If A Sheriff’s Sale Is "Subject To" A Senior Mortgage, The Senior Lender Gets None Of The Sale Proceeds, Even If There Is A Surplus
Lesson. In Indiana, mortgage foreclosure sale surplus proceeds generally go back to the mortgagor/owner.
Legal issue. Whether, in connection with a junior mortgagee’s foreclosure case, the trial court’s disbursement of sheriff’s sale surplus proceeds to the senior mortgagee violated Indiana’s mortgage foreclosure statutes and laws.
Vital facts. The owner of the mortgaged real estate had a senior mortgage loan, as well as a home equity line of credit (a junior mortgage loan), with the same lender. After the owner defaulted, the lender foreclosed on the second (junior) mortgage only. The foreclosure decree ordered a sheriff’s sale of the real estate subject to the senior mortgage lien. The judgment did not award any damages associated with the senior loan or otherwise identify the senior debt amount. The judgment/decree only dealt with the home equity line of credit/junior mortgage. Following the sheriff’s sale, about $50,000 in excess proceeds remained after payment of the judgment amount.
Procedural history. The lender moved for an order that this surplus be disbursed to the lender toward payment of the senior mortgage debt. The owner argued that the surplus should have been released to her because the sale was specifically subject to the first mortgage. The trial court awarded the mortgage foreclosure surplus proceeds to the senior lender, and the owner appealed.
- Indiana case law provides, generally, that when a sheriff’s sale purchaser buys subject to a prior mortgage, the purchaser takes the land “charged with the payment of the debt.” This does not equate to personal liability for the debt, however. “The land itself is the primary fund out of which the debt is payable.”
- In Edler, the Indiana Court of Appeals relied upon mortgage foreclosure statutes, including Ind. Code 32-29-7-9(b), which states that if property is sold at a foreclosure sale “the sheriff shall pay the proceeds as provided in I.C. 32-30-10-14.”
- Section 14 states, in pertinent part, that sale proceeds “must” be applied as outlined and that “in all cases in which the proceeds of sale exceed the amounts described in subdivisions (1) through (4), the surplus must be paid to the clerk of the court to be transferred, as the court directs, to the mortgage debtor….”
- Case law also says that “lienholders whose rights have not been adjudged or foreclosed in the foreclosure action have no right to share in the proceeds of the sale.”
Holding. The Court of Appeals reversed the trial court and ordered the surplus proceeds to be paid to the mortgagor/former owner.
Policy/rationale. The owner contended that, because the sale was expressly subject to the first mortgage, the surplus could not be used as a partial payment toward that mortgage. The Court agreed and noted that the lender chose not to foreclose its senior mortgage and “could not essentially reverse course by seeking the surplus sale proceeds” in contravention of Indiana foreclosure laws. (The Court declined to get into how else the lender might have been able to collect the outstanding debt, and the opinion seemed critical of the lender’s decision not to foreclose the senior mortgage simultaneously with the junior mortgage. The record was unclear as to why this did not occur.)
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I represent both senior and junior lenders, as well as mortgage loan servicers, in connection with foreclosure cases and sheriff’s sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at email@example.com. 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.