Full Judgment Bid = Zero Deficiency
August 01, 2008
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.