Judgment Granted To Lender Despite Absence Of Signature On Promissory Note
WSJ: Foreclosures Hit Rich And Famous

Receiver Not Authorized To Sell Property Without Mortgagor’s Consent

On January 11 and January 20, 2010, I discussed issues related to Indiana receiver sales and some of the unresolved questions under Indiana law.  Shortly thereafter, the Indiana Court of Appeals definitively answered one of those questions in Wells Fargo v. Midland, 2010 Ind. App. LEXIS 346 (Ind. Ct. App. 2010) (.pdf).  The opinion provides that the trial court erred in a mortgage foreclosure case when it gave the receiver the authority to sell the subject real estate at a private sale without the mortgagor’s consent.

Backdrop.  Lender/mortgagee Wells Fargo filed a commercial mortgage foreclosure suit against borrower/mortgagee Tippecanoe.  Wells Fargo promptly filed a motion for the appointment of a receiver, and the order granting the motion provided that the receiver had the power to sell the subject real estate at a private sale without Tippecanoe’s consent. 

Operative statutes.  The Court first noted that the general receivership statute provides “a non-exhaustive list of the powers” a court may grant to a receiver at Ind. Code § 32-30-5-7(5).  Among other things, “the receiver may, under the control of the court or the judge:  (5) sell property . . . in the receiver’s own name . . ..”  The Court next cited to a “more specific statute” governing receiverships in mortgage foreclosure actions that articulates the receiver’s role more narrowly and, significantly, “does not include the right to sell the mortgaged property at a private sale.”  See, I.C. § 32-29-7-11(a).  The Court concluded that the latter statute carried more weight because it was a more specific statute pertaining to the subject of mortgage foreclosures. 

Stripping the right of redemption.  The Court then considered Indiana’s statutory right of redemption at I.C. § 32-29-7-7.  The Court proclaimed that “every defendant in a mortgage foreclosure action has the right to redeem its property by paying off the amount due at any time before the property is sold at a sheriff’s sale.”  Tippecanoe asserted that the trial court’s authorization of the receiver to sell the subject real estate at a private sale, without Tippecanoe’s consent and before the sheriff’s sale, “stripped Tippecanoe of its statutory right of redemption.”  The Court agreed.

The only “sale” contemplated by the statutes governing receiverships over mortgage[d] property is a sheriff’s sale.  I.C. § § 32-29-7-3, -4, -7, -8, -9, -10.  Thus, all property owners are entitled to redeem their property up to the date on which their property is sold by the sheriff.  See also I.C. § 32-29-1-3 (prohibiting a mortgage instrument from authorizing the mortgagee—i.e., the bank—from selling the mortgaged property); Ellsworth v. Homemakers Fin. Serv., Inc., 424 N.E.2d 166, 169 (Ind. Ct. App. 1981) (holding that “[a] mortgagee is not permitted to sell mortgaged premises, but such sale shall be made by judicial proceeding” and that “[t]he judgment of foreclosure shall order the mortgaged premises sold by the sheriff”).  It must be true, therefore, that any receiver charged with preserving and maintaining mortgaged property must do so through the date of the sheriff’s sale and may not sell the real property prior to that time without the owner’s consent.  By giving the receiver herein the authority to sell the Tippecanoe property prior to a sheriff’s sale and without Tippecanoe’s consent, the trial court stripped Tippecanoe of its statutory right of redemption.

Waiver?  The primary contention of Wells Fargo on appeal was that Tippecanoe previously waived its right of redemption in the mortgage, which indeed contained a waiver clause.  The argument failed, however, because Tippecanoe executed the waiver before the default occurred.  Pursuant to Indiana cases, the waiver could not be enforced. 

Going forward.  The Wells Fargo opinion definitively answers the question of whether the receiver, in a mortgage foreclosure case and at the request of the plaintiff mortgagee, can sell the property if the owner/borrower/mortgagor contests the sale.  The decision does not, however, conclusively resolve the issue of whether the receiver can sell the property when other parties, such as junior mortgagees or mechanic’s lien holders, object.  One could argue that the Court’s rationale supports the notion that the consent of all parties may be required for a receiver’s sale to happen.  I’ll continue to monitor the cases to see whether anything else develops in this area. 

Wells Fargo addresses a handful of other important issues that are useful for commercial mortgage lenders and their foreclosure counsel.  Next week’s post will discuss those points.  This week’s lesson is that a lender cannot force a receiver’s sale over the objection of a borrower.  Mortgagees and receivers need the mortgagor’s consent.