Your lending institution has an Indiana decree of foreclosure related to commercial real estate. You have reason to believe the judgment amount exceeds the value of the collateral, so you want to preserve the right to collect the deficiency from the borrower or a guarantor. If you're wondering how low the mortgage foreclosure sale price can be without rendering the sale defective, keep reading.

An extreme example. Conceivably, a lender/senior mortgagee, as the sole bidder, could acquire the property at a sheriff's sale for a small fraction of the fair market value by submitting a credit bid that expends only a portion of the judgment amount. This would allow the lender to resell the property at a profit and to pursue collection of the deficiency, potentially resulting in a double recovery. The lower the sale price is, the higher the deficiency judgment will be.

No statutes. There are no Indiana statutes regulating the price that parties must bid at a mortgage foreclosure sale. Unlike an execution sale, in which a judgment debtor can demand an appraisal under the so-called "valuation and appraisement laws," mortgage foreclosure sales are exempted from this rule. See, Ind. Code § 32-29-7-9(b); Trial Rule 69(C); Arnold v. Melvin R. Hall, Inc., 496 N.E.2d 63, 65 (Ind. 1986).

The shock test. Indiana appellate court opinions do not articulate a formula for a lawful sale price. They merely provide guidelines. The Indiana Supreme Court's decision in Arnold is the definitive case on this subject. A borrower/mortgagor, whose interest in property has been sold at a sheriff's sale, need not accept the results of the sale without question and has the right to file a motion seeking that the sale be set aside. Indiana law presumes that the sheriff's sale "provides a decent method by which value can be fixed . . .." Arnold, 496 N.E.2d at 65. "Thus, it is manifest that the purpose of the sale is not to afford some stranger an opportunity to make off with the debtor's property to his own great advantage and to the great disadvantage of the debtors or creditors." Id. Where it appears that the results of a sale are such that the entry of a deficiency judgment "is shocking to the court's sense of conscience and justice," the sale may be set aside. Id. The burden of proof is on the borrower or guarantor to establish that "the disparity between the value of the property sold, and the price paid, [was] so great as to shock the sense of justice and right." Id. See also, Newhouse v. Farmers National, 532 N.E.2d 26 (Ind. Ct. App. 1989).

Fair market value not the issue. The United States Supreme Court in BFP v. Resolution Trust, et al., 511 U.S. 531 (1994) addressed the question of whether the consideration received from a sheriff's sale satisfied the Bankruptcy Code's requirement that transfers of property by insolvent debtors within one year of the filing of a bankruptcy petition be in exchange for "a reasonably equivalent value." Id. at 533; 11 U.S.C. § 548(a)(2). BFP dispels the notion that the price paid at a sheriff's sale must equate to fair market value. "Market value, as it is commonly understood, has no applicability in the forced-sale context; indeed, it is the very antithesis of forced-sale value . . .. In short, 'fair market value' presumes market conditions that, by definition, simply do not obtain in the context of a forced sale.'" Id. at 537-38. "An appraiser's reconstruction of 'fair market value' could show what similar property would be worth if it did not have to be sold within the time and manner strictures of state-prescribed foreclosure. But property that must be sold within those strictures is simply worth less. No one would pay as much to own such property as he would pay to own real estate that could be sold at leisure and pursuant to normal marketing techniques." Id. at 539. The Supreme Court deemed that a fair and proper price, or a reasonably equivalent value, for foreclosed property "is the price in fact received at the foreclosure sale, so long as all the requirements of the State's foreclosure law have been complied with." Id. at 545.

What to bid? Arnold, coupled with BFP, establish an extremely high evidentiary burden for a borrower or guarantor to set aside a sheriff's sale. Certainly the most conservative approach for a lender would be to submit a bid based upon fair market value, but Arnold specifically, and BFP generally, reject the proposition that sheriff's sales must be set aside if the property sells for less than the appraised value. Again, the only question is whether the difference between the price paid and the property's value will shock the judge's sense of justice and right. What does that mean? Who knows. This is one of those gray areas in Indiana law.

The best bet is to analyze the facts and circumstances of the specific case, and then formulate a logical and fair number. Be prepared to offer evidence (documents and witness testimony) to support the price in the event a party challenges it. Use common sense. There are a multitude of factors that could justify a bid, including a prior appraisal, market conditions, current cash flow, or lack thereof, as well as future fees and expenses associated with resale, taxes, insurance premiums, repairs, maintenance, etc. Be creative, but don't take extreme or overly-arbitrary positions.

Move on. Lenders/senior mortgagees should avoid tendering an absurdly low bid, which would only serve to invite a motion to set aside the sheriff's sale. Such a motion would result in the loss of valuable time and money in connection with defending the motion and/or holding another sale. A balance should be struck between maximizing the deficiency judgment and preventing court proceedings to set the sale aside. The ultimate goal should be to get the sale and the litigation behind you, so your institution can move forward with liquidation and any post-sale collection proceedings.

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