My July 25, 2008 post explains that, under Indiana law, a motion for the appointment of a receiver must be granted in foreclosure cases in which the mortgagor has agreed in writing to the appointment of a receiver. There are many scenarios when a mortgagee (secured lender) might want to utilize the receiver, once in place, to sell commercial real estate loan collateral before a foreclosure judgment is entered and in lieu of a sheriff’s sale. Some day, I might discuss the pros and cons of receiver’s sales, or the rationale behind a decision to pursue such a sale. This post is limited to whether a receiver’s sale is even an option in Indiana and, if so, whether the receiver can sell the real estate free and clear of all liens, a la a sheriff’s sale.
Two main obstacles. First, the receiver must have court authority for the sale. The receiver will need to file a motion in the foreclosure case and obtain a court order that permits the sale and details the logistics. Second, the receiver should have the commitment of a title insurance company that an owner’s policy can be delivered to the buyer post-sale. The policy would provide, among other things, that title to the property has been conveyed free and clear of all liens. It’s my understanding that most, but perhaps not all, Indiana title insurance companies will insure receiver’s sales.
Statutory authority, or lack thereof. To obtain court authority, lawyers logically would look first to Indiana’s receivership statute. Ind. Code § 32-30-5-7(5) states that a “receiver may, under control of the court or the judge . . . sell property in the receiver’s own name . . ..” “Property” is not defined in the statute, but it’s safe to presume that the term includes real estate. More significantly, the receivership statute does not state at § 7(5), or anywhere else, that the receiver can sell property free and clear of all liens. Thus the statute doesn’t specifically authorize the contemplated sale, but it doesn’t prohibit one either.
Case law provides the solution. More definitive answers can be found in a handful of appellate court opinions, the majority of which are very dated. Indiana case law supports the proposition that trial courts may order real estate to be sold by a receiver free and clear of any existing liens, with the liens attaching to the proceeds of the sale. Here is a listing of the cases we found, and I’d like to thank last year’s summer associate, Peter Gundy, for assisting with this research: Kline v. Hammond Machine & Forge Works, 127 N.E. 220 (Ind. Ct. App. 1920); Randall v. Wagner Glass Co., 94 N.E. 739 (Ind. Ct. App. 1911); Totten & H. Iron & Steel Foundry Co. v. Muncie Nail Co., 47 N.E. 703 (Ind. 1897); Mueller v. Stinesville & Bloomington Stone Co., 56 N.E. 222 (Ind. 1900).
Contested sales? The cases imply the need for court authority and mandate that all parties with an interest in the real estate receive notice of the receiver’s motion with an opportunity to be heard. As a practical matter, most if not all the parties to the case probably should be on board with the decision to proceed with such sale. If the sale is contested, particularly by the owner/borrower/mortgagor, the law becomes less clear as to what the outcome should be. I’ve heard through the grapevine that this issue could be on its way to the Court of Appeals, so perhaps we’ll see a definitive decision from the courts in the near future.
Liens attach to proceeds. Although Indiana law permits a receiver’s sale of real estate free and clear of all liens, the liens are not extinguished. Rather, they attach to the proceeds of the sale, which proceeds are placed into escrow pending the outcome of the case. Lien priority, damages amounts and other issues still can be litigated.
Again, why receiver’s sales might or might not make sense in a given case goes beyond the scope of this post. Today’s point is that, under Indiana law, there is legal authority to support the notion that a receiver can circumvent a sheriff’s sale by holding a pre-judgment sale of the underlying real estate loan collateral. A receiver generally can deliver a deed conveying title free and clear of all liens as long as all the interested parties receive notice of the receiver’s plans, all (or most) of the parties agree to the approach, the judge enters an order authorizing the sale and a title insurance company is prepared to provide an owner’s policy at closing.