Impact Of SCOTUS Tax Sale Opinion On Indiana Commercial Foreclosure Law: Sheriff’s Sale Bidding
There was plenty of media coverage earlier this Summer leading up to, and in the wake of, the U.S. Supreme Court’s decision in Pung. You don’t need me to summarize the background of this Michigan tax sale-related case or the various opinions issued by the Justices. Plenty of news stories and blog posts easily can be found by a simple Google search. This is about whether Pung touched on matters about which I previously posted. It did.
Legal issue. Broadly speaking, the question was whether the county’s tax sale was unconstitutional because the owner did not receive the benefit of the fair market value of the real estate at the auction.
Vital facts. Not unlike Indiana’s process, the Michigan county held a tax sale of the owner’s property following the failure to pay delinquent real estate taxes. The auction resulted in a third party’s purchase of the property for $76,000. Although the owner received much of the sale proceeds (aka the “surplus” – about $73,000 – after the county took its cut), the evidence indicated that the fair market value of the property was about $194,000. Based on that, the owner lost approximately $118,000, even with the surplus payment.
Procedural history. Following the tax sale, the owner sued the county and asserted various constitutional claims, including theories based on the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause. The district court, on summary judgment, concluded that the owner was not entitled to a FMV-based payment.
Key rules. For purposes of this blog, the key legal principle cited in Pung stemmed from a 1994 Supreme Court decision in BFP v. Resolution Trust, et al., 511 U.S. 531 (1994), to which I cited in my 2008 post: How Much Should A Lender/Senior Mortgagee Bid At An Indiana Sheriff’s Sale? In short, when a foreclosure sale is conducted in accordance with applicable law, the legally significant value is the price actually received at the sale, not a hypothetical market price.
Holding. The price paid at a tax sale is the presumptive constitutional value of the real estate. Thus, fair market value is not constitutionally required to be paid at a tax sale.
Policy/rationale. Although the Court left open an owner’s right to contest sales on procedural grounds, such as defective notice, bidding irregularities, statutory non-compliance, etc. (i.e., whether the sale was “fairly conducted”), the owner in Pung lost on the central question of whether the county must compensate the owner based on the fair market value of the property.
The Pung opinion is pro-government and, indirectly, pro-lender/mortgagee. The Court noted that the government historically has had the ability to collect taxes through such so-called forced sales. Thus, tax and foreclosure sales are not ordinary market transactions or arms-length deals. By design, they lead to distressed prices. It follows that a mortgagor/borrower (or a personal guarantor of a mortgage loan that could be on the hook for a deficiency judgment) cannot demand that a fair market value price be paid for mortgaged property at a sheriff’s sale.
Lesson. My 2008 post still holds up. The Indiana Supreme Court’s decision in Arnold v. Melvin R. Hall, Inc., 496 N.E.2d 63, 65 (Ind. 1986), which relied upon the BFP case, is unaffected by the owner’s challenges in Pung. If anything, the holding and rationale in Arnold are bolstered by Pung. In Indiana, to set aside a sheriff’s sale, the burden of proof is on an owner/mortgagor or guarantor to establish that “the disparity between the value of the property sold [at a mortgage foreclosure sale], and the price paid, [was] so great as to shock the sense of justice and right.” Fair market value is immaterial. Another way to view the Pung holding is that potential buyers at sheriff’s sales, including judgment creditors such as mortgage lenders, do not need to bid the full fair market value of the real estate for fear of the sale being set aside or otherwise attacked.
Part of my practice involves mortgage litigation and sheriff sale-related 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 X @JohnDWaller or on LinkedIn, or you can subscribe to posts via email as noted on the bottom of this page.