In an Indiana commercial foreclosure action, there are numerous reasons for the lender to move the court for the appointment of a receiver, including securing the property, collecting rents, paying taxes, and dealing with tenant issues that arise during the foreclosure process. It is also often in the lender’s best interest for the receiver, who is typically a licensed real estate broker, to be able to market and sell the real estate. In almost all circumstances, allowing a receiver to solicit offers over a period of time will result in a better recovery for the lender than a standard sheriff’s sale. However, the ability of a receiver to sell real estate is limited by a 2010 Indiana Court of Appeals decision regarding the property owner’s “equity of redemption”.
Under Indiana Code § 32-29-7-7, the property owner of a foreclosed property has a right to “redeem” the property at any time prior to the sheriff’s sale by paying the amount owed pursuant to the judgment that ordered the sale of the real estate. Effectively, this statute provides a property owner a legal last chance to save their property up to the date of the sheriff’s sale.
This Code section was not given much attention in workouts and foreclosures in Indiana until the Indiana Court of Appeals’ 2010 decision, Wells Fargo Bank N.A. v. Tippecanoe Associates, LLC, 923 N.E.2d 423 (Ind.App. 2010). In Wells Fargo, the lender appealed the trial court’s refusal to grant the appointment of a receiver with the power to sell the subject real estate. While the Court of Appeals determined that the appointment of a receiver was required pursuant to Indiana Code § 32-30-5-1 if an event of default had occurred (something that was disputed in that case), the Court further determined that such a receiver would not be authorized to sell the real estate prior to the sheriff’s sale without the consent of the property owner/mortgagor.
In coming to that determination, the Wells Fargo court discussed the interplay between Indiana’s general receiver statute, Indiana Code § 32-30-5-7, and the receiver statute provided within the mortgage foreclosure chapter, Indiana Code § 32-29-7-11(a). Indiana Code § 32-30-5-7 provides a non-exhaustive list of potential receiver powers that specifically includes selling property, while Indiana Code § 32-29-7-11(a) provides a list of certain powers of a receiver in a mortgage foreclosure. The Court determined that Indiana Code § 32-29-7-11(a) limits the broader powers provided by Indiana Code § 32-30-5-7, and therefore a receiver is not authorized to sell real estate in a foreclosure (a criticism of how the Court interpreted the interplay of these two Code sections is beyond the scope of this article), although the receiver is authorized to sell real estate prior to the sheriff’s sale if the property owner has waived its equity of redemption post-default.
The application of Wells Fargo to workout situations is that it is in a lender’s best interest to obtain the property owner’s consent to a sale and waiver of its equity of redemption. Inclusion of such waiver at loan origination in a loan agreement and/or mortgage is of no effect because the property owner is not in default at that time. Instead, the waiver must be obtained after the occurrence of an event of default. The most common such post-default agreement is a forbearance agreement, whereby the lender agrees to forbear from enforcing an existing event of default for a specified period of time in exchange for conditions and waivers provided by the agreement. If a forbearance agreement contains (i) an acknowledgment of a default, (ii) waiver of the property owner/mortgagor’s equity of redemption under Indiana law, and (iii) consent to the sale of the subject real estate by a receiver, the lender should be entitled to the appointment of a receiver with the power to sell following a subsequent event of default or expiration of the forbearance period notwithstanding the Wells Fargo decision.
In conclusion, the equity of redemption waiver issue provides a lender with significant motivation to forbear from immediately enforcing a default, as the potential impact on a recovery by having a receiver effectively market the property over a period of time can be significant and more than offset the cost of delayed enforcement.