NUTS AND BOLTS OF A FORECLOSURE ACTION IN THE WAKE OF EMERGING FEDERAL STATUTORY LAW

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1 NUTS AND BOLTS OF A FORECLOSURE ACTION IN THE WAKE OF EMERGING FEDERAL STATUTORY LAW CLE Credit: 1.0 Thursday, June 20, :40 a.m. - 10:40 a.m. Carroll-Ford Room Galt House Hotel Louisville, Kentucky 1

2 A NOTE CONCERNING THE PROGRAM MATERIALS The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority. Printed by: Kanet Pol & Bridges 7107 Shona Drive Cincinnati, Ohio Kentucky Bar Association 2

3 TABLE OF CONTENTS The Presenter... i The Nuts and Bolts of a Foreclosure Action in the Wake of Emerging Federal Statutory Law... 1 Sample A

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5 THE PRESENTERS H. Toby Schisler Dinsmore & Shohl, LLP 255 East Fifth Street, Suite 1900 Cincinnati, Ohio (513) H. TOBY SCHISLER is a partner in the Cincinnati office of Dinsmore & Shohl, LLP. His practice is concentrated in the areas of litigation, tort, products liability and mass tort. Mr. Schisler received his B.A., cum laude, from Miami University and his J.D. from the University of Cincinnati College of Law. He is admitted to practice before the United States District Court for the Southern District of Ohio and the United States Court of Appeals for the Sixth Circuit. Mr. Schisler is a member of the Cincinnati and Ohio State Bar Associations, the Cincinnati Chapter of the Muscular Dystrophy Association and the Cystic Fibrosis Foundation. In addition, he serves as a volunteer youth soccer coach and as a legal advisor to a high school mock trial team. i

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7 THE NUTS AND BOLTS OF A FORECLOSURE ACTION IN THE WAKE OF EMERGING FEDERAL STATUTORY LAW H. Toby Schisler, Esq. I. INTRODUCTION Foreclosure is a legal proceeding that bars or extinguishes a mortgagor's right of redeeming a mortgaged estate. Kentucky is a judicial foreclosure state. KRS provides: (1) In an action to enforce a mortgage or lien, judgment may be rendered for the sale of the property and for the recovery of the debt against the defendant personally. (2) In an action to enforce a mortgage or other lien, a sale of the property may be ordered without giving time to pay money or do other act. This outline is presented from the perspective of the lienholder s counsel. However, the process is relatively uniform throughout the state, and thus the outline will serve useful to borrower s counsel as well. NOTE: It is imperative to always consult the local rules of the county in which the property is located before any foreclosure action is instituted. While some of the county differences are noted, not all of them are addressed. 1 II. BEFORE FILING THE COMPLAINT A smooth and efficient foreclosure lawsuit begins with intensive investigation prior to filing the complaint. A. Review the Documents 1. Generally. The instruments creating the lien to be foreclosed are essential to the action. As such, all instruments must be carefully reviewed to ensure that the appropriate instruments are in place, of record (if appropriate), and legally enforceable. CAUTION: If the foreclosure is of a mortgage, counsel should confirm that the mortgage holder has possession of the original note and any associated allonge and/or assignment. Furthermore, the allonge should reference a specific note by number, 1 Always consult the local rules in the applicable county. For Jefferson County, the Master Commissioner s Office has published "Guidelines for Lien Enforcement Actions in Jefferson County, Kentucky" to assist attorneys. This guide is available at the Master Commissioner s Office. 1

8 obligor, and date. If the allonge is not attached to the note, and it does not provide such specific information, the defendant could challenge whether Plaintiff is the actual holder of the note. 2. Required notices. Before filing the complaint, the relevant documents need to be reviewed to ensure that all necessary notices have been given to the borrower. Specifically, the loan documents might require that the borrower receive notice of default and the opportunity to cure the default. Additionally, notice of acceleration of the debt might be required. If there are no contrary provisions in the loan documents, i.e. provisions requiring notice and the opportunity to cure, filing the lawsuit is sufficient notice of default and acceleration of the underlying obligation. However, if the loan documents are silent as to whether notice of acceleration is required, it is recommended that reasonable notice of acceleration be given prior to filing. 3. Identify obligated parties. The documents should also be reviewed to determine all parties obligated under the instruments creating the lien to be foreclosed. It is important to use the exact names of the obligated parties used in the instruments in the complaint. However, if other aliases are known, those aliases should also be used in the complaint. If the obligated party is an entity, review of the Secretary of State s records will confirm the accuracy of the name used. If the Secretary of State s records contain a variation of the entity name used in the instruments creating the lien to be foreclosed, both the name used in the instrument and the name found in the Secretary of State s records should be used in the complaint. B. Inspect the Property 1. Parties in possession. The owner of the property retains the right to possession of the property until after the foreclosure sale. 2 However, if the property has been abandoned, the lien holder s counsel may file a motion for possession in order to prevent waste. 3 Furthermore, an inspection could reveal tenants or other occupants of the property, and these individuals would need to be named as defendants in the foreclosure lawsuit. In the event that tenants are on the property, the lien holder might want to consider moving for the 2 KRS (1)(b). 3 KRS

9 appointment of a receiver to manage the property, so that the property is protected and all rents are preserved. 2. Immediate danger to the property. It is also important to try to confirm whether appropriate insurance is in place to protect the property. If the lien holder is the holder of a mortgage, mortgages typically provide that the mortgage holder may obtain insurance protecting its interest in the property if the property is not otherwise insured. 3. Vacant and abandoned property. C. Title Examination It is also important to inspect the property to determine whether it is "vacant or abandoned." New legislation has been passed to expedite the foreclosure and sale of "vacant and abandoned" property. KRS provides that, when the court determines a property is vacant and abandoned, "a sale of the property shall be ordered expeditiously," which, by statute, is within seventy (70) days of the order. Real property is considered "vacant and abandoned" under this statute when: (1) "there has been no legal resident or other person legally entitled to occupy the property residing at the property for a period of forty-five (45) or more consecutive days," and (2) "two (2) or more of the following or similar circumstances which would lead a reasonable person to believe that the property is vacant exist: (a) Overgrown or dead vegetation; (b) Accumulation of flyers, mail, or trash; (c) Disconnected utilities; (d) The absence of window coverings or furniture; (e) Uncorrected hazardous conditions or vandalism; or (f) Statements of neighbors, delivery persons, or government employees that the property is vacant." Caution: To preserve the attorney-client privilege with respect to any reports obtained relative to the inspections of the property performed for the lien holder, counsel for the lien holder should order the reports and have them addressed to counsel rather than directly to the lien holder. 1. Determine the proper defendants. All parties having a lien on the property must be named as defendants in the foreclosure complaint. 4 These parties include, for example, other mortgage holders, judgment lien holders, mechanic s lien holders, and applicable taxing authorities. Addi- 4 KRS

10 tionally, all then current owners, tenants, and other occupants of the property must be named as defendants to ensure that their respective interests in and to the property are subject to any judgment rendered by the court, as well as the ultimate sale of the property. 2. Identify any and all title issues. 3. Tips. Upon receipt of the title examination report, it is important to carefully review it to identify any defects which may exist in the chain of title to the property or other title issues that may be resolved prior to filing the complaint. For example, if the current owner s deed to the property was defectively executed, the grantor of the deed can be named as a defendant in the foreclosure lawsuit for the purpose of requiring that the grantor assert any claim he might have to the property. If he fails to do so, any remaining interest the grantor may have in the property because of the defectively executed deed can be extinguished through the foreclosure. It is also important to confirm the accuracy of the legal description of the property. The legal description provided in the title report should be carefully compared to the description contained in the instrument to ensure that the descriptions are the same. Any discrepancies will likely need to be addressed, and it is easier to address these issues prior to the filing of the lawsuit. a. Title examinations can generally be completed within one week to ten days. b. Heirs and spouses are necessary parties to the action. 5 If it is unclear whether the current owner of the property is married, the unknown spouse of the current owner should be named as a defendant and served. Service of an unknown spouse will need to be accomplished through a Warning Order Attorney. Additionally, if it is unknown whether the record title owner is deceased, the record title owner should be served via Warning Order Attorney, as should the record title owner s unknown heirs. c. In addition to the initial title examination, the title examination should be updated right before the complaint is filed to ensure that any intervening lien holders are named as defendants in the lawsuit. 5 See Shiveley s Adm rs v. Jones, 45 Ky. 274 (1845). 4

11 D. Confirm the Foreclosing Entity Before filing a foreclosure complaint, it is imperative to confirm the exact identity of the person or entity that is the current lien holder and that the client is, in fact, that person or entity. For example, if it is a mortgage to be foreclosed, counsel should verify that the client is the holder of the note and the record holder of the mortgage. If not, prepare, execute, and/or record the necessary allonge(s) and/or assignment(s) before filing the complaint. III. PREPARING AND FILING THE COMPLAINT A. Venue The complaint must be filed with the Circuit Court in the county where the property is located. 6 B. Essential Allegations 1. Allegation regarding note or other agreement. If it is a mortgage to be foreclosed, the complaint must include an allegation that the borrower executed a valid and enforceable note or, if a note is not involved, other agreement for which the applicable mortgage is providing security. 2. Allegation regarding mortgage or other lien. If it is a mortgage to be foreclosed, the complaint should allege that the borrower executed and the lender recorded a valid and enforceable mortgage or other lien interest. However, if another type of lien is being foreclosed, the complaint should establish in the allegations the borrower s obligations relative to the particular lien as well as the validity and enforceability of the lien. 3. Allegation regarding default. If it is a mortgage to be foreclosed, the allegations in the complaint must establish the existence of default, including monetary and non-monetary defaults. It should also include allegations regarding the provision of notice of default (if required and/or given) and any acceleration of the debt. 4. Allegation regarding divisibility of the property. Per Kentucky statute KRS , the complaint must allege whether or not the property can be divided without materially impairing its value or the interests of the parties to the action. 6 KRS (3). 5

12 5. Allegation regarding the parties. The complaint must list and explain each party s interest in the property or action Allegation regarding attorney s fees. If the foreclosure is of a mortgage and attorney s fees are sought, an allegation should be included that the mortgage holder s counsel is not a regularly salaried employee of the mortgage holder. 7. Property identification. C. Exhibits A reasonable description of the property should be included in all complaints for foreclosure. 1. Note or other agreement. If the foreclosure is of a mortgage, copies of the note and all necessary endorsements on the note or on an affixed allonge should be attached as exhibits to the complaint Mortgage or other lien. If the foreclosure is of a mortgage, a copy of the recorded mortgage should be attached as an exhibit to the complaint. If the foreclosure is of another type of lien, a copy of the instrument evidencing or perfecting the lien should be attached as an exhibit to the complaint. 3. Notices. If the foreclosure is of a mortgage, although not required, any notices of default and/or notices of acceleration should be attached as exhibits to the complaint. 4. Other. To the extent other relief is being requested in connection with a foreclosure of a mortgage, attach copies of the other loan documents supporting that relief, such as a loan agreement, assignment of rents and/or UCC filings. 7 KRS KRS ; KRS

13 D. Prayer for Relief 1. Judgment on the note or other agreement. If the foreclosure is of a mortgage, the complaint should include a request for judgment against the borrower on the note or other agreement for which the applicable mortgage is providing security. NOTE: Be sure to include in the foregoing request the principal, interest, default interest, late charges and any prepayment penalty due in connection with the note or other agreement as well as a request for reimbursement of any payments made by lender for insurance and/or taxes, and any other charges permitted by the loan documents (such as attorneys' fees). 2. Request that property be sold. The request for sale should include the following: a. If a mortgage is being foreclosed, that the mortgage holder s mortgage be found as a first and superior lien; b. If another type of lien is being foreclosed, that the particular lien be found as valid and enforceable lien and, if it has first priority, that it be found as a first and superior lien; c. That the possessory, equitable and all other interests of the borrower and all applicable owners, tenants and occupants and all others included as defendants because of a possible interest in the property (i.e., unknown heirs and spouses) be extinguished and that title to the property be sold free thereof; d. That the property be sold to satisfy the lien holder's judgment described above; e. That the matter be referred to the Master Commissioner for determination of the rights and priorities of all liens against the property; and f. That all other defendants be required to assert their respective claims or forever be barred. 3. Other relief. If the foreclosure is of a mortgage, the mortgage holder may also assert rights under a recorded assignment of rents and/or UCC filings. 7

14 E. Kenton County Requirements When filing the complaint, an affidavit certifying that the lender is the owner and holder of the note and mortgage and identifying the lender as the original holder or an assignee, trustee, or successor-in-interest of the original holder also must be filed. Additionally, the complaint must include documents establishing the lender as the successor-in-interest if any merger, change of trustee, or other transfer issue has taken place. IV. LIS PENDENS A lis pendens notice provides record notice of the plaintiff s claim to the real estate. KRS provides that the foreclosure action does not affect the right, title or interest of any subsequent purchaser, lessee, or encumbrancer of the real property unless they are given notice. A properly recorded lis pendens provides constructive notice to subsequent lien holders and other interested parties of the action, triggering their duty to intervene in the action. 9 A. When and Where to File It is imperative to file a lis pendens immediately after the foreclosure complaint is filed. The lis pendens notice should be filed in the real estate records of the County Clerk of the county in which the foreclosure complaint has been filed. If the property is located in more than one county, a lis pendens should be filed in the real estate records of the County Clerk of each county in which the real estate is located. B. Required Elements The lis pendens must state: 1. The number and style of the action and the court in which the action was commenced; 2. A description of the subject real estate; 3. The name of the person whose right, title interest in or claim to the real property is involved or affected; and 4. All other parties involved in the action. C. Caution Sometimes it takes several days for an instrument presented to the County Clerk for filing to be entered into the index. Therefore, after the complaint and lis pendens are filed, it is recommended that counsel 9 Cumberland Lumber Co. v. First & Farmers Bank of Somerset, Inc., 838 S.W.2d 403 (Ky. App. 1992). 8

15 V. SERVICE update the title examination once again to confirm no intervening liens were recorded before the lis pendens. If any intervening liens are found, the complaint and lis pendens will have to be amended to account for the additional interests. To reduce the risk of this occurring, it is recommended that, when filing the complaint, counsel also take a fully executed lis pendens notice, which can be completed after the filing of the complaint, and then immediately presented to the County Clerk for recording. Obtaining proper service is extremely important in a foreclosure matter. Failure to properly serve a party can result in that party s interest or lien surviving the foreclosure sale, meaning that the final purchaser at the Master Commissioner s sale, which is generally the mortgage holder and thus counsel s client, takes title to the property subject to that interest or lien. A. Personal Service Personal service may be made by certified mail, 10 by personal service, 11 by the sheriff, 12 or by a special bailiff Individual. Service may be made by delivering a copy of the summons and of the complaint to him/her personally. 2. Corporation. Service on a corporation may be made by personal service upon the registered agent. If there is no agent or the agent cannot be served, the counsel for the lien holder may serve the corporation by registered or certified mail, return receipt requested, addressed to the secretary of the corporation at its principal office. 3. Non-residents. Kentucky s long-arm statute provides for personal jurisdiction over non-residents in certain circumstances. If long arm jurisdiction is 10 CR 4.01(a). 11 CR 4.04(2). 12 KRS KRS

16 permitted, service of process may be made upon the Secretary of State as the statutory agent. 14 B. Warning Order Attorney If the lien holder is unable to obtain service on a defendant in any manner listed above, the lien holder may move the court for an appointment of a Warning Order Attorney for the particular defendant, pursuant to Civil Rule A Warning Order Attorney will be appointed to achieve constructive service via publication. However, service via a Warning Order attorney is only effective with regard to adjudicating the particular defendant's rights in or to the applicable property; it may not be used to obtain a personal judgment, such as a deficiency judgment. VI. MOTION TO APPOINT A RECEIVER A plaintiff seeking appointment of a receiver should file a motion demonstrating that he has (or probably has) a lien on the property and that the property is in danger of being materially injured. 15 Upon sufficient facts, the court may appoint a receiver during the pendency of the action. The appointment of a receiver is generally within the discretion of the court, so either there must be a sufficient showing of facts to satisfy the statutory requirements or, if the foreclosure is of a mortgage, the right to a receiver must exist pursuant to the applicable loan documents. VII. PREPARING TO DEFEND A. Issues with the Note Below are some common defenses based on issues with or defects the note No note is attached to the complaint, or the note is missing necessary endorsements The note attached is payable to someone other than the plaintiff KRS , which provides for personal jurisdiction over a nonresident that has transacted business in the Commonwealth or has an interest in real property located in the Commonwealth from which the claim arises. 15 KRS (1). See also Thompson v. Branch Banking and Trust Co., 2009 WL (2009). (upholding the trial court s appointment of a receiver when there was an express provision within the mortgage providing for the appointment). 16 Addison Parker & Kate Sanford, "Overview of Basic and Emerging Defenses and Counterclaims to Foreclosure," in Real Estate Law and Practice Institute C-5 (2010). 17 KRS KRS (u). 10

17 3. The plaintiff does not physically possess the note and/or assignment of the note is insufficient. 4. The loan was not properly securitized. 5. Pooling and Servicing Agreements can be reviewed online at 6. Possession of the endorsed note may not have been transferred to the trustee of the trust within the required period of time. B. Home Affordable Modification Program (HAMP) 19 HAMP is a federal loan modification program designed to help financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable both in the borrower s present economic status and in the future. However, whether or not this program can be used to stop the foreclosure process will depend on whether or not the servicer of the particular loan is a participant in the program. 1. Borrower eligibility. a. Borrower has documented a financial hardship and represented that he or she does not have sufficient liquid assets to make the monthly mortgage payments and is either in default or determined to be in imminent default; b. Property is occupied as borrower s primary residence; c. Borrower is a natural person; and d. Mortgage was originated on or before January 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties. 2. Procedure. The Servicer will take steps to adjust the monthly mortgage payment to 31 percent of a borrower s pretax monthly income. 19 See Making Home Affordable Modification Program Overview, at portal/programs/hamp.jsp, last accessed February 28, See also the Fact Sheet, at 11

18 C. Truth in Lending Act Generally. TILA is a federal law passed to promote the informed use of consumer credit through a meaningful disclosure of credit terms. 2. Applicability. TILA provides for a three day "cooling off" rescission right, which applies to consumer transactions resulting in non-purchase money mortgages on a debtor s principal residence. This three day period can extend to three years due to disclosure violations, such as: Failure to furnish one accurate Truth and Lending Disclosure Statement and two fully completed and accurate Notices of Right to Cancel to each homeowner whose ownership interest is subject to the security interest. Understatement of the finance charge by more than $ Remedies. Rescission voids the mortgage and the consumer shall not be liable for any amount, including any finance charge. Additionally, within 20 days of receiving notice of the rescission, the creditor must return any property given in connection with the transaction. 21 Statutory damages under TILA are modest, and in the home loan context, range from $200 to $2,000, plus attorney fees. D. Home Owners Equity Protection Act (HOEPA) 22 HOEPA is an amendment to TILA which applies to high cost, closed end loans, otherwise subject to TILA rescission. HOEPA requires additional disclosures, prohibits certain loan terms, prohibits certain acts and practices, and provides for enhanced statutory damages, additional rescission rights, and expanded assignee liability U.S.C. 1635, Reg Z at 12 C.F.R C.F.R (d)(1)-(2). 22 See 15 U.S.C. 1639, 15 U.S.C. 1602(aa) and Reg Z at &

19 E. Other Common Defenses Non-default. 2. Lack of notice or lack of waiver of notice. 3. Ascertainment of the accurate balances. VIII. JUDGMENT Before moving for judgment, it is important to verify that the legal description in the judgment matches the current legal description, as the Master Commissioner will look to the description used in the judgment when preparing the deed. It is important that any errors are corrected before the Master Commissioner prepares the deed. Additionally, it is a good practice to run one last title update prior to filing for judgment, just to ensure that all parties are named and interests addressed. Again, it is much easier to deal with other party s interests prior to the judgment than it would be set the judgment aside. A. Summary Judgment With regard to any defendant who timely answers the complaint, assuming there is no dispute as to the validity of the secured interest or the priority of that security interest, a motion for summary judgment is appropriate. The time period within which a summary judgment can be obtained will vary from county to county. B. Default Judgment With regard to any defendant who fails to timely answer the complaint, a default judgment should be obtained with regard to the rights or interest of that defendant. The time period within which default judgments can be obtained will vary from county to county. C. Judgment Entry Requirements 24 The following requirements are general requirements of a foreclosure judgment. It is important to check local rules, as the requirements may vary slightly. 1. The judgment should include an adjudication of the necessary elements of a foreclosure such as (i) the existence and validity of 23 M. Deane Stewart, Kentucky Real Estate Law and Practice (2007). 24 Check the local rules to determine county specific requirements for the order of sale. Each county s requirements vary slightly. 13

20 the underlying obligation, (ii) the fact that the plaintiff is the holder of applicable obligation and lien to be foreclosed (i.e., the note and mortgage), and (iii) the proper service of all of the parties to the case. 2. The judgment should also provide that the liens subject to the foreclosure are to be enforced. 3. The judgment should set forth the amount of the judgment against the borrower, if applicable, as well as any award of court costs and attorney's fees. 4. If there are multiple lien holders, the judgment should set forth the priority of the lien holders. 5. The location of the property should be included, together with a legal description of the property. The legal description should follow the current record description. 6. The judgment should include a statement as to the divisibility or indivisibility of the property and whether a portion or the whole property is to be sold The judgment should provide that the purchaser of the property at the Master Commissioner's sale will take the property free and clear of all of the claims of the parties to the action subject to current unpaid real estate taxes and assessments, record easements, restrictions and stipulations and survey matters. 8. The judgment should set forth the order of distribution of the proceeds of the foreclosure sale. 9. The judgment should provide that any dower, possessory, equitable and all other interests of the borrower, other owners, tenants and occupants of the property and all others who may have such an interest in the property are extinguished and the property is to be sold free and clear of such interests. 10. The judgment should grant the plaintiff the right to comply with the terms of the sale by taking a credit bid upon the plaintiff's judgment without making a cash deposit or executing a sale bond. 11. The judgment should refer the matter to the Master Commissioner. The Master Commissioner must conduct any advertisement of the sale in accordance with local rules. Generally, the sale must be advertised once per week for three weeks. However, in some rural counties, the local paper is published only every two 25 KRS

21 weeks in which case the advertisement will actually delay the sale for six weeks, as it must appear three times The judgment should also set forth the specific location, time and terms of the sale. 27 Alternatively, the order may require the Master Commissioner to file a separate notice of sale with the court with service upon the parties. 13. The judgment should provide that an appraisal of the property is to be performed before the sale is conducted. The appraisal is to be done pursuant to the provisions of KRS D. County Particulars In addition to the foregoing general requirements, the judgment must comply with any local law requirements. Some examples include the following: 1. All counties. In most counties, the Master Commissioner will automatically schedule a sale as his or her schedule permits; however, counsel for the lien holder is advised to contact the local Master Commissioner for particular requirements. 2. Jefferson County. a. Scheduled sale. Upon entry of the judgment and order of sale, the judgment creditor must schedule a sale through the Master Commissioner s office. b. After scheduling. Within five days of scheduling a sale, the party requesting the sale shall file a statement of the amount to be raised and serve a copy on all parties and the Master Commissioner. A form for this statement may be obtained from the Master Commissioner s office. The statement shall itemize all amounts included in the party s judgment, current through the sale date and a per diem rate (but not to include court costs and reserved amounts). 26 KRS KRS

22 c. Additional advertising. 3. Fayette County. In addition to the newspaper advertisement, notice of the sale must also be given by posting handbills at the Master Commissioner s office and on or near the property to be sold for at least ten days prior to the date of sale. The party submitting the order for advertisement or appraisal shall deposit with the Master Commissioner an amount sufficient to pay the estimated costs. The Master Commissioner will not submit the order to the court until the deposit is made. 4. Kenton, Boone, and Campbell Counties. The attorney who moved to refer an action to the Master Commissioner must deliver a copy of the Order referring the case to the Master Commissioner at his/her office. 5. Boyle County. Lender s counsel must submit the proposed Order of Sale to the Master Commissioner for his review and recommendation. IX. FORECLOSURE SALE A. Public and Reasonable Every court-ordered sale must be public and upon "reasonable" credit. 28 B. Successful Bidder 1. Amount due at sale. a. At the sale, the successful bidder is required to pay at least 10 percent of the amount bid at the day of the sale, with the remainder due when the Master Commissioner delivers the deed. If the plaintiff is the successful bidder, it will not have to deposit 10 percent. Instead, it will only be required to pay the Master Commissioner s fees and sale costs which are usually around $1,000 to $2,000, but not to exceed $5,000. b. KRS requires the purchaser to post a bond for the sale price with a surety approved by the Master Commissioner, bearing interest from the date of sale at the judgment rate, which bond shall have the force of a judgment KRS KRS

23 2. Distribution of sale proceeds. Assuming that the plaintiff is not the successful bidder, the amount bid and paid is applied in the following order: a. Master Commissioner s fees and costs of sale; b. Delinquent ad valorem real estate taxes and assessments; and c. The amount owed to lien holders (paid in the order of their priority if there is more than one lien holder). C. Right of Redemption 30 If the successful bid is less than two-thirds the value of the property, the owner of the property will have the right to redeem the owner's interest for a period of one year after the sale. The right to redeem is exercised by payment in full of the sum of the sale price plus interest at 10 percent per annum. The right of redemption may be sold by the owner. D. Jefferson County 1. Reasonable credit. "Reasonable" credit is governed by Jefferson Circuit Court Rule 505, which states that the sale shall be "on terms of one-fourth cash down and the balance on credit of six (6) months, bearing interest at the rate of twelve percent (12%) per annum from the date of the sale." 2. Corporate purchaser. 3. Bond. If the purchaser is an entity and not an individual, authorization from the corporation must be shown before the Master Commissioner will accept the bid. Jefferson Circuit Court Rule 505 provides that no bond is taken; instead no deed is delivered until the purchase price is fully paid. 30 KRS

24 E. After the Sale The Master Commissioner will file a report of sale, and any objections to the report must be filed within ten days. F. Avoid Common Pitfalls If the client intends to bid on the property at the sale, confirm with the client that the bid must be more than two-thirds the appraised value of the property. The appraisal is performed by the Master Commissioner's office and will be available prior to the sale. If the client intends to bid on the property but would like some other person or entity to take title to the property, the client will need to assign to such other person or entity the client's rights in and to the underlying note, mortgage and other loan documents or other documents creating the applicable lien. If judgment has been obtained prior to the assignment, the judgment will also need to be assigned to such other person or entity. To avoid unnecessary delays, counsel should raise this question with the client well in advance of the sale date. X. OTHER INFORMATION A. Approximate Time for Uncontested Foreclosure B. Cost Although timing can vary from county to county, the estimated time is between 140 to 200 days from the date the foreclosure complaint is filed to the sale of the property by the Master Commissioner. 1. Statutory fee and transfer taxes. The transfer tax in Kentucky is $1.00 per thousand. There will also be filing and service fees relative to filing/service of the complaint. 2. Other costs to consider. a. Title examination fees. These fees depend on the specific property, which fees to search the title of residential property typically being much less than the title examination fees associated with commercial or farm property. b. Master Commissioner s fees also vary from county to county and depend on the length of the written description. Estimated cost is $750 to $1,

25 c. Appraisals. Two appraisals are required at an estimated total cost of $300 for residential property, which the cost of appraisals for commercial property being much greater. d. Miscellaneous Master Commissioner Costs. These costs may include copying charges, long distance telephone calls, and postage. e. Auctioneer Fee. An auctioneer may or may not be used. 19

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27 SAMPLE A COMMONWEALTH OF KENTUCKY SHELBY CIRCUIT COURT DIVISION CIVIL ACTION NO.: FIRST MORTGAGE HOLDER, INC., a Delaware corporation PLAINTIFF vs. BORROWER, LLC, a Kentucky limited liability company Serve: Alan Agent, Registered Agent 1000 First Street Frankfort, Kentucky via Certified Mail DEFENDANT and JUNIOR MORTGAGE HOLDER, INC., a Texas financial Institution Serve: Junior Lien Holder, Inc Second Street Dallas, Texas DEFENDANT and Pursuant to K.R.S (2)(a)6. Serve Through: Kentucky Secretary of State Summonses Branch 700 Capital Avenue, Suite 86 Frankfort, Kentucky MECHANIC'S LIEN HOLDER, INC., a Kentucky corporation Serve: Amanda Agent, Registered Agent 3000 Third Street Louisville, Kentucky via Certified Mail DEFENDANT and COMMONWEALTH OF KENTUCKY Serve: Jack Conway, Attorney General The Capital, Suite Capital Avenue Frankfort, KY Via Certified Mail DEFENDANT 21

28 and COUNTY OF SHELBY, KENTUCKY Serve: Hart Megibben, Shelby County Attorney 501 Main Street, Suite 10 Shelbyville, KY Via Certified Mail DEFENDANT Serve also: Rob Rothenburger, Shelby County Judge Executive 419 Washington Street Shelbyville, KY Via Certified Mail and CITY OF SHELBYVILLE, KENTUCKY Serve: Thomas L. Hardesty, Mayor City of Shelbyville 315 Washington Street Shelbyville, Kentucky Via Certified Mail DEFENDANT COMPLAINT Comes now Plaintiff, First Mortgage Holder, Inc. ("Plaintiff"), by and through counsel and for its Complaint herein against the primary Defendant, Borrower, LLC ("Borrower Defendant"); Defendant, Junior Mortgage Holder, Inc. ("Junior Mortgage Holder Defendant"); Defendant, Mechanic's Lien Holder, Inc. ("Mechanic's Lien Holder Defendant"); Defendant, Commonwealth of Kentucky ("KY Defendant"); Defendant, County of Shelby, Kentucky ("Shelby Defendant"); and Defendant, City of Shelbyville, Kentucky ("Shelbyville Defendant") (collectively, Borrower Defendant, Junior Mortgage Holder Defendant, Mechanic's Lien Holder Defendant, KY Defendant, Shelby Defendant and Shelbyville Defendant shall be referred to herein as the "Defendants"), states as follows: 22

29 I. JURISDICTION AND VENUE 1. That Plaintiff is duly incorporated and in good standing in the State of Delaware as a corporation and has been duly qualified to do business and is in good standing in the Commonwealth of Kentucky as a foreign corporation. 2. That, to the best of Plaintiff's current actual knowledge and belief, without inquiry or investigation and without constructive or imputed knowledge being imposed (hereinafter, "to Plaintiff's knowledge"), Borrower Defendant is duly organized in the Commonwealth of Kentucky as a limited liability company but is not in good standing and may be subject to a pending dissolution. 3. That, to Plaintiff's knowledge, Junior Mortgage Holder Defendant is duly organized and in good standing as a Texas state financial institution in the State of Texas but is not qualified to do business as a foreign entity in the Commonwealth of Kentucky. 4. That, to Plaintiff's knowledge, Mechanic's Lien Holder Defendant is duly organized and good standing as a corporation in the Commonwealth of Kentucky. 5. That this Court may exercise personal jurisdiction over Junior Mortgage Holder Defendant pursuant to K.R.S (2)(a)6., as the claims herein against such Defendant arise from its interest in the subject real property, and this Court may exercise personal jurisdiction over the remaining Defendants as they are domiciliaries of the Commonwealth of Kentucky. 6. The amount in controversy exceeds the minimum jurisdictional requirements of this Court. 7. That, pursuant to KRS , venue is proper in Shelby County because all or a significant part of the subject real property is situated in that county. 23

30 II. FACTS 8. That Plaintiff hereby incorporates by reference the preceding paragraphs as if fully restated herein. 9. That, on or about April 1, 2010, Borrower Defendant did take a loan from Plaintiff in the original principal amount of $500,000 ("Loan") as evidenced by a Promissory Note, dated April 1, 2010 (the "Note") and executed by Borrower Defendant and delivered by Borrower Defendant to Plaintiff, pursuant to which the Loan, together with all interest accruing thereon under the Note, was to be repaid by Borrower Defendant to Plaintiff (the Note is attached hereto as Exhibit A). 10. That, pursuant to the Note, Borrower Defendant agreed to pay Plaintiff $500,000, plus interest at the rate of 6.00% per annum (the "Contract Rate"), in 180 monthly installment payments of principal and interest, with all unpaid principal and interest being due on April 1, 2020, the maturity date of the Loan. 11. That, under the terms of the Note, if any payment is not paid when due and remains unpaid for 10 days, Borrower Defendant will be charged 5% of such delinquent payment ("Late Charge" or, if more than one, "Late Charges"). 12. That, under the terms of the Note, if Borrower Defendant fails to make any payment of principal and/or interest due under the Note when due and such failure continues for a period of 10 days after written notice is given to Borrower Defendant by Plaintiff, such failure constitutes an "Event of Default," as such term is defined under the Note. 13. That, under the terms of the Note, after the occurrence of an Event of Default under the Note, Plaintiff has the option of declaring the entire amount of principal and interest due under the Note to be immediately due and payable, without notice or 24

31 demand to Borrower Defendant, and may exercise any of Plaintiff's rights under the Note and other Loan Documents (as defined under the Note). 14. That under the terms of the Note, after acceleration under the Note, the outstanding principal balance of the Loan shall thereafter bear interest at a rate which is the higher of (a) 15% per annum; or (b) 5% per annum above the prime rate of interest in effect from time to time as published by the Wall Street Journal (the "Default Rate"). 15. That, under the terms of the Note, Plaintiff is entitled to collect from Borrower Defendant Plaintiff's reasonable attorneys' fees and costs incurred by Plaintiff in connection with collecting the amounts owed under the Note. 16. That, as security for the Note, Borrower Defendant granted to Plaintiff a mortgage, as evidenced by the Mortgage, Assignment of Leases and Rents, and Fixture Filing, dated April 1, 2010 (the "Mortgage"), on certain real property owned by Borrower Defendant, which real property is legally described on the attached Exhibit B and is referred to and defined in the Mortgage as the Premises and Improvements (collectively, the "Property"). 17. That, in addition to granting a security interest in the Property, Borrower Defendant also granted to Plaintiff under the Mortgage a Uniform Commercial Code (the "UCC") security interest in all fixtures now or hereafter erected on, attached to or used or adopted for use in the operation of the Premises (as defined in the Mortgage) and in all other items included within the definition of the "Property" under the Mortgage (excluding the Premises and Improvements), whether then owned or thereafter acquired (collectively, the "UCC Property"). 18. That Plaintiff's security interest under the UCC in and to the UCC Property was perfected by the filing of UCC Financing Statements in Mortgage Book 500, Page 2 in the office of the Shelby County Clerk in Shelbyville, Kentucky and as File Number of the records of the Secretary of State of Kentucky (copies of the 25

32 UCC Financing Statements are attached hereto as Exhibit C-1 and Exhibit C-2) and constitutes a good and valid first lien on all of the UCC Property. 19. That, on or about April 1, 2010, the Mortgage was recorded in Mortgage Book 500, Page 1 in the office of the Shelby County Clerk in Shelbyville, Kentucky and secured against the Property (a copy of the Mortgage is attached hereto as Exhibit D). 20. That, under the terms of the Mortgage, the event described under the preceding paragraph 12 constitute an "Event of Default," as such term is defined under the Mortgage. 21. That, under the terms of the Mortgage, upon the occurrence of an Event of Default under the Mortgage, Plaintiff shall have the right to foreclose the Mortgage. 22. That, under the terms of the Mortgage, upon the failure by Borrower Defendant to perform any of the covenants and agreements contained in the Mortgage, Plaintiff has the option of disbursing such sums and taking such actions as Plaintiff may deem necessary, in Plaintiff's sole discretion, to protect Plaintiff's interest under the Mortgage and any amounts disbursed by Plaintiff in connection therewith shall become additional indebtedness secured by the Mortgage and bear interest from the date of disbursement, at Plaintiff's option, at the Contract Rate or at the highest rate which may be collected from Borrower Defendant under applicable law. 23. That, under terms of the Mortgage, upon the occurrence of an Event of Default under the Mortgage, Plaintiff shall have the right to have a receiver appointed for the Property. 24. That, to Plaintiff's knowledge, the Mortgage constitutes a good and valid first lien on the Property. 25. That, as additional security for the Note, Borrower Defendant also absolutely and unconditionally granted, bargained, sold, transferred, assigned, conveyed, set over and delivered to Plaintiff all right, title and interest of Borrower 26

33 Defendants in, to and under all written and oral leases and rental agreements with respect to the Property, whether then existing or thereafter entered into, including, without limitation, all rents, income and profits which may then or thereafter be or become due and owing under such leases and rental agreements or on account of the use of the Property, any award thereafter made in any bankruptcy, insolvency or reorganization proceedings in any state or federal court involving any of the tenants under such leases or rental agreements and any and all payments made by such tenants in lieu of rent, all as evidenced by the Assignment of Rents and Leases, dated April 1, 2010 (the "Assignment"). 26. That, on or about April 1, 2010, the Assignment was recorded in Deed Book 500, Page 3 in the office of the Shelby County Clerk in Shelbyville, Kentucky and secured against the Property (a copy of the Assignment is attached hereto as Exhibit E). 27. That, under the terms of the Assignment, Plaintiff shall receive and collect all rents, income and profits as they come due from the Property from the date of the Assignment forward and during the pendency of any foreclosure proceedings. 28. That the Assignment constitutes a good and valid first lien on all rents, income and profits generated by or associated with the Property. 29. That, to Plaintiff's knowledge, Borrower Defendant is the fee simple owner of the Property, which is located in Shelby County, Kentucky. III. COUNT I BREACH OF PROMISSORY NOTE AND FORECLOSURE OF MORTGAGE 30. That Plaintiff incorporates by reference the preceding paragraphs as if fully restated herein. 31. That Plaintiff is the holder of the Note and the Mortgage. 27

34 32. That Borrower Defendant is in default under the Note for failure to pay monthly installments of principal and interest when due, which failure has continued since January 1, That, on or about February 1, 2011 and in accordance with the Note, Plaintiff provided Borrower Defendant with notice of said default in payments of monthly installments of principal and interest (the "Default Notice"). 34. That Borrower Defendant has not cured said default in payments of monthly principal and interest since receiving the Default Notice and such default now constitutes an Event of Default under the terms of the Note and Mortgage and, therefore, an Event of Default under the Assignment (a copy of the Notice of Default is attached hereto as Exhibit F). 35. That, as a result of the Event of Default of Borrower Defendant under the Note and the Mortgage as described herein, Plaintiff has declared the entire unpaid principal balance under the Note and all accrued unpaid interest and all other amounts due under the Note and the other Loan Documents to be immediately due and payable, which declaration was made as of March 31, That, as of the date this Complaint was filed, Borrower Defendant owed $490,000 in principal; $10,000 in unpaid interest accruing at the Contract Rate; $1,000 in unpaid interest accruing at the Default Rate; and $500 in Late Charges. 37. That, because of Events of Default under the Note and the Mortgage and the Assignment as described herein, this matter has been referred to legal counsel who is not a salaried employee of Plaintiff. 38. That the Property cannot be divided without materially affecting the value of the Property or the interests of the parties hereto; and therefore, the same should be sold as a whole under proper orders of this Court to satisfy the debt, interest and costs 28

35 owed to Plaintiff under the Note and the Mortgage, subject only to ad valorem real property taxes. 39. That Junior Mortgage Holder Defendant may be claiming an interest in and to the Property by virtue of a Mortgage, Security Agreement and Assignment of Leases and Rents, dated May 30, 2010 and recorded May 30, 2010 in Mortgage Book 500, Page 50 in the office of the Shelby County Clerk in Shelbyville, Kentucky, in the original principal amount of $200,000, and, therefore, should be required to come forth and assert its claims, if any, it has in and to the Property or forever be barred. 40. That Mechanic's Lien Holder Defendant may be claiming an interest in and to the Property by virtue of a Notice of Lien Statement of Amount Due, dated March 1, 2011 and recorded March 2, 2011 in Book ML1, Page 10 in the office of the Shelby County Clerk in Shelbyville, Kentucky, in the amount of $20,000, plus interest and costs including attorney fees, and, therefore, should be required to come forth and assert its claim, if any, it has in and to the Property or forever be barred. 41. That KY Defendant may be claiming an interest in and to the Property by virtue of possible delinquent ad valorem taxes, and therefore, should be required to come forth and assert its claim, if any, it has in and to the Property or forever be barred. 42. That Shelby Defendant may be claiming an interest in and to the Property by virtue of possible delinquent ad valorem taxes, and therefore, should be required to come forth and assert its claim, if any, it has in and to the Property or forever be barred. 43. That Shelbyville Defendant may be claiming an interest in and to the Property by virtue of possible delinquent ad valorem taxes, and therefore, should be required to come forth and assert its claim, if any, it has in and to the Property or forever be barred. 29