Lesson. Depending on the nature of the lien foreclosure action, former property owners may not always get the surplus sheriff’s sale proceeds – equity can play a role.
Case cite. Brent St. John v. Carnoustie Circle Owners Ass’n Inc., 235 N.E.3d 204 (Ind. Ct. App. 2024)
Legal issue. Whether the distribution of excess sheriff’s sale proceeds following an HOA lien foreclosure was contrary to law.
Vital facts. Purchaser acquired title to a condo at a sheriff’s sale resulting from a homeowners association’s (HOA) lien foreclosure. The plaintiff HOA conceded that the sale was subject to Mortgagee’s senior lien on the subject property, but the judgment did not provide for payment of any sale proceeds to Mortgagee. Instead, the judgment stated that residual net proceeds were to be paid into court “subject to further order.” Following the sale and satisfaction of the HOA’s judgment and other minor liens, about $100K in surplus proceeds remained.
Procedural history. Former Owner filed a petition claiming entitlement to the surplus. Mortgagee, which had been defaulted prior to the judgment entry, in turn, filed a notice asserting its senior lien, but did not make a claim for any proceeds. Purchaser, in turn, objected to any funds being distributed to Former Owner and argued that the proceeds should instead be redirected to Purchaser to pay down the mortgage. The trial court sided with Purchaser, and Former Owner appealed.
Key rules. Former Owner relied upon Indiana Code Section 32-30-10-14 (“Section 14”) and the 2016 Edler opinion, which deal with the distribution of surplus funds after a mortgage foreclosure sale. I discussed Section 14 and Edler in the first “related post” below.
The Indiana Court of Appeals found it significant that HOA liens are governed by statutes outside of mortgage-related statutes. See, Indiana Code Section 32-25-6. Further, the Court noted that, in Indiana, “a lien for unpaid [HOA] assessment may be foreclosed by a lawsuit ‘under laws of Indiana governing mechanics’ and materialmen’s liens.’”
Holding. The Indiana Court of Appeals, in an unpublished opinion, affirmed the trial court.
Policy/rationale. The Court distinguished this case from the Edler case, which involved Section 14 and the disposition of sheriff’s sale proceeds in mortgage foreclosure matters. Since Brent St. John was an HOA lien foreclosure, Indiana Code Section 32-25-6-3 and corresponding mechanic’s lien laws and procedure controlled. Those laws/procedures aren’t particularly relevant, because the case frankly involved a unique set of facts. The bottom line is the Court found a way to bypass Section 14’s rule that any surplus funds should be paid back to the mortgage debtor (here, Former Owner). The trial court’s ruling did not specify the statute upon which it relied but merely decided to allocate funds “to the sole party having the incentive to clear title to the property [Purchaser].” The Court of Appeals embraced that concept when it concluded that “[Purchaser] was equitably entitled to the [net sale proceeds].” Thus, as a practical matter, Purchaser got most of its money back after satisfying other liens on the property. Because the outcome of Brent St. John was based on equitable principles, the result conceivably could be different under a separate set of circumstances.
Related posts.
- If A Sheriff’s Sale Is “Subject To” A Senior Mortgage, The Senior Lender Gets None Of The Sale Proceeds, Even If There Is A Surplus
- Statutory Disposition of Foreclosure Sale Proceeds
- Mortgagee Prevails In Claim For Indiana Tax Sale Surplus
- Priority Of HOA Liens In Indiana
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Part of my practice involves representing parties in sheriff’s sale matters. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. 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.