What Happens to Junior Liens During Indiana Foreclosure Proceedings?

This article explores what happens in Indiana when a senior lien holder forecloses on a junior lien holder. In this scenario, the junior lien holder cannot prevent the foreclosure of its lien. Instead, the junior lien holder should evaluate and act to best protect its financial interest even if it does not file its own claim on debt and for foreclosure.

The Foreclosure Process in Indiana

The scenario is historically common: a first mortgage forecloses its lien and must foreclose all junior interests to transfer clear title via a sheriff's deed. The junior mortgage wishes to protect its secured interest in any sheriff sale proceeds while expending as little money as possible based on the probability that the property will sell at an amount likely to generate any surplus funds. If the junior lien holder does nothing, it will be foreclosed without rights of redemption or rights to any sale proceeds. Instead, proceeds from the sheriff sale will be paid to the mortgage debtor in accordance with I.C. § 32-30-10-14.

Asserting a Junior Lien in Court

While junior lien distributions are contemplated by the statute, a valid interest must be asserted and recognized in the court's order of judgment. This is typically accomplished by the filing of a general answer which confirms junior lien status and asks the court to recognize its priority above that of other junior liens, as well as over that of the mortgage debtor. This is followed by securing a judgment entry that sets forth that junior lien interest in sheriff sale proceeds. This can usually all be accomplished without the need for a formal complaint, service of process, and judgment on the underlying junior debt.

Once judgment is entered, the junior mortgage should evaluate whether there is any equity in the real estate such that control of the sales price or ownership of the real estate itself is in the junior lienholder's best interest. To ensure the real estate sells for a specific price, the junior mortgage is required to bid for the real estate with certified funds in the full amount of the purchase price.

Bidding and Best Practices for Junior Liens

As recent years have seen the housing market improve to the point of securing formerly unsecured junior liens, certified fund bids on behalf of junior lien holders have become more common; and counsels for junior lien holders, as well as sheriffs, continue to adjust their procedures to ensure these sales run smoothly and provide the desired outcome for junior lien holders. Some best practices may include ensuring the judgment also includes a provision ordering the Plaintiff-Senior lien holder to release its payoff information in advance of the sale. This is to avoid any regulatory or statutory concerns that may delay such information from being provided to the junior lien holder without borrower authorization.

Additionally, it is important for clients to know that only one specified bid can be placed in these situations. Once real estate is secured by the junior lien holder by virtue of its highest bid, the junior lien holder may request funds paid in excess of the Plaintiff-Senior lien holder's total payoff be distributed back to them pursuant to the judgment entry. In doing so, the junior lien holder may be required to establish the amount of its debt by virtue of an affidavit or otherwise, depending on the court hearing the matter.

Monitoring Sheriff Sales and Seeking Distribution

If the junior lien has determined that it does not need to ensure a specific sales price or ownership of the property to protect its interest, then simply monitoring the sheriff sale results for proceed availability after payment in full to the senior lien holder is all that is required in advance and at the time of sale. Should proceeds be available in this circumstance, then a petition for distribution of those surplus funds, established by an affidavit of debt, typically ensures the funds are paid accordingly to the junior lien holder.

Key Takeaways

1. Assert and Recognize Junior Lien Interests: File a general answer in court to confirm your junior lien status and prioritize it over other junior liens and the mortgage debtor.

2. Bidding Strategies: If you decide to control the sales price or ownership, prepare to bid with certified funds for the full purchase price.

3. Best Practices: Ensure the senior lien holder releases its payoff information in advance to avoid delays and regulatory issues.

4. Monitoring Sales: If not bidding, monitor sheriff sale results and petition for surplus funds distribution based on affidavit of debt.

5. Adjusting to Market Conditions: As the housing market improves, junior lien holders need to stay informed and adapt to ensure their interests are protected.