Sometimes multiple mortgages on multiple properties secure a single promissory note. Lenders/mortgagees may pursue separate foreclosure actions against separate properties, but there cannot be a double recovery. Neu v. Gibson, 968 N.E.2d 262 (Ind. Ct. App. 2012) illustrates this and applies the so-called “full credit bid rule” that was the subject of my post Full Judgment Bid = Zero Deficiency.
The transaction. In exchange for the sale of stock, Nowak gave Gibson a promissory note and granted Gibson a mortgage against real estate in both Indiana and Michigan. Nowak sold the Indiana real estate to Neu but did not inform Gibson of the sale. Nowak ultimately defaulted on the promissory note to Gibson.
Suits. Legal proceedings ensued in Indiana between Gibson and Neu that led to an Indiana Supreme Court decision concerning the doctrine of equitable subrogation, which was the subject of my March 1, 2011 post. Unbeknownst to Neu, Gibson also pursued a legal proceeding in Michigan with respect to the Michigan real estate. Gibson obtained a foreclosure judgment in Michigan and made a credit bid at the sale for the full amount of the judgment. Gibson ultimately acquired title to the Michigan real estate. The collection proceedings then turned back to Indiana where the issue was whether the Indiana judgment had been satisfied by virtue of the Michigan sale.
Full credit bid rule. Neu’s primary argument in the Indiana case focused on Gibson’s entry of a full credit bid in the foreclosure sale of the Michigan real estate. The question was whether Gibson’s claim against the Indiana real estate, which claim rested on the same debt secured by the Michigan real estate, was barred by the “full credit bid rule.” (Michigan also recognizes and applies this rule.) Essentially, the rule provides that the payment of a bid at a sheriff’s sale sufficient to satisfy the judgment extinguishes that judgment. It follows that, where a judgment creditor has been paid the full amount of the judgment, there is a complete satisfaction of that judgment.
Rule applied. In Neu, Gibson obtained a foreclosure judgment on Nowak’s promissory note with regard to the Michigan real estate in the amount of $305,722.48. A few months later, the Michigan real estate was the subject of a foreclosure sale where Gibson submitted the highest bid of $305,722.48. The Court said: “as Gibson purchased the Michigan Real Estate for a price equal to the amount of the foreclosure judgment, the debt became satisfied and the underlying promissory note was extinguished.” Consequently, the mortgage on the Indiana real estate was terminated.
Fair market value immaterial. In an effort to avoid the consequences of the Michigan proceedings, Gibson contended that the Court should use the fair market value of the Michigan real estate – not the full credit bid – in determining the amount still owed in the Indiana action. Gibson submitted an appraisal of the Michigan real estate stating the property was only worth $72,000. As discussed in the Titan opinion and my 8/1/08 post, however, the full credit bid rule “precludes a lender for purposes of collecting its debt from making a full credit bid and subsequently claiming that the property was actually worth less than the bid.” The Court summed up its opinion as follows:
As Gibson purchased the Michigan real estate for a price equal to the amount of the foreclosure judgment, the debt became satisfied and the underlying promissory note was extinguished. . . . With the satisfaction of the underlying promissory note, there is no longer any debt to support the foreclosure on the Indiana real estate. If, in fact, we were to allow Gibson to foreclose on the Indiana real estate after foreclosing on the Michigan real estate, we would grant him a windfall, which we are not prepared to do.
Takeaway. One of the lessons of Neu is that judgment creditors probably should not make full judgment (credit) bids at foreclosure sales unless the real estate is worth the amount of the judgment. On the other hand, if judgment creditors absolutely want the property, and if there are no other assets to pursue, then a full credit bid at a sheriff’s sale makes sense. But do so knowing that there is no residual debt to collect. A full credit (judgment) bid resolves the debt and extinguishes any other liens securing such debt.