Foreclosures article: Statutory Disposition of Foreclosure Sale Proceeds

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When foreclosing on a borrower’s loan collateral, it’s no secret that banks and commercial lending institutions ultimately are seeking money. Normally, they hope to dispose of the collateral and, ideally, become whole from the proceeds of the sale. A senior lienholder will obtain most, but not all, of any such proceeds. In Indiana, statutes govern specifically who gets the cash.

Mortgages. Ind. Code § 32-30-10 outlines the procedures for mortgage foreclosure actions. The distribution of proceeds from a judicial sale are statutorily mandated. First Federal Savings Bank v. Hartley, 799 N.E.2d 36, 40 (Ind. Ct. App. 2003). According to I.C. § 32-30-10-14, which should be used as a template when preparing the section of any proposed foreclosure decree/order dealing with the disposition of sheriff’s sale proceeds, the money must be applied as follows:

1. Sale expenses. The first payout is to the civil sheriff for its fees and notice/advertising costs. A sheriff’s sale in Indiana costs a few hundred dollars. Under certain circumstances, Indiana law allows a mortgage foreclosure sale to be conducted by a private auctioneer, and the fees of the auctioneer would be a part of this payout.

2. Property taxes. Second, real estate taxes that are due and owing for the property being sold must be paid. The sheriff is required to transfer the amounts collected to the county treasurer ten days after the sale. This eliminates the need to name the county or the county treasurer in the foreclosure suit. (If there are other tax-related liens on the property, the taxing authority must be named as a defendant so that it can answer as to its interests.) When assessing what might be recovered after a sale, pay attention to what the title work says about delinquent real estate taxes.

3. The Debt. The payment of the outstanding principal, interest and costs to the senior lienholder comes third. This almost always will be the full, accelerated debt as articulated in the judgment.

4. Junior Liens. Any payments of amounts owed to any junior lienholders are next, in accordance with their legal priority.

5. Borrower. Lastly, if any sale proceeds remain, that surplus must be paid to the Clerk of the Court to be transferred as the Court directs, usually back to the borrower.

Security Interests. The disposition of collateral under Indiana’s UCC, Article 9.1 (Secured Transactions), is slightly different and will depend upon the nature of the collateral. Article 9.1 should be reviewed in detail for each specific case and the particular collateral in question, because there are many different rules that could apply. With certain collateral (accounts receivable, for instance), disposition by sale normally will not occur. On the other hand, sales of tangible personal property collateral, like inventory or equipment, are common. I.C. § 26-1-9.1-610 speaks to disposing of collateral after default. Unlike with mortgages, in Indiana a judicial sale of personal property collateral is not required. Lenders may choose to conduct the sale privately, although it may make sense to group the personal property with any real estate that is being sold at a sheriff’s sale. I.C. § 26-1-9.1-615 governs how to apply the proceeds:

1. Sale Expenses. First, proceeds are applied to the reasonable expenses of retaking, holding, preparing for disposition and reasonable attorney’s fees and expenses incurred by the secured party. This would include payment of the sheriff’s fees if the civil sheriff is conducting the sale, or to private auctioneers upon a private sale.

2. The Debt. Second, payment goes to the satisfaction of the obligation secured by the security interest.

3. Junior Liens. The third payment, if any, would be for the satisfaction of the obligation secured by any subordinate security interest.

4. Debtor. Finally, any remaining proceeds go to the debtor.

So, if and to the extent there are cash proceeds from an Indiana foreclosure sale of loan collateral, the debt of the plaintiff lender will not be satisfied until after the sale-related expenses are reimbursed and, in cases of a mortgage, any real estate taxes due and owing are paid. Also, lenders never will receive a windfall from a sale because the debtor generally receives any surplus, which is a remote possibility anyway.

John D. Waller is a partner at the Indianapolis law firm of Wooden & McLaughlin LLP. He publishes the blog Indiana Commercial Foreclosure Law at http://commercialforeclosureblog.typepad.com John’s phone number is 317-639-6151, and his e-mail address is jwaller@woodmclaw.com.