Financial Services Blog

August 16, 2011

Kentucky Opens The Way For Private Auctioneers In Foreclosure Sales

            Kentucky mortgage lenders will want to know about our new state law that permits the use of private auctioneers in the foreclosure process.  KRS 426.522, which became effective on June 8, 2011, permits a creditor or mortgage holder to request that the subject collateral, either personality or land, be sold by “an auctioneer licensed in this state.”  The foreclosing creditor has been given the unilateral right to make this election.

            In this general respect, Kentucky joins Indiana and Illinois in permitting private auctioneers.  Anecdotal evidence from those states suggests that the retention of auctioneers in court-mandated sales results in a significantly higher percentage of foreclosed properties finding third-party purchasers, as opposed to being consummated to the plaintiff-lender on a credit bid.  Ohio law does not appear to permit private auctioneers, although over-marketing is common with unique or high value collateral.  Tennessee, for other reasons, generally sees relatively few court sales of real estate collateral in defaulted loans.

           

            If the creditor makes this election, KRS 426.522 requires the public sale occur on the site where the property is located.  The new Kentucky statute establishes that the auctioneer’s fee may not exceed 6% of the sale price for real property, or 20% for personal property.  Further the charged fee cannot include the allowable charges permitted the master commissioner under KRS 31A.010.  While auctioneer costs should be found to be part of the creditor’s allowable collection costs, analysis is still recommended of the total anticipated fee in light of the facts of each collection action.  It also appears that the Commissioners’ office will be the auctioneer’s hiring principal, but it is unclear the discretion that a creditor will have to dictate which auctioneer is employed on a case by case basis.

            Finally, the statute reaffirms certain pre-sale advertisement requirements.  Because the existing notice requirements never contemplated private auctioneer conducted sales, consideration must be given to erring on the side of full statutory notification in all cases of uncertainty, at least until further case law or local rules provides additional clarification.

Comments (2)

Posted by MN on August 18, 2011, 4:27 pm:

Very Interesting Bill....I am curious to know more about the success in IN. Also, we recently had a "borrower in possession" sale on a property that did not bring even a fraction of the appraised value (though the auction company claims that advertising was adequate). I would like to know how much discretion the creditor will have in selecting the auction company. It appears that results may be based on the effectiveness of the auction company to advertise to those in the market that are interested in a particular property.

Posted by Bill Repasky on August 30, 2011, 12:20 pm:

I viewed as suspect the reports I saw as this issue was before the General Assembly, as they seemed to have been generated by parties with a business interest in the outcome. We also have to admit that this law is new to the books and that there is no meaningful track record to consider. The Legislative History behind HB 460, which led to this new law, is close to useless for this purpose. There was no meaningful discussion that I could find and it passed on a unanimous vote. While the statute gives the creditor complete control to demand a private auctioneer, it is unclear whether the creditor will be able to select the auction company or if it will be compelled to accept whoever the Master Commissioner designates. I called several counties on this question. Two were unaware of the new law, one said it had a commissioner who would perform when requested, and another said they were studying it. Because I tend to represent creditors with more complex foreclosure problems or unique collateral properties, I am continuing this research, and in one case rather quickly. I will update this as I develop meaningful information. Finally, you are correct that it is fundamentally important to find auctioneers with experience respecting the collateral type and then to insist they develop a marketing plan aimed to the proper market demographic, and occasionally niche, holding the reasonably expected purchasers.

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William T. Repasky practices with the Litigation Department at Frost Brown Todd. He focuses on lending and commercial services; banking litigation and financial institutions.

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