Apparent Windfall Not Enough to Set Aside Federal Foreclosure Sale or Negate Deficiency Judgment

Lesson. Judgment debtors (defendants) concerned about liability for a post-sheriff’s sale deficiency judgment should closely monitor the sale process and, if possible, take action to maximize the value of the real estate.

Case cite. United States v. Fozzard, 2022 U.S. Dist. LEXIS 226668 (N.D. Ind. Dec. 16 2022)

Legal issue. Whether an inequitable windfall resulted from a foreclosure sale.

Vital facts. This is my second post about Fozzard. To better understand it, please review my 3/9/23 post. The evidence indicated that GPOA, defendant Fozzard’s condo owner's association/junior secured creditor, and GRC, the developer of Fozzard’s condo complex, were related entities. Fozzard owed GPOA, not GRC, a debt. He focused much of his defense on the fact that the VP of the GPOA, who was also a principal of GRC, tendered the winning bid for GRC (not GPOA) at the sale. The Court captured the essence of Fozzard’s theory: “because GRC had won the property at an apparent discount, Fozzard should not have to pay the alleged debt to GPOA, which was supposed to come out of the sale proceeds.”

Procedural history. GPOA moved for an entry of judgment on its damages, and the Court found that Fozzard owed GPOA nearly $78k. Fozzard objected.

Key rules. Fozzard identified a number of defenses to support his theory, but the Court held that none of them applied. Indiana’s doctrine of “unclean hands” is not favored and is applied “with reluctance and scrutiny.” The defense of “equitable estoppel” requires, among other findings, a showing that the defendant relied on the plaintiff’s conduct “to act in a way that changed his position prejudicially.” Finally, “laches” does not focus only on timing - “prejudice or injury is necessary.”

Holding. The United States District Court for the Northern District of Indiana, over Fozzard’s objection, entered judgment in favor of GPOA and against Fozzard for $77,799.13.

Policy/rationale. Fozzard’s arguments centered on the notion that defendant/cross-claim plaintiff GPOA failed to obtain a judgment on its cross-claim before plaintiff SBA’s foreclosure sale. Fozzard’s thinking was (a) GPOA, a junior creditor, was required to proceed on the same track as senior creditor SBA; (b) GPOA then should have tendered a judgment/credit bid at the sale and obtain title to the property; and (c) GPOA ultimately should have sold the property to GRC for the amount GRC offered Fozzard two years earlier ($160k). Instead, according to Fozzard, GPOA received a windfall because GRC purchased the property at a severe discount while GPOA obtained a judgment against Fozzard for the full amount owed. Basically, Fozzard believed that GPOA was set up to receive a double recovery.

The following is a summary of the key points behind the Court’s rejection of Fozzard’s defenses:

    Delay in seeking judgment: “Certainly, GPOA did not move for entry of judgment according to Fozzard’s preferred (when viewed in retrospect) timeline, but the Court sees no misconduct here, much less intentional misconduct, so Fozzard does not prevail.”

    GPOA’s lack of bid: “Perhaps GPOA may have been able to realize a profit if it undertook these actions, but the Court sees no reason to find that GPOA had a duty to act in this manner. By not bidding on the property, GPOA accepted the risk that it may never recoup damages from Fozzard, as not all judgments that are entered are ultimately paid by the debtors. By bidding on the property, GPOA would have accepted the risk that it may not be able to find a buyer for the property or that the property would not yield a sale price sufficient to cover GPOA’s damages. The Court sees no reason to impose on GPOA the duty to accept one of these risks over the other.”

    Windfall to GPOA: “Though the evidence shows that GRC and GPOA have the same directors, the entities are not the same. GRC may be the beneficiary of buying (at a fairly conducted marshal’s sale) a piece of property at a discounted price, but this does not alter the fact that GPOA has incurred damages through Fozzard’s breach of the contract between him and GPOA. A judgment that awards damages to GPOA to make it whole is not a windfall. It is justice.”

Note: The decision has been appealed to the 7th Circuit. If and when an opinion results from the appeal, I will follow up here.

Related posts.

• What Is A Credit Bid?
• An Indiana Deficiency Judgment Arises Out Of The Foreclosure Judgment Itself, Not A Separate Action

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I represent parties involved in foreclosure sales. 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.