Posts in Sheriff's Sales

February 26, 2013
Discrimination Allegations Unavailing For Borrower In Post-Foreclosure Eviction

Today’s post follows-up on a theme from my February 15th post with respect to evictions following a sheriff’s sale.  That post dealt with eviction of tenants.  Today’s post, regarding United States of America v. Cotton, 2012 U.S. Dist. LEXIS 341 (N.D. Ind. 2012) (rtclick/save target as for .pdf), deals with mortgagors/owners. 

Backdrop.  Borrower owned real estate subject to a bank’s mortgage and a junior mortgage held by the United States Department of Agriculture (“USDA”).  Due to a failure to make payments, the bank filed a foreclosure action against the borrower and obtained a summary judgment that authorized a sheriff’s sale.  At the sale, third-party bidders purchased the real estate.  The USDA thereafter asserted its redemption rights under federal law (28 U.S.C. § 2410(c)).  In exchange for a deed, the USDA paid the purchasers an amount equal to what the purchaser’s paid at the sheriff’s sale, plus interest.  After recording the deed, the USDA sent the borrower a notice to vacate the premises within thirty days.  The borrower refused to comply. 

Procedural maneuvering.  To obtain possession of the real estate, the USDA, in a lawsuit separate from the state court foreclosure, filed a motion for judgment on the pleadings pursuant to F.R.C.P. 12(c).  The Court in Cotton noted that the USDA had to establish “that [bank’s] lien on the [subject real estate] stood in first priority, ahead of the USDA’s; that it timely exercised its redemption right in the [subject real estate]; and that it followed the proper procedures under Indiana law to perfect legal title in the [real estate].”  The Court concluded that the USDA had met its burden.

Right to possession.  The USDA’s right of redemption vested upon the sale of the real estate at the sheriff’s sale.  The USDA timely redeemed the real estate and properly recorded the subject deed.  This served to perfect the USDA’s legal title in the real estate.  In Indiana, property law grants to property owners the absolute and unconditional right “to exclude from their domain those entering without permission.”  The Court stated that:  “as the owner of an undivided fee simple interest in the [real estate], the United States is entitled to permit, or exclude, whomever it desires from the property; including [the borrower].”

Borrower’s contentions.  The borrower did not contest the action upon the legal formalities of the acquisition by the USDA, but rather upon notions of equity.  The borrower asserted that the USDA did not have “clean hands,” an equitable doctrine I discussed in a December, 2012 post.  Generally, “one who seeks relief in a court of equity must be free of wrongdoing in the matter before the court.” 

    First, the borrower argued that the USDA had an obligation to intervene on his behalf and to provide him with legal representation and advice in the state court foreclosure proceedings.  The Court noted that, while the USDA might have an obligation under federal law to assist minority and impoverished individuals in efforts to obtain affordable housing, such obligation does not extend to the requirement to provide free legal services to those persons. 

    Second, the borrower asserted that “because the USDA previously defended against allegations of race discrimination in a class action lawsuit, this alleged misconduct should either be imputed or presumed into the context of the instant case.”  The cases upon which the borrower relied involved alleged racial discrimination in applying for mortgage loans.  In Cotton, the borrower received a mortgage from the USDA without any complications.  The borrower invited the Court “to entertain a presumption that because the USDA discriminated against similarly situated persons in the past, it necessarily follows that he too was a victim of discrimination.  Because the evidence in the pleadings [did] not substantiate this allegation, the Court [was] not inclined to leap to such a conclusion.”

The Court in Cotton held that the actions of the USDA did not make it inequitable for the Court to order the requested relief.  The Court granted the USDA’s motion for judgment on the pleadings and found that the borrower was in wrongful possession of the subject real estate.  The Court ordered him to vacate the premises accordingly.  One point Cotton illustrates is that, in Indiana, a sheriff’s sale terminates the borrower’s (former owner’s) rights to the mortgaged real estate.

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Posted at 09:48 PM in Procedure/Trial Rules , Redemption , Sheriff's Sales  |  Permalink

February 15, 2013
Foreclosing Party, As Owner, May Evict Tenants In Breach

Secured lenders repossessing real estate collateral at a sheriff’s sale normally keep tenants in place to maintain income.  There are instances, however, when a plaintiff lender, or a third-party sheriff’s sale purchaser, may desire to evict a tenant.  Ellis v. M&I Bank, 960 N.E.2d 187 (Ind. Ct. App. 2011) sheds light on a new owner’s rights, following a sheriff’s sale, vis-à-vis tenants. 

Unusual circumstance.  In Ellis, a developer leased the subject real estate to tenants (husband and wife), but then defaulted on its line of credit.  As a result, the developer’s lender foreclosed and ultimately acquired the real estate at a sheriff’s sale.  The court’s decree of foreclosure was against the developer and the husband only, not the wife/co-tenant.  When the lender pursued a writ of assistance to evict the tenants, the wife asserted that her interest in the real estate had not been extinguished in the mortgage foreclosure case.  She was right.   

To terminate, name tenants.  The Court in Ellis noted that, in Indiana, the purchaser at a sheriff’s sale “steps into the shoes of the original holder of the real estate and takes such owner’s interest subject to all existing liens and claims against it.”  Because the lender did not make the wife a party to the foreclosure case, the sheriff’s sale could not be enforced against her.  This is because, in Indiana, “where a mortgagee knows or should know that a person has an interest in property upon which the mortgagee seeks to foreclose, but does not join that person as a party to the foreclosure action, and the interested person is unaware of the foreclosure action, the foreclosure does not abolish the person’s interest.”  See my 10/07/11 and 07/09/10 posts for more on this area of the law.  Because the wife was not named or served in the foreclosure action, the trial court found that her interest was not extinguished by the foreclosure judgment and that the lender’s interest in the real estate remained subject to her leasehold interest. 

How did the lender obtain possession of the real estate from the wife?

Option 1 – strict foreclosure.  One option available to the lender was to terminate the interest of the wife through a strict foreclosure action.  I have written about this remedy, including Indiana’s 2012 legislation, extensively.  Please click on the category Strict Foreclosure to your left for more.  The lender in Ellis did not pursue this option. 

Option 2 - eviction.  The lender elected, as the then-owner of the real estate, to pursue eviction based upon the subject lease agreement.  The eviction action was separate and distinct from the foreclosure action.  The evidence in Ellis was clear that the tenants had breached the lease and that the lender had the corresponding right to terminate.  The trial court entered an order of possession for the lender based on the lease, and the Court of Appeals affirmed. 

Plaintiff lenders, after the entry of the foreclosure decree and sheriff’s sale, usually can evict parties in possession of the subject real estate through the mechanism of a writ of assistance, about which I have written in the past, assuming the mortgage lien is senior to the possessory interest.  That remedy generally is effective only when the targets of the writ of assistance were made parties to the underlying action.  The rub in Ellis was that one of the parties in possession of the real estate (the wife) was not named in the case.  Rather than embarking on what may have been a relatively costly, complicated and lengthy strict foreclosure action, the lender in Ellis chose a simpler approach by filing a straightforward landlord/tenant eviction action based upon the terms of the subject lease.  This turned out to be a good solution to the problem caused by failing to name the wife.

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Posted at 10:57 AM in Procedure/Trial Rules , Sheriff's Sales , Strict Foreclosure  |  Permalink

November 12, 2012
How Should A Junior Lender/Mortgagee Respond To An Indiana Foreclosure Suit?

One of our bank clients, which has a home equity line of credit portfolio, recently asked me to give a presentation on how best to deal with foreclosure suits filed by senior lenders (first mortgagees).  Whether junior mortgages are residential or commercial, the basic plan of attack in Indiana is the same:

 1. Email Summons and Complaint filed by senior mortgagee, together with scan of the bank’s loan documents, to foreclosure counsel.  Advise foreclosure counsel of the manner of service of process (certified mail or hand delivery) and date of receipt.

 2. Foreclosure counsel will file an appearance and a motion for extension of time with the court.  Nothing else typically will be due with the court until 50 – 53 days after the date of service of process.

 3. During the 50 – 53 day window, the bank should do the following:

a. Order an appraisal or broker price opinion, and determine the fair market value of the mortgaged property.

b. Create an estimate of the senior mortgagee’s entire indebtedness, including unpaid principal balance, accrued interest, late fees, delinquent real estate taxes, per diem interest and attorney fees/litigation costs.  The complaint will list many of these figures.

c. Create an estimate of carrying costs associated with owning the real estate, including real estate taxes, hazard insurance premiums, maintenance/repair costs, utility expenses and attorney fees/litigation expenses for foreclosure. 

d. Create an estimate of liquidation expenses, including broker fees and closing costs.

e. Determine the bank’s own estimated indebtedness, including unpaid principal balance, accrued interest, per diem interest and late fees.

 4. Before the close of the 50 – 53 day window, the bank should determine whether it would ultimately net any money if it were to acquire the mortgaged property at the sheriff’s sale and then liquidate it.  The question is whether the value of the mortgaged property exceeds the senior mortgagee’s indebtedness, the carrying costs and the liquidation expenses.  Here is a basic formula:  Fair Market Value - (Senior Debt + Carrying Costs + Liquidation Expenses) = Equity.

 5. If the calculation in #4 shows insufficient equity, then the bank should consider instructing foreclosure counsel to file a disclaimer of interest and motion to dismiss.  (The exception to this would be if the bank desires to collect the debt from other assets of the borrower or a guarantor.)  The case might end here.

 6. If the calculation in #4 shows sufficient equity, then the bank should advise foreclosure counsel of its debt figures in #3(e) above and instruct counsel to file an answer to the complaint and a cross claim against the borrower (and guarantor, if applicable).

 7. The bank or foreclosure counsel next should order a title commitment to be effective through the date of the filing of the complaint, and ensure all lien holders are named in the case.

 8. Foreclosure counsel will monitor the lawsuit and obtain judgment/foreclosure decree for the bank.

 9. After the entry of judgment but before the sheriff’s sale, the bank should revisit the equity analysis in #4.  The bank – the junior lender - must decide if it is prepared  to pay off the senior mortgagee’s judgment so that the bank can credit bid its own judgment at the sale. 

 10. The junior lender should communicate its decision regarding #9 to foreclosure counsel, with bidding instructions, if any. 

 11. As applicable, foreclosure counsel will attend the sheriff’s sale, tender a cash deposit sufficient to pay the senior mortgagee’s judgment in full and submit a credit/judgment bid on behalf of the bank, which will acquire title to the property if it’s the winning bidder.  If the bank is outbid, then it will receive cash in the amount of its credit bid (and a refund of the deposit). 

Perhaps the most important thing to bear in mind is that the process requires junior mortgagees to bring enough cash to the sheriff’s sale to pay off the credit (judgment) bid of the senior mortgagee.  A junior lender cannot submit its own credit bid or obtain title to the real estate unless it first outbids the senior lender with cash.  Hence the significance of the analysis in #4. 

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Posted at 12:58 PM in Mortgages , Procedure/Trial Rules , Sheriff's Sales  |  Permalink

October 12, 2012
Post-Sale Redemption Mystery Unsolved

Last week, the Indiana Supreme Court said much about Mortgage Electronic Registrations Systems, Inc. (“MERS”) in Citimortgage v. Barabas, 2012 Ind. LEXIS 802 (Ind. 2012).  The Court also said a lot about who should receive notice of a foreclosure proceeding.  I hope to discuss those matters next week. 

No comment.  Just as important was what Citimortgage didn’t say.  I’m referring to the issue of the enigmatic post-sheriff’s sale statutory right of redemption found at Ind. Code § 32-29-8-3 entitled “Good faith purchaser at judicial sale; right to redeem of assignee or transferee not made a party.”  For background, please click on my August 2 and November 1, 2011 posts regarding Citimortgage.  Subsequently, the Indiana General Assembly amended portions of Section 3, but as I wrote in March of this year the obscure one-year redemption language remained untouched by the legislature.  Here is the statute, and the key language is underlined: 

     Sec. 3. A person who:
        (1) purchases a mortgaged premises or any part of a mortgaged premises under the court's judgment or decree at a judicial sale or who claims title to the mortgaged premises under the judgment or decree; and
        (2) buys the mortgaged premises or any part of the mortgaged premises without actual notice of:
            (A) an assignment that is not of record; or
            (B) the transfer of a note, the holder of which is not a party to the action;
holds the premises free and discharged of the lien. However, any assignee or transferee may redeem the premises, like any other creditor, during the period of one (1) year after the sale or during another period ordered by the court in an action brought under section 4 of this chapter, but not exceeding ninety (90) days after the date of the court's decree in the action.

When the Supreme Court accepted transfer in Citimortgage, many thought the Court would interpret the redemption language in Section 3.  No such luck.  The Court  expressed “no opinion as to whether Citimortgage had the right to redeem the property under [Section 3].”   This is because the Court decided the case on other grounds.  The opinion provided no help with the confusion and uncertainty created by the analysis of the Court of Appeals in Citimortgage, which precedent has now been vacated.

Status.  It’s my understanding Indiana’s legislature may consider clearing up I.C. § 32-29-8-3 in the 2013 session.  For now, while Indiana law is well settled that a sheriff’s sale terminates the right of redemption for borrowers/mortgagors, the law remains unclear as to whether there exists some kind of post-sheriff’s sale right of redemption for mortgage assignees whose assignments were not recorded before the filing of the foreclosure complaint.  As I often say, foreclosing lenders should invest in a foreclosure (title) commitment, and purchasers at sheriff’s sales should buy title insurance. 

NOTE:  In the 2013 session, Indiana's General Assembly deleted much of Section 3(2)(B) so as to resolve the matter once and for all.  My post. 

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Posted at 04:38 PM in Mortgages , Procedure/Trial Rules , Redemption , Sheriff's Sales  |  Permalink