By Tom Murray

We recently addressed a situation for one of our Indiana HOA clients that illustrates why it is important for a homeowners association or condominium association to have its attorney file his/her Appearance with the court as well as the Association’s Answer when the Association has been named as a defendant in a mortgage foreclosure complaint. After a Sheriff's Sale was conducted for a home within our client’s community, the Board of Directors received notice that there was an application filed with the Judge who presided over the mortgage foreclosure suit. The application asked for the “excess proceeds” to be distributed to a party other than the Association.

We reviewed the court docket for that file. We found that the Association was served with a copy of the mortgage foreclosure complaint in which the Association was named as a defendant along with the homeowners. The Association did not have an attorney file an Appearance and Answer with the court. Later, the court issued a mortgage foreclosure decree. A Sheriff's Sale was held at which a third-party buyer purchased the home. The buyer paid a sum substantially greater than the amount of the judgment. That means that the mortgage company was paid in full, and the new buyer was able to purchase the home at a price that probably was far less than its fair market value.

Since there were “excess proceeds”, the County Clerk held them until someone applied to receive them. If the Association had filed an Appearance and Answer with the court in that suit, as it turned out, the Association could have applied to receive whatever amount was owed to it by the owners who lost their home. Since the Association failed to do so, it was too late for the Association to apply to receive any portion of the excess proceeds.

If an Indiana HOA or condo association has its attorney file an Appearance and Answer with the court, the Association’s Answer will acknowledge that its lien rights are subordinate to that of the first mortgage holder, BUT it should also assert that the Association does have a lien interest in the property by virtue of the language in the Declaration of Covenants (or a similarly titled document). (Its position is even stronger if the Association filed a Lien with the County Recorder. Even if the Association had not already recorded a Lien, it could do so at this point.) If the community is a condominium, the Indiana Condominium Act creates an automatic, statutory Lien against the property. These measures “put the Association in line” to receive any potential “excess proceeds” if (1) an eventual Sheriff's Sale is held, (2) an investor or other third party is the successful bidder, and (3) there are excess proceeds.

In central Indiana, about 75% - 85% of monthly Sheriff's Sales last year resulted in a “bidding war” by investors or other third-party purchasers. Such bidders believe that there is equity in the property over the amount of the mortgage company’s judgment, so it is worth their effort to pay the mortgage company in full and take ownership of the home.

Up until the recent trend of Sheriff's Sales resulting in third-party purchasers, the primary benefit of an Association’s Appearance and Answer being filed with the court was that it was easy for the Association’s attorney to track the progress of the mortgage foreclosure. However, formerly, the mortgage company typically ended up taking title because it was the only bidder, meaning that there were no excess proceeds available. Now that increasing numbers of third-party purchasers are buying homes at Sheriff's Sales, the HOA has a much better chance of being paid if there are “excess proceeds”. Thus, in addition to being able to track the progress of a mortgage foreclosure, the HOA may be able to recover some or all of what is owed.

Because the cost of answering a mortgage foreclosure is relatively inexpensive, it is typically money well spent to give the homeowners association or condo association a chance to recover some or all of what may otherwise be an uncollectable debt.  For all these reasons, we recommend Associations have their legal counsel enter an Appearance and file an Answer when notified of a mortgage foreclosure in their community.