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Click here for a news piece from monitordaily.com. "The pace of corporate defaults in the first quarter of 2008 equaled the total for all of 2007, according to a new report from Standard & Poor's...."
This supplements my March 2, 2007 post: The execution of a writ of assistance need not be "commercially reasonable." Please click here for that post, which in part dealt with the federal district court's February 16, 2007 conclusion that Indiana Trial Rule 70(A) writs of assistance should be executed by the county sheriff immediately and without regard to commercially-reasonable standards. The Seventh Circuit agreed with the opinion of Judge Tinder (who is, incidentally, now a Seventh Circuit Judge).
Affirmed. At issue was the timing of an eviction of a property owner after after an execution sale of the real estate. The owner, Mr. Dempsey, cried foul because JP Morgan Chase refused to delay the eviction to allow Mr. Dempsey to attend a funeral. Here's what the Seventh Circuit said regarding the appeal of that issue:
We likewise agree with the district court that there is no merit to Dempsey’s claim that the writ of assistance was executed unfairly because Chase refused to delay the eviction to allow Dempsey to attend a funeral. Dempsey has provided no support whatsoever for his contention that the writ must be executed in a commercially reasonable manner. “A writ of assistance is an equitable remedy used to transfer real property, the title of which has been previously adjudicated, as a means of enforcing the court’s own decree” where the party that the writ is issued against has refused to obey that decree—like Dempsey did here. See TeWalt v. TeWalt, 421 N.E.2d 415, 418 (Ind. Ct. App. 1981); see also IND. R. TRIAL P. 70(A). Thus, it is not surprising that the sheriff has the “right and duty” to execute the writ immediately upon receiving it. 7 C.J.S. Writ of Assistance § 14. As the district court noted, “Dempsey could have avoided his trouble by moving out voluntarily and promptly when Chase obtained title to the property as opposed to forcing Chase to utilize the sheriff’s department to enforce the court’s decision.”
For a .pdf of the entire March 31, 2008 decision in Dempsey v. JP Morgan Chase, 2008 U.S. App. LEXIS 7707 (7th Cir. 2008) click here.pdf.
Tool for creditors. Again, if you acquired title to real estate at a sheriff's sale and if the owner will not vacate voluntarily, your remedy is a writ of assistance. Dempsey provides powerful legal precedent, favorable to creditors, associated with how Indiana writs of assistance can and should be executed.
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.
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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.
As reported on this blog, over the past several months the Indiana Court of Appeals has issued a number of opinions directly or indirectly related to defective titles searches. On March 31, 2008, in House v. First American Title, et. al., 2008 Ind. App. LEXIS 618, the Court again provides guidance to commercial lenders and other parties affected by title defects post-foreclosure. As always, I provide .pdf's of the opinions I discuss: House.pdf.
Situation. The facts of House are straightforward. Plaintiff Wayne House bought a home from Centex, which held title after foreclosing on the prior owners. Defendant Security Title had performed a title search for House and reported no liens on the property. House improved the property and then attempted to flip it. A prospective buyer wouldn't close upon learning that judgment liens existed on the property. The judgment liens were held against the prior owners - the owners upon which Centex foreclosed. House filed suit to clear title.
Security Title exposed to liability. Security Title claimed it did not have to disclose the judgment liens because they were legally deficient. The Court noted, however, that neither Indiana law nor Security Title's contract with House supported the proposition that Security Title was not required to disclose recorded liens it believed were legally deficient. Moreover, given the procedural context of the decision - a Trial Rule 12(B)(6) motion to dismiss - the Court could not at the pleading stage determine as a matter of law, without further factual inquiry, whether the liens were in fact legally deficient.
Some Indiana lien laws. Security Title asserted that a handful of well-settled laws applicable to judgment liens, and enforcement of such liens, warranted a dismissal of House's case. It's helpful to be reminded of these Indiana legal principles:
The litigation continues.... Given the nature of the subject liens, Indiana's laws seemingly should protect Security Title from liability stemming from the judgment liens. Nevertheless, issues regarding whether the prior owners held the property as tenants by the entireties and/or the priority or enforceability of the judgment liens were factual and thus inappropriate for a T.R. 12(B)(6) dismissal. The House case generally teaches us that companies conducting title searches should disclose all recorded liens, regardless of whether the searchers believe such liens are deficient. Indeed this is one of the primary reasons why foreclosing lenders order title work in the first place - to determine whether there are liens on the property that need to be dealt with during the foreclosure suit.