Increase in Third-Party Bids at Sheriff Sales Creates Challenges

Unlike in many judicial foreclosure states, there is no post-sale confirmation process in Indiana. The sheriff sale itself marks the end of any redemption period and is generally considered the end of the foreclosure process.

Nonetheless, there is often one more step in the state’s foreclosure process that is beginning to pose evidentiary concerns and risk exposure for foreclosing plaintiffs and their servicers. Clients should understand the process risks and under what circumstances a plaintiff may need to petition the court post-sale for proceeds from the sheriff sale.

Although most sheriff sales result in the plaintiff's purchase of the property through a credit bid of its awarded judgment, third-party outbids are becoming more common. As a result, plaintiffs must petition the court more often for the proceeds from the sale. An increase in petitions leads to additional scrutiny from the courts about how much servicers are charging or being charged for specific fees and costs related to foreclosures.

Although it may be too soon to find independent research regarding an increase in third-party purchases at sheriff sales, the influx is easy to see within our firm's own data. In 2016, Manley Deas Kochalski, LLC has seen an increase in Indiana third-party outbids of approximately 60 percent as compared to the monthly average in 2015.

The consequence of this uptick in third-party outbids is that sheriffs who previously dealt with mostly judgment credits are collecting more money than ever before and must determine the legally appropriate and least risky path to distribute it. More and more, we are finding that sheriffs who don’t want the liability associated with distributing funds are sending all the money collected, or that which is over and above the specifically itemized judgment award, to the clerk of courts for the court to determine proper distribution.

Although every court handles distribution with its own level of scrutiny and discretion, judges are increasingly requiring foreclosing plaintiffs to produce evidence to support the sums requested over and above those which were specifically itemized and awarded in the judgment entry. For example, a typical judgment entry may include amounts expended by the plaintiff to collect the debt along with itemizations of the debt itself, including but not limited to unpaid principal, interest, late charges, and escrow. However, because the legal foreclosure process isn’t concluded at the time of judgment, a typical judgment entry will also include general provisions allowing for statutory interest and sums expended by plaintiff from the time of judgment to the sale date. Because those amounts aren’t known before judgment, it’s up to the court to determine, post sale, whether those amounts should be collectible and paid to the plaintiff out of third-party proceeds.

Unfortunately, Indiana doesn’t have a bright-line rule on what is collectible from the borrower or from the sale of secured collateral during foreclosure. Instead, courts have awarded essentially any fee or costs associated with foreclosure to the plaintiff under the general default provisions contained in most mortgages. Nonetheless, with the increase in foreclosure filings, there’s an increase in judicial concern about what and how much should be considered reasonable under the general provisions of a typical mortgage contract.

This process can have many implications for our clients. First, client servicers are often not set up to execute affidavits post-sale, so the process of obtaining properly signed affidavits required with the petition can be difficult and time-consuming. Next, the client is often left in limbo between foreclosure and REO while waiting for the sheriff sale proceeds to be credited to the account. This is a particular concern if the sheriff's procedure is to send all proceeds to the court for distribution.

Additionally, once these proceedings are instituted, all of the client's credit bid amount may be reviewed by the court to determine what’s reasonable. It is our firm's stance that any sums specifically awarded in the itemized judgment entry can’t be reconsidered without a motion to set aside provisions of the judgment under Ind. Trial Rule 60. Still, it’s not uncommon during this post-sale process to find affidavits for judgment that may be lacking the same specific sums itemized for bidding at sale, even in situations where the costs were incurred before the judgment affidavit was executed. In that situation, courts may strike those sums at this later stage of the case.

Finally, any time there’s money to distribute, it’s more likely that a contest will occur. Specifically, lien holders who had no priority dispute at the time of judgment may later want the plaintiff's bid scrutinized to determine if some of the third party sums could be distributed to the otherwise unsecured lien holder instead. It’s also more likely that the debtor, who had no defense to the foreclosure itself, may suddenly contest the distribution because any sums not awarded to the plaintiff are presumed to belong to the debtor under statute.

Understanding the process is the first step to reducing the challenges, delays, and risks associated with Indiana’s post-sale funds distribution. Additionally, MDK encourages clients to examine their judgment affidavit process to ensure all reasonable fees and costs associated with the loan at the time of judgment are included.  Clients should understand that because judges may be reluctant to award post-judgment fees and costs, clients should determine appropriate business strategies accordingly.

‍Please note this article was originally published in the MDK Regional Quarterly in 2016.