Mortgagor/Owner Compelled To Turnover Tax Sale Surplus Funds To Mortgagee/Judgment Creditor

Lesson. Indiana law may obligate an owner/mortgagor to turnover real estate tax sale surplus funds to his judgment lien creditor or mortgagee.

Case cite. 2444 Acquisitions v. Fish, 84 N.E.3d 1211 (Ind. Ct. App. 2017).

Legal issue. Whether a lender/mortgagee could compel his borrower/mortgagor to turnover previously-refunded surplus funds arising out of a county’s tax sale of the mortgaged real estate.

Vital facts. This case involved a private loan from Plaintiff to Defendant that was secured by a mortgage on Defendant’s real estate. Following a loan default, Plaintiff obtained a judgment and foreclosure decree against Defendant in state court. Before the sheriff’s sale, Defendant filed a Chapter 11 bankruptcy case. In connection with that proceeding, the bankruptcy court ordered the County to turnover surplus funds, from a prior real estate tax sale, to counsel for Defendant to be held in trust. The bankruptcy case later was dismissed, and Defendant’s counsel transferred the tax sale surplus to his client.

Procedural history. Plaintiff filed a motion in the state court case for the Defendant to turnover the tax sale surplus funds. The trial court granted Plaintiff’s motion, and Defendant appealed.

Key rules. Ind. Code 6-1.1-24-7(c) authorizes who can make a claim for a refund in the event of a tax sale surplus. Although that statute does not expressly authorize a mortgagee or judgment creditor to obtain a surplus, Indiana courts have held that persons “with an interest in the real estate, including those who did not own the real estate at the time of the tax sale or who did not purchase the real estate at the tax sale, may assert a claim for a tax sale surplus directly with the trial court.” Indiana case law provides that a mortgagee qualifies as a person with a substantial property interest of public record.

Holding. The Indiana Court of Appeals affirmed the trial court’s order granting Plaintiff’s motion for turnover.

Policy/rationale. One of Defendant’s challenges was that Plaintiff could not file a motion against Defendant to recover the surplus but that Plaintiff instead was limited to proceedings supplemental for any relief. The nuance here is that prior Indiana case law (see post below) dealt with a mortgagee’s pursuit of funds still held by the County, not funds already refunded to the owner. The Court rejected the Defendant’s contention because the statute does not specify the procedural conduit to file the claim, which essentially is one for an equitable declaratory judgment. The Court reasoned that, because Plaintiff held a lien against the real estate subject to the tax sale, Plaintiff’s interest in the real estate had priority over the interest of the property’s owner, Defendant. The Court concluded that, since Plaintiff “has a more substantial interest in the tax sale surplus funds than [Defendant], we find that equity requires the disbursement of the funds to [Plaintiff].” The Defendant asserted other technical bases for a reversal, all of which the Court rejected.

Related post. Mortgagee Prevails In Claim For Indiana Tax Sale Surplus 
__________

I represent lenders, as well as their mortgage loan servicers, entangled in tax sale disputes and contested foreclosures. 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.