The situation. A client engaged me to bid for a commercial property at a recent sheriff’s sale, but another party outbid us. However, the sale was unusual in that the Small Business Association (SBA), which was a junior mortgagee, retained a post-sale one-year statutory right redemption under 28 U.S.C. 2410(c). (The SBA essentially is the U.S. Government.) The right arose out of the SBA’s loan to the borrower secured by a second mortgage on the subject real estate. The client and I wondered whether we could acquire title to the property through the purchase of the SBA’s right of redemption, which would enable us to redeem the property from the sheriff’s sale (pay off the sheriff’s sale buyer) and slide into ownership.
Redemption law. As noted by my prior posts of 2/1/08 and 5/15/08, generally there is no post-sale right of redemption in Indiana. The sheriff’s sale is the end of the line for the borrower and all other lienholders. There are, however, various federal statutes granting the U.S. Government a post-sale right of redemption, and those rights typically will be spelled out in the foreclosure decree (as they were in my recent matter). See, for example, my 7/23/10 post dealing with a federal tax lien. In my case, the SBA’s right stemmed from the junior mortgage and Section 2410.
Transferrable? Candidly, we didn’t know whether we could buy the SBA’s judgment and, most importantly, its right of redemption. Why not? We thoroughly researched the subject but could find no law definitively answering the question one way or the other. In other words, we could find no statute and no case law saying that we couldn’t do this. So, the client decided to move forward, and we were able to connect with the right people at the SBA to initiate negotiations.
SBA’s position. We formally offered to buy out the SBA (at a discount). Whether by virtue of the law, policy, or a combination of the two, here is how the SBA’s in-house legal department politely responded to us (paraphrased):
The SBA cannot sell its right of redemption to the unsuccessful bidder; we can only release it or execute upon it. This is because the right of redemption is specific to SBA and is not transferrable. The unsuccessful bidder could enter into an agreement with the SBA to redeem the property in exchange for the escrow of the judgment amount, plus costs, interest, and the SBA’s full principal and interest balance. The SBA can then assign all the other loan documents, but your client, the unsuccessful bidder, won’t need the mortgage because, once SBA redeems, your client will become the owner. Once these funds are escrowed, the SBA goes into court and redeems, gets title and then turns around and resells the property to the party that puts up the funds (your client).
In the end, our client could accomplish its objective – just not how we originally thought. We would never actually buy the redemption right but instead would enter into an agreement with the SBA to essentially purchase the property from the SBA after the SBA exercised its right of redemption. The scenario really was better for us because the SBA, not the client, would take the lead with exercising the right of redemption.
Outcome. Unfortunately for the client, our case took an unexpected turn when the successful bidder at the sheriff’s sale got wind of our plan and negotiated with the SBA himself. We understand he offered to pay off the SBA in exchange for its release of the right of redemption – a simpler transaction - at a price our client was unwilling to pay. What we’ll never know is whether the SBA would have negotiated down off of its demand for full payment of its junior debt in order to deal with us. We assume in certain cases that the SBA would do so, but in our unique case apparently the winning bidder was willing to pay full value, or at least far more money than what our client had offered (and what the property was worth). As an aside, by virtue of the sheriff’s sale and the post-sale SBA transaction, the winning bidder made both the plaintiff/senior mortgagee and the SBA/junior mortgagee whole – a rarity in commercial foreclosure cases.
What did we learn? In concept, a third party can in fact deal with the SBA with respect to its right of redemption. As such, there is a path to post-sale ownership. Of course any such third party will, at a minimum, be required to pay off in full the winning bidder for the price paid at the sheriff’s sale. The amount required to pay the SBA, however, appears to be negotiable and will vary depending upon the circumstances of the particular case. An investor would only consider this if he or she perceived there to be value in the property over and above the price paid at the sheriff’s sale – which again would be a rare case.
I frequently represent investors who acquire real estate at sheriff’s sales or who purchase senior commercial mortgage loans that I subsequently foreclose. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.