Daily Development for Friday, January 12, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

MORTGAGES; FORECLOSURE; SHERIFF'S FEE: Where, after obtaining judgment but before foreclosure sale, mortgagee reaches settlement with the mortgagor, sheriff’s fee for conducting the sale is limited to the amount actually collected by the mortgagee, rather than computed on the amount of the judgment or the value of the property.

Regency Savings Bank, F.S.B. v. Southgate Corporate Office Center, 388 N.J. Super. 420, 908 A.2d 854 (App. Div. 2006); October 25, 2006.

A mortgagee obtained a final foreclosure judgment against a mortgagor for nearly $36 million. The mortgagee sent a writ of execution to the sheriff, who scheduled a sale of the foreclosed property. Before the sale took place, however, the mortgagee entered into a settlement agreement with the mortgagor, whereby the mortgagor would make a nonrefundable payment of $250,000, and the mortgagee would cancel the sheriff's sale and give the mortgagor ninety days to refinance. If the mortgagor successfully obtained refinancing, it would pay the mortgagee $32 million, and if not, it would transfer its property interest to the mortgagee's designee.

After entering the agreement, the mortgagee asked the sheriff to cancel the sale and return the writ of execution. The sheriff responded by asking how much money the mortgagee had received in consideration for canceling the sale so that he could calculate his fees and commissions. The mortgagee told the sheriff that it had not received any amount in satisfaction of the debt, and had only received $250,000, which was being held in escrow and which would later be applied to payment of outstanding real estate taxes on the property.

The sheriff still refused to return the writ of execution. He demanded a fee of $732,000 based on the contention that the settlement was for the amount of the foreclosure judgment of $36 million. The sheriff filed an action to compel the mortgagee to pay the amount he demanded. Meanwhile, the settlement option expired, and the property deed and $250,000 were released from escrow.

Here’s what the statute says:

“When a sale is made by virtue of an execution the sheriff shall be entitled to charge the following fees: On all sums not exceeding $5,000.00, 6%; on all sums exceeding $5,000.00 on such excess, 4%; the minimum fee to be charged for a sale by virtue of an execution, $50.00.

....

When the execution is settled without actual sale and such settlement is made manifest to the officer, the officer shall receive 1/2 of the amount of percentage allowed herein in case of sale.”

The lower court rejected the sheriff's assertion that his percentage fee should be based on a settlement amount equal to the total foreclosure judgment. Instead, it found that the settlement amount was $250,000, making the fee $5,050.

On appeal, the Appellate Division affirmed the lower court's determination. The Court found that the statute was unclear on its face, in terms of who should pay the fee, and whether the percentage should be applied to the value of the property or the amount of the settlement. It also noted other ambiguities in the statute. Therefore the Court looked to legislative history and judicial precedent to guide its decision.

Prior New Jersey cases had held that a sheriff is not to receive a fee on amounts received at the sale in excess of the amount of the claimant’s judgment.  If the foreclosing party must pay the fee, and doesn’t get the surplus, then this seems to be reasonable.

But the court interpreted other earlier cases to mean that if the mortgagee bids only a nominal amount and purchases the property then the fee is payable only on that amount, and not on the whole debt that is wiped out by the property.   This of course, is striking, because the mortgagee gets the property and pays no fee for that value. 

Examination of those factors demonstrated that the legislature had not intended to give the sheriff a commission for sales in excess of the amount required to satisfy the execution. The Court found that the sheriff's commission should be based on the amount that the creditor actually recovered, or the amount of the underlying settlement. It stated that if it read the statute to mean that a mortgagee had to pay the sheriff a commission based on the judgment or the property value, regardless of the settlement amount, there would be no incentive for the mortgagee to settle. Since settlement is always encouraged, the Court held that the sheriff's fee must be based on the amount of cash the mortgagee receives in the settlement agreement.

Comment 1: Although this case involves interpretation of a specific state statute, the policy analysis reported at the end of the report is relevant to other jurisdictions in the interpretation of their statutes. 

Comment 2: Note that neither side got what it wanted.  The mortgagee’s position was that it owed nothing because it got nothing on its debt - the unpaid taxes exceeded the amount that it received.  It lost, and should have.  The mortgagee’s position strikes the editor as pretty dumb.  It would mean that the mortgagee would get a free foreclosure sale in order to get taxes and other expense items covered.  The sheriff clearly is entitled to some fee when the mortgagee gets some return. 

Comment 3: But is it right that the mortgagee only realized $250,000 from the threatened foreclosure?  The settlement agreement rolled over into a deed in lieu of foreclosure, essentially  The property was to be transferred to the mortgagee’s designee.  The sheriff argued that this was a benefit resulting from the settlement of the foreclosure to the same extent that the escrow payment was a benefit, and that the sheriff’s fee should be based upon the value that the mortgagee would up controlling.  What’s wrong with that argument?  True, it discourages settlements, but where the settlement is simply a naked dodge to avoid the foreclosure sale already ordered, isn’t the sheriff entitled to the statutory fee? 

The court analogized to cases in which the mortgagee bid only a nominal amount to buy the property at foreclosure.   Those cases had limited the sheriff’s fee to an amount based upon the amount bid.  But the difference between those cases and this one is that in those cases there was an auction.  No one else chose to bid at the auction, but if they had, the mortgagee would have had to bid higher to get the property.  Thus, we must presume, taking into account the special nature of foreclosure sales, that the nominal bid of the lender was what the property was “worth.”

This is not true in a deed in lieu.  The lender is getting the property in satisfaction of the debt.  No one has the right to bid for it against the lender.   Logically, the court should take the property value into account in figuring the sheriff’s return.  The case is wrongly decided. 

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