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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.