal property are hard to come by.) The Court of Appeals ultimately concluded that the omissions in Surrisi were fatal to the personal property aspect of the sheriff’s sale. (My June 13, 2011 post discussed a notice case, but the result was different.)

The sale and following events. The sheriff’s sale occurred, and the lender was the winning bidder. The bill of sale issued by the sheriff identified both the real estate and the business personal property. The lender, thinking that it had acquired title to everything, subsequently sold the restaurant and the business personal property to a third party. At some point – the timing is not entirely clear from the opinion – the borrower filed a motion to set aside the sheriff’s sale as it related to the business personal property. The borrower contended that the business personal property was not sold.

The legal question. The issue was whether the sheriff’s bill of sale was faulty so as to negate the personal property side of the sale. The outcome focused on the fact that the praecipe, notice and sales disclosure form identified only the real property.

The statute. Notices of sheriff’s sales are creatures of statute in Indiana. Ind. Code § 32-29-7-3(g) states that notices “must contain a statement, for informational purposes only, of the location of each property by street address, if any, or other common description of the property other than legal description.” The statute also expresses this qualification: “A misstatement in the informational statement under this subsection does not invalidate an otherwise valid sale.” In practice, plaintiff lenders prepare the notices and provide them to the sheriff’s offices for use in connection with the sheriff’s statutory publication obligations.

The interpretation of the statute. In Surrisi, the lender seized upon the statute’s qualifying language and argued that the failure to mention the business personal property in the notice of sale was a misstatement that should not otherwise invalidate the sale. The Court rejected the argument. The Surrisi notice did not involve a “misstatement” in the information about the property “but rather what property was offered for sale.” The Court apparently could not get over the notice flaw, which was compounded by the fact that the praecipe for sale requested only the real property to be sold by the sheriff. There also was evidence that the sales disclosure form completed by the lender specifically indicated that personal property was not included in the transfer. The Court further noted that the agreed judgment did not require the real and personal property to be sold at the same sale.

The outcome. Perhaps the most interesting piece of the Surrisi opinion was its final sentence: “On remand, the trial court should determine the amount of compensation due to the [borrowers] for the loss of their business personal property.” The result suggests that the lender made a full judgment/credit bid at the sale. As previously explained here, such a bid equates to the complete satisfaction of the debt – no deficiency. If there was a deficiency, then the Court would not have remanded the case to determine compensation for the borrower. Instead, the remand would have been to determine whether, or to what extent, the deficiency judgment should be extinguished. Remember the lender got a judgment against the borrower. The irony is that the Court of Appeals has paved the way for the borrower to recover money from the lender for the value of the business personal property. Although the value was not mentioned in the opinion, what a turning of the tables!

The lesson. If personal property is to be a part of any sheriff’s sale, then the notice of the sale should contain a “common description” of such property. While less important, to be consistent, the personal property should also be identified in the praecipe for sheriff’s sale and the sales disclosure form. These seemingly innocuous oversights in Surrisi proved to be quite problematic for the lender, particularly considering that, unlike real estate, to my knowledge the lender couldn’t get any kind of title insurance to cover the personal property piece of the transaction.

Marion County (Indianapolis) Sheriff's Sales Now Being Recorded

Quickly, I attended the monthly Marion County Sheriff's sale yesterday for a client, and the staff (Pam) announced that the sheriff's office is now recording the oral auction phase of the sale.  Microphones have been placed in the room.  It's my understanding that the purpose of the recordings is to verify the bids if a dispute later arises over a bid amount or the identify of a bidder.  The recordings will not be made available to the public, however.   

Indiana’s Requirement For Pre-Sale Payment Of Delinquent Property Taxes

Distressed loans secured by commercial property often involve delinquent real estate taxes.  Workout professionals should remain mindful of this possibility as they analyze their collateral and make decisions concerning the enforcement of the loan.  Questions I’m frequently asked are whether the lender should pay the real estate taxes and, if so, when. 

Prior procedure.  Indiana law historically required the plaintiff/lender, assuming it was the winning bidder at the sheriff’s sale, to pay any delinquent real estate taxes immediately after the sale.  In the case of a cash bidder (third party), taxes would be paid off the top or, in other words, the county treasurer got the first cut of the sale proceeds.   

2011.  In recent years, we noticed that some county sheriff’s offices started to require the plaintiff/lender to pay delinquent real estate taxes before the sale.  This has now become a formal, statutory requirement by virtue of Ind. Code § 32-29-7-8.5 “Requirements for Payment of Property Taxes and Real Estate Costs Before Sheriff’s Sale.”  The statute states, in pertinent part, that “the party that filed the praecipe for the sheriff’s sale shall pay . . . all delinquent property taxes, special assessments, penalties, and interest that are due and owing on the property on the date of the sheriff’s sale.”  A failure to pay will result in the cancellation of the sale.

Policing the issue?  Beginning in January 2011 in Marion County (Indianapolis), the Treasurer, in conjunction with the Sheriff, requires that a Tax Clearance Form (.pdf) be (a) completed by the party requesting the sale, (b) stamped by the Treasurer’s Office and (c) then submitted to the Sheriff’s Office with the written bid.  The form must be stamped regardless of whether delinquent taxes were ever an issue.  Lender’s counsel needs to complete the information at the top of the form (the date of the sheriff’s sale, file number, owner, address and parcel number), as well as the contact information at the bottom of the form.  The Treasurer’s Office completes everything else.  Note that one form needs to be completed for each parcel number (i.e. 4 parcels, 4 forms). 

As I’ve said on this blog many times, please be sure to confer with the particular county sheriff’s office in advance because rules and procedures may vary by county.  Perhaps other counties will follow Marion County’s lead in terms of documenting the status of the real estate taxes.  For now, call ahead to see what is needed. 

Timing.  At last week’s Marion County sales, we were able to submit payment for delinquent property taxes and obtain the stamped clearance form on the same day.  The better approach would be to allow yourself and your foreclosure counsel a few days before the sale to address the matter in case there are problems or the Treasurer’s Office is congested.  Without the stamped form, the Sheriff will not hold the sale.  It is my understanding that the Treasurer may set up an e-mail address so these forms can be submitted and completed via e-mail.  I will provide more information as it becomes available. 

Build into judgment.  Since I.C. § 32-29-7-8.5 now requires real estate taxes to be satisfied before the sale, the amount of any delinquent real estate taxes that either have been or will be paid by the lender should be an item of damages identified in the judgment.  Before the statutory change, borrowers theoretically could attack that damage figure as being speculative.  Some borrowers claimed that, because the lender had not actually incurred the loss at the time of the entry of judgment, courts could not award the damages.  Hypothetically, the borrower might later pay the taxes or a third-party buyer might pay the taxes.  Now, because the foreclosing lender is compelled to advance the taxes, courts in turn should be compelled to include such losses in the calculation of damages.

Plan ahead.  In the past, delinquent real estate taxes may have popped onto the lender’s radar in the days leading up to the sheriff’s sale.  Now, that issue should be addressed at the time of the filing of a motion for default judgment, motion for summary judgment or trial.  Lenders and their foreclosure counsel should make it their routine practice, when calculating the debt, to verify with the county treasurer the status of the real estate taxes generally and the amount of any delinquent real estate taxes specifically.  (As an aside, delinquent taxes frequently are identified in a title commitment.)   

For more on this subject, please see my November 16 and November 24, 2010 posts that deal with tax sales.

Indiana Real Estate Taxes And Sheriff's Sales

Today, in the wake of new statutory language for 2011 -- Ind. Code 32-29-7-8.5 -- I revised  and re-posted three prior articles related to Indiana sheriff's sales and the role of delinquent real estate taxes in such sales.  I'll try to bring things together in a separate post next week and comment upon this week's experience with Marion County's brand-spanking-new Tax Clearance Form.  More to come.... 

Sheriff's Sale Checklist - Marion County (Indianpolis) Illustration - Revised

This follows-up my August 14, 2009 post - New Marion County (Indianapolis) Sheriff's Sale Requirements- and fulfills my promise, while presenting at last last year's foreclosure CLE/seminar, to provide a sale checklist.  The following list includes many of the key steps but is not an exhaustive list of considerations.  So, please make sure you and your counsel independently review the applicable statutes and rules as you prepare for your own sale.  Please also glance at last week's post - Indiana Sheriff's Sales: Local Rules, Customs and Practices Control - for further advice/tips. 

Upon Entry Of Judgment/Pre-Sale

1. Praecipe for sale at clerk’s office; submit first page of complaint/two copies of judgment. 
2. Obtain sale date and sale number from sheriff.
3. Submit notice of sheriff’s sale to sheriff.
4. Request bidding instructions from client.
5. Obtain sale data sheet from sheriff.
6. Prepare bid form.
7. Obtain check for sheriff’s costs/sale fees.
8. Draft sheriff’s deed and request check for recorder’s fee.
9. Draft clerk’s return.
10.  Draft sales disclosure and request check for auditor’s fee.
11.  Obtain statement for any delinquent real estate taxes from treasurer’s office.
12.  Request check from client to treasurer for any delinquent taxes. 

Day Before Sale

13.  If applicable, pay any delinquent taxes and secure receipt from treasurer; obtain stamped Tax Clearance Form from treasurer (regardless of whether there were any delinquent taxes).
14.  Submit to sheriff:
    (a) Bid form with sheriff’s fees/costs check;
    (b) Deed with recorder’s fee check;
    (c) Clerk return;
    (d) Sales disclosure form with auditor’s fee check; and
    (e) Tax Clearance Form.

Sale Day

15.  Attend auction at City/County Building. 

After Sale

16.  If client purchases, obtain all file-marked conveyance documents and clerk’s return.
17.  If third party purchases, obtain check for sale proceeds from sheriff.

(This revises/updates my 3-7-10 post.)

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.  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.)

(Tax) Lessons Learned From A Marion County (Indianapolis) Sheriff's Sale

In February of 2010, 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 that post and convey a handful of things about which I was reminded during recent experiences.  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. The sale fees/costs must be paid to the "Marion County Sheriff."   (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.)  

Taxes.  Beginning in 2011, Ind. Code 32-29-7-8.5 mandates that any delinquent real estate taxes, which by the way include delinquent sewer lien fees, be paid by the plaintiff/senior mortgagee before the sale.  In the past, checks for taxes were tendered with the sale bid, or in some counties taxes could be paid by the successful bidder after the sale.  Now (2011), Indiana statute requires the taxes to be current by the date of the sale, or the sale will be cancelled.  Proof of payment can come from a receipt from the County Treasurer's office.  However, in Marion County (Indianapolis), local procedure dictates that a Tax Clearance Form, stamped by the Treasurer's office, be provided to the sheriff with the presale bid package.      

Source of delinquent tax figure.  Without boring you with the details, I've learned the hard way that delinquent tax figures provided by the sheriff's office on its presale notice often are slightly inaccurate.  I would recommend that lenders or their lawyers go directly to the county treasurer's office in order to confirm (in writing, if possible) the amount of any delinquent taxes or fees. 

(This updates/revises my 12-15-08 post.)

2011 Indiana County Sheriff's List

Thanks to Cindy Edmiston of SRI, Incorporated for circulating the attached list of Indiana sheriffs for 2011.  Sheriff's sale documents, such as the notice, clerk return and deed, should identify the county sheriff.  Evidently, there will be forty-six new sheriffs in 2011.  Mortgagees and their foreclosure counsel should update certain forms accordingly. 

What's A "Praecipe"?

It's helpful for representatives of commercial lending institutions to know some "legalese" when dealing with their foreclosure counsel and the various governmental entities involved with the Indiana foreclosure process.  Today's vocabulary lesson surrounds what it means to "praecipe`" (pronounced "press-ah-pee") for a sheriff's sale of real estate loan collateral.

Trigger.  Once the secured lender and its counsel have received a judgment and foreclosure decree, and after observing the three-month waiting period (if applicable), it's time to sell the real estate for purposes of satisfying all or part of the judgment.  In Indiana, to trigger the sheriff's sale process, Ind. Code 32-29-7-3(b)requires the lender/mortgagee/plaintiff/judgment creditor to file a praecipe for sheriff's sale with the clerk of the court.  Upon the filing of a praecipe, the clerk "shall promptly issue and certify to the sheriff of that county a copy of the judgment and decree under the seal of the court."

Definition.  A praecipe is a fancy (actually, a Latin) word for a written request.  Black's Law Dictionary defines the term, in pertinent part, as follows:  "includes an order to the clerk of court to issue an execution on a judgment already rendered....  Also an order, written out and signed, addressed to the clerk of a court, and requesting him to issue a particular writ." 

Details vary.  The logistics of the praecipe for sheriff's sale may vary by county and will depend upon how a particular court, clerk or sheriff's office conducts its business.  For example, a separate writ of execution may need to be filed.  Or, the praecipe itself may need to attach copies of the judgment and/or involve the tender of sale fees in advance.  As written here before, I strongly advise contacting your civil sheriff's office to confirm the who, what, when, where, why and how of putting the sheriff's sale's wheels into motion.  

As an aside, I'd like to mention that the frequency of my posts has dipped this month due to some pre-planned time away from the office, as well as preparation for and participation in a five-day jury trial that concluded this past Monday.  I plan on getting back on track with weekly posts in September.  As always, thanks for reading, commenting and emailing....    

Indiana Has Three-Month Waiting Period Before Sheriff's Sales Can Be Triggered

Workout specialists from commercial lending institutions often ask me how quickly they can repossess their real estate loan collateral here in Indiana. One of my very first posts, back in November of 2006, generally addressed that question: Basic Foreclosure Process/Timing In Indiana. As I've mentioned before, to the chagrin of secured lenders, particularly when they're facing loans in default with no hope of a turnaround, mortgage foreclosures must be judicial or, in other words, through the court system. Foreclosures are lawsuits, with all the attendant delays and expense.

Three months post-complaint. Generally, real estate collateral must be sold, pursuant to a judge's decree (a judgment), by the county civil sheriff. Before triggering the post-judgment sale process, lenders and their counsel should remain mindful that Indiana has a statutory three-month waiting period that must first expire. Ind. Code 32-29-7-3(a) states:

In a proceeding for the foreclosure of a mortgage executed on real estate, process may not issue for the execution of a judgment or decree of sale for a period of three (3) months after the filing of a complaint in the proceeding.

As noted, the period starts with the filing of the complaint.

Rare. My experience has been that this rule will be a non-issue in the vast majority of cases. As a practical matter, this grace period should only come into play in situations involving motions for default judgment, which I normally don't recommend in commercial foreclosure cases anyway.

Exception. There is an exception to the three-month rule in I.C. 32-29-7-3(a). Subsection (2) says:

if the court or an enforcement authority ... finds that the mortgaged real estate is residential real estate and has been abandoned, a judgment or decree of sale may be executed on the date the judgment of foreclosure or decree of sale is entered, regardless of the date the mortgage is executed.

As noted, this exception does not apply to commercial properties. For residential/consumer cases involving vacant/abandoned houses, you and your counsel should ensure the court includes these factual findings in your foreclosure decree so as to avoid the grace period.

Even though this three-month requirement will rarely be an obstacle in a commercial foreclosure, it's still important to know that it exists as you and your counsel consider how long it may be before there will be a sheriff's sale.

NOTE: I.C. 32-29-7-3 was amended in 2012. See my March 23, 2012 post.

Sheriff's Deeds In Marion County (Indianapolis): One-Page Rule

On March 7, 2010, I provided a Sheriff's Sale Checklist - Marion County Illustration.  As noted, one of a foreclosing lender's tasks is to tender a sheriff's deed (click for local form) to the sheriff's office to perfect the sale bid.  Last August, the Marion County Sheriff's Office revised some of its sale rules and requirements.  Here is a link to the office's site on that issue:  Real Estate Rules for Attorneys.

Rules.  With respect to the sheriff's deed form, the Marion County Sheriff's website says:  

Notices, deeds clerk returns and bid forms must be on 8 ½” by 11” paper.  All forms must have the Sheriff’s file number in the upper right corner.  Documents without the file number in the upper right corner will NOT be processed.  All forms MUST be completely filled out with accurate information.  Deeds must be one (1) page.  If second page is needed, the legal description may be an attachment, BUT the street address and parcel number must be spelled out in the area where deed indicates legal description is attached.  Deeds without the signature/notary page on front will NOT BE SIGNED!

As noted, deeds should be one page.

Rejection.  In the past, absent a very short legal description of the property, our firm routinely tendered sheriff's deeds with the legal description attached as an exhibit.  At a sale last month, for the first time the sheriff's office rejected our deed and required us to provide another deed with the legal description contained on its face.  The one-page rule was enforced.  (Lesson learned.) 

Rationale.  In speaking with the sheriff's office, I was told that the primary reason for the one-page requirement is to ensure that legal descriptions don't get misplaced or lost.  The goal is to protect the integrity of the deed.  Since Marion County processes 400-600 deeds for each month's sale, the one-page guideline is understandable.

Exception?  In order to squeeze our legal on last month's deed, my secretary had to work some magic with fonts, margins, etc.  She got it done, and the sheriff evidently has accepted our revised deed.  But what if the legal simply is too long to insert into a one-page deed?  I'm informed by the sheriff's office that the incorporation of an exhibit will be acceptable in those instances.  The rules above support this, but note that the street address and parcel number must still be typed on the face of the deed. 

Plan and discuss.  In the end, common sense should and likely will prevail, but clearly the "default" (preferred) approach by the Marion County Sheriff is to limit the deed to one page, without any attached exhibits.  Because local rules, customs and practices prevail in each county, I recommend that you or your lawyer contact the county sheriff's offices in advance of your sales to ensure you are complying with sale details, such as the form of deed.  In the meantime, please email me or post a comment with regard to your experiences with attaching legal descriptions to sheriff's deeds in counties other than Marion, thanks.    

The Pesky Sales Disclosure Form - Marion County (Indianapolis) Update

I posted a sheriff's sale checklist on March 7, 2010, and I've written about the sales disclosure form (SDF) component to the sheriff's sale process previously.  The involvement and handling of SDF's in connection with the sheriff's sale of your real estate loan collateral continues to evolve.  Please remain mindful that local rules, customs and practices control.  To fully prepare for the sale, contact your county civil sheriff's office in advance.  

The Marion County Civil Sheriff's Office now requires that, before they will accept the SDF, it must first be submitted and completed on line.  Here is a link to the site for submission:  SDF Link.  I'm also providing a .pdf of a cheat sheet, with contact information, regarding this process:  SDF .pdf.  The plaintiff/mortgagee/bidder at the sheriff's sale must complete the SDF on line and then submit the printed form (with the auditor's fee check) to the sheriff's office at the time one submits the sale bid.  (This has something to do with the fact that the on line form, once printed, contains data in the upper right corner that shows the appropriate on line submission.)  Please note that the form itself will not be fully completed since the sheriff will need to execute it post-sale.  

Please email or post a comment if you or your foreclosure counsel have had a different experience.  I have not yet seen this on line requirement in other counties, but perhaps this is changing across the state.  As I've posted before, in other counties, including Marion County, a hard copy of the blank form could be completed and submitted to the sheriff.

Enough about SDF's -- I'm now going on a family vacation and will post something again during the week of June 14th, if not before....   

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

This replaces my April 14, 2008 post and includes the most current links to various Indiana county sheriff's offices.  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 civil sheriff's office. 

County-specific.  Although the Indiana Code covers the fundamentals of the sheriff's sale process, the specific rules and procedures vary by county.  I once presented at a foreclosure-related seminar, 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.

State link.  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.

Marion County.  I'm located in Indianapolis, Marion County, Indiana, and our civil sheriff has a helpful site - click here - that I've permanently linked to on my home page. 

Contiguous counties.  Here are links to sheriff's sites in the seven counties contiguous to Marion County:

• Hamilton County
• Hancock County
• Shelby County
• Johnson County
• Morgan County
• Hendricks County
• Boone County

Other counties and third party servicers.  The following are 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 counties provide more information and forms than others.  In addition, many Indiana counties (about 17, including Boone and Vigo), outsource all or a portion of the sheriff's sale process through SRI, Inc.  Another contractor, Lieberman Technologies, serves six Indiana counties, including Shelby and Vanderburgh.

Despite information that may be available on the internet, I've found it to be invaluable to talk to, and form a working relationship with, the representatives who will be handling your sale.

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.

           

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. 

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.