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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.

Case cite.  Edler v. Regions, 60 N.E.3d 288 (Ind. Ct. App. 2016)

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.

Key rules. 

  • 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.)

Related posts.

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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 john.waller@woodenmclaughlin.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.


Computing Time Deadlines In Indiana: Tax Sale Notice Not 1 Day Late

Lesson. For tax sale notice deadlines, count backwards from the date of the sale to determine when the notice mailing is due.

Case cite. Schafer v. Borchert, 55 N.E.3d 914 (Ind. Ct. App. 2016).

Legal issue. Whether the county timely mailed its notice of tax sale to the owner.

Vital facts. The date of the tax sale was October 3rd. The county mailed the notice of tax sale on September 12th.

Procedural history. Buyer purchased the subject property at the tax sale and filed an action to quiet title following the receipt of the tax deed from the county. The former owner contested the action and sought to set aside the tax deed. The owner’s theory was that the county mailed the notice one day late – twenty days before the sale instead of twenty-one. After a bench trial, the court entered judgment for the buyer and found that, although the notice was one day late, it “substantially complied” with the statutory requirements.

Key rules.

Ind. Code 6-1.1-24-4(a) controlled the notice issue. At the time, the statute provided that the county auditor “shall send a notice of the sale by certified mail to the owner or owners of the real property … at least twenty-one (21) days before the day of the sale….” The current statute – link here – basically says the same thing.

Indiana Trial Rule 6(A) generally controls, in part, how parties determine deadlines in connection with litigation. In Schafer, the Indiana Court of Appeals applied the rule in the context of a tax sale. Rule 6(A) says:

In computing any period of time prescribed or allowed by these rules, by order of the court, or by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed is to be included unless it is:
(1) a Saturday,
(2) a Sunday,
(3) a legal holiday as defined by state statute, or
(4) a day the office in which the act is to be done is closed during regular business hours.
In any event, the period runs until the end of the next day that is not a Saturday, a Sunday, a legal holiday, or a day on which the office is closed….

Holding. The Court of Appeals affirmed the trial court but on different grounds. “It was not necessary for the trial court to reach the issue of substantial compliance….” The notice was in fact timely.

Policy/rationale. Schafer is a counting lesson. The trial court (and the former owner) mistakenly concluded that the clock began to run when the county mailed the notice. However, the statute “places a requirement on the auditor concerning the timing of notice, not the timing of when the tax sale must be held after notice is provided.” In other words, as explained by the Court, the statute does not mandate the sale to be held no fewer than twenty-one days after notice is mailed. Instead, the “act or event” for Rule 6(A) is the date of the sale. As such, “the days should be counted backwards to the date notice is mailed.” Since the sale date was October 3rd, the first day to be counted for the deadline was October 2nd. (See the italics section in the rule above.) Counting backwards from the sale, instead of forwards from the mailing, twenty-one days was September 12th, which is when the county mailed the subject notice.

Related posts.

Court Rejects Property Owner’s Plea To Set Aside Tax Sale

Tax Sale Set Aside: Inadequate Notices To Property Owner

Tax Sale Bullet Strikes Property Owner

Indiana Tax Sale Notices To Mortgagees

Mortgagees Beware: Only Owners Receive Notices Of Indiana Tax Sales
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I sometimes represent lenders, as well as their mortgage loan servicers, entangled in disputes arising out of tax sales. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.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.