Indiana Court Of Appeals Rules Receiver In Mortgage Foreclosure Action Cannot Make Private Sale Of Mortgaged Property Absent Consent Of Owner-Mortgagor

As in other “judicial foreclosure” states, mortgages on real property in Indiana are enforced through the commencement of a foreclosure lawsuit and, following entry of a judgment, a sale of the property at a public auction conducted by the county sheriff (or with court approval, a private auctioneer engaged by the sheriff).

Quite commonly, the mortgage holder will end up acquiring the property at the sheriff’s sale, through bidding in all or part of its judgment, to protect perceived value in the property. However, in certain circumstances -- for instance, where there are legitimate concerns about environmental problems at the site -- the mortgage-holder may be reluctant to take title to the property via the foreclosure process. Mortgage holders faced with this situation have sometimes sought to avoid the issue by obtaining the appointment of a receiver for the mortgaged property in the foreclosure action, and then requesting that the court authorize the receiver to sell the property via a private sale. This alternative approach was an available option in part because most standard mortgage instruments contain a provision whereby the mortgagor consents to the appointment of a receiver for the property in the event of a default, and Indiana’s general receivership statute effectively make the appointment of a receiver mandatory for non-residential mortgaged property in those circumstances, upon the request of the mortgagee.

However, the Indiana Court of Appeals’ recent decision in Well Fargo Bank, N.A. v. Tippecanoe Associates, LLC et al, decided March 10, 2010, appears to have render this alternative sale method unavailable to mortgage holders, at least in those instances where the owner-mortgagor will not consent to the private sale of the property by the receiver. The Court of Appeals ruled in Tippecanoe Associates that a receiver appointed in a mortgage foreclosure action does not have the power under Indiana law to sell the mortgaged property subject to the receivership in a private sale absent the consent of the owner-mortgagor, in part because such a sale would effectively deny the owner-mortgagor its statutory redemption rights with respect to the property.. In reaching that conclusion, the Court of Appeals also confirmed that a pre-default waiver of redemption rights by the owner-mortgagor is not enforceable in Indiana.

The background to the ruling is as follows: Wells Fargo filed a lawsuit to foreclose a mortgage it held on real estate owned by Tippecanoe Associates. In the foreclosure proceeding, the bank sought and obtained the entry of an order appointing a receiver for the Tippecanoe real estate under Indian’s general receivership statute, IC 32-30-5-1, et seq. The trial court’s order appointing the receiver included a provision that authorized the receiver to sell the property via a private sale, without Tippecanoe Associates’ consent, and prior to a sheriff’s sale. Tippecanoe appealed from the inclusion of this sale provision in the order.

The Court of Appeals acknowledged that Indiana’s general receivership statute, which in part sets forth the grounds for the appointment of a receiver in a mortgage foreclosure action and in other types of lawsuits, contains a section (IC 32-30-5-7) that allows the trial court to empower a court-appointed receiver to sell property under the receiver’s charge. However, the Court noted that there is also a separate Indiana statute, IC 32-29-7-11, which specifically addresses the role and duties of a receiver appointed in a mortgage foreclosure proceeding. The Court pointed out that this latter statute does not contain any provision authorizing a receiver to make a private sale of the mortgaged property, and that the only “sale” of the property contemplated by this statute is the sheriff’s foreclosure sale. The Court of Appeals ruled that this specific statute dealing with receiverships over mortgaged property took precedence over the general receivership statute on the issue of the receiver’s power to sell the property.

The Court of Appeals also explained that allowing a receiver in a mortgage foreclosure action to sell the property via a private sale, and over the owner-mortgagor’s objection, would strip the owner-mortgagor of its statutory redemption rights, which under Indiana law the mortgagor may exercise up to the date the mortgaged property is sold by the sheriff. Although Wells Fargo argued that this concern did not arise in the case because Tippecanoe Associates had previously waived its statutory redemption rights under a provision in the mortgage, the Court of Appeals concluded from a review of relevant prior case law that a waiver of redemption rights by a mortgagor made prior to the occurrence of a default under the mortgage is not enforceable in Indiana.

It is not completely clear from the opinion in Tippecanoe Associates whether, based on the Court of Appeals’ conclusion that IC 32-29-7-11 takes precedence over IC 32-3-5-7, a receiver appointed in a mortgage foreclosure proceeding does not have the powers to make a private sale of the property under any circumstances, or if, based on the Court’s subsequent analysis of the redemption rights issue, the receiver has the power to make such a sale upon the consent of the owner-mortgagor (and a corresponding, post-default waiver by the mortgagor of redemption rights with respect to the property). It also should be noted that the Tippecanoe Associates’ decision does not appear to call into question the power of a “general” receiver appointed over the business and assets of a defendant in a non-mortgage foreclosure proceeding to sell property under the receiver’s charge, including real estate.

Posted by: James M. Matthews

Categories: Foreclosures