Review of the Twists and Turns of the Overbid Payment Statute CRS

Review of the Twists and Turns
of the Overbid Payment Statute
CRS § 38-38-111
Richard Benenson
Kerry LeMonte
Brownstein Hyatt Farber Schreck
1
Agenda
•
What is an overbid? Overview of overbid statute, C.R.S. § 38-38111, and its requirements post-2012 amendments
•
Who can claim overbid proceeds? Rights of junior lien holders,
and the intersection with the right to redeem
•
What fees & costs can be claimed in an overbid? Attorneys’ fees
and costs incurred in enforcing, defending, protecting and
insuring holder’s interest in the foreclosed property
2
What is an “overbid”?
-
An “overbid” means the amount a property is sold for at a
foreclosure sale that is in excess of the written or amended bid
amount executed by the holder of the evidence of debt secured
by the deed of trust or other lien being foreclosed. C.R.S. § 3838-100.3 (17.3).
-
Prior to 2012, the statute referred to these funds as “excess
proceeds.”
3
What Is an Overbid?
4
2012 Amendments to CRS § 38-38-111
•
In 2012, the Colorado legislature enacted major changes the
treatment of excess proceeds, or “overbids,” specifically:

PT must publish notice of overbids

PT now required to make “reasonable efforts” to notify a former
owner of fund available to him or her (assuming the overbid is more
than $25)

Unclaimed overbid funds must be held by the PT in escrow until
they are claimed, or for five years post-sale.
5
Public Trustee Notice Requirements
•
Send a notice of the overbid to the owner no later than 30 days
after expiration of redemption period.
•
Mail to owner and publish within 90 days from the expiration of
all redemption periods for 5 times a notice detailing an
unclaimed overbid that is greater than $500.
•
Costs for mailing and publishing shall be paid from the moneys
being held in escrow.
6
“Reasonable Efforts” to Identify
•
If the overbid is greater than $25, PT must make “reasonable
efforts” to identify and notify parties that are entitled to
overbid funds, including specifically to identify the owner’s
address.
•
What qualifies as “reasonable efforts” is unclear.
•
At a minimum, run a skip trace search and document your
reasonable efforts.
7
General Overbid Notice and Tracking Best
Practices
•
Make sure your website clearly states who to contact regarding
overbids, and how (i.e. phone and email)
•
Clearly post information regarding unclaimed funds
•
Keep track internally of each overbid, including sale date, owner
name, 30-day notice deadline, notice sent, follow-up notice and
publication deadlines, 5-year cut off deadline and any
communications received regarding the overbid
8
Who Can Claim Overbid
Proceeds?
9
Treatment of Overbid
•
When a foreclosed property is sold for an amount that exceeds
the amount of the deed of trust holder’s bid, Colorado law
dictates that the excess proceeds are paid out according to
statutory priority until the funds are depleted. C.R.S. § 38-38111.
10
Treatment of Overbid
•
The statutory priority is as follows:

Holder of debt is paid full amount of deficiency as indicated in the
holder’s bid. C.R.S. § 38-38-111(1).

Junior lien holder who filed a Notice of Intent to Redeem, unless that
junior lien holder itself is redeemed out by a more junior lien holder.
C.R.S. § 38-38-111(2).

Any remaining proceeds after all such junior lien holders have been
satisfied are given to the owner of the property as of the date and time
of the recording of the NED or lis pendens. C.R.S. § 38-38-111(3).

If the owner fails to claim the proceeds within five years of the sale, the
proceeds are transferred to the state under the Unclaimed Property
Act.
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Who Can Claim Overbid Proceeds?
•
Senior holder of debt cannot.
•
Senior holders who foreclose on a property don’t have a right
to “overbid” proceeds, because it is their bid (including fees and
costs) that determines the amount of overbid.
•
If the senior lien holder is not the lien holder foreclosing on the
property, it has no right to any overbid proceeds produced by
the foreclosure of a junior interest. Restatement (Third) of
Prop.: Mortgages § 7.4 (1997).
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Who Can Claim Overbid Proceeds?
•
Junior lien holders – Have right to be paid up to the “unpaid
amount of each such lienor’s lien plus fees and costs” from the
overbid proceeds IF:
•
Their lien was recorded before the recording of the NED (C.R.S. § 38-38302(1)(c));
•
The lienor is one of the persons who would be entitled to cure pursuant to
Section 38-38-104(1);
•
They filed a Notice of Intent to Redeem no less than eight business days
following the sale (C.R.S. § 38-38-302(1)(d)) (subject to the statutory
exemptions for late notices); AND
•
They are not redeemed out by a more junior lien holder.
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Who is a junior lien holder?
The following cannot claim any portion of an overbid:
•
A lienor holding a lien that is not entitled to redeem by virtue of
being recorded after the notice of election and demand
•
A lienor that has not timely filed a notice of intent to redeem
pursuant to C.R.S. § 38-38-302 (except a federal agency)
•
A lienor who accepts less than a full redemption pursuant
to C.R.S. § 38-38-302(4)(c)
14
Who is a junior lien holder?
•
Entitlement to overbid proceeds is dependent upon a valid Notice
of Intent to Redeem, which requires:

Proof of lien - Original instrument or certified copy (if qualified holder)
and any assignment

Signed and acknowledged statement by lienor or lienor’s attorney
showing the amount required to redeem the lien, including per diem
interest through the 19th business day after the sale, and the fees and
costs actually incurred and permitted under C.R.S. § 38-38-107

Copies of receipts, invoices, account transfers, or other similar documents
evidencing that the fees and costs were actually incurred as of date of
statement
15
Who is a junior lien holder?
•
A junior lien is: “a deed of trust or other lien or encumbrance upon the
property for which the amount due and owing thereunder is subordinate to
the deed of trust or other lien being foreclosed.” CRS § 38-38-100.3(11).
•
The Colorado Revised Statutes do not define the term “encumbrance.”
•
But the Colorado Court of Appeals has formulated a definition of
encumbrance that likely applies in the context of a PT foreclosure: “any right
or interest in land subsisting in a third person, to the diminution of the value
of the land, not inconsistent with the passing of fee simple title.” Campbell v.
Summit Plaza Assocs., 192 P.3d 465 (Colo. App. 2008).
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Who is a junior lien holder?
•
A PT foreclosure extinguishes a myriad of junior interests, including:

after-recorded deeds of trust (second or third mortgages);

deeds and quitclaims, easements, and leases;

judgment liens;

environmental liens under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) or state law;

real estate brokers’ commission liens;

liens for wells and drilling equipment;

harvesters’ liens; and

contracts and agreements with state or local governing authorities.
17
Who is a junior lien holder?
•
HOAs can be junior lien holders.
•
Owners associations have a statutory lien for all unpaid regular
and special assessment under the Colorado Common Interest
Ownership Act (CCIOA).
•
Like other liens, an association lien includes attorney fees and
costs. CRS § 38-33.3 316(7).
•
The association perfects its lien on recording the declaration, so
no additional claim of lien need be recorded. CRS § 38-33.3316(4).
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Who is a junior lienholder?
•
IRS (and likely all federal agencies) can be junior lienholders EVEN IF they do
not file a Notice of Intent to Redeem.
•
Title Ins. Co. of Minnesota v. IRS, 963 F.2d 297 (10th Cir. 1992): IRS exempt from
state requirement to file notice of intent to redeem by federal statute.
•
Although the facts of this decision involve only the IRS, the reasoning employed
by the court can easily be extended to all federal agencies.
•
This means that after a foreclosure sale, title may not vest until the expiration of
the applicable federal redemption period (120 days for the IRS and one year for
all other federal agencies) regardless of whether the federal agency files timely
a Notice of Intent to Redeem.
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Who else can recover overbid proceeds?
•
Garnishee of the judgment debtor whose judgment postdates the filing of the NED cannot assert a lien on the property
and thus cannot be junior lien holder.
•
•
If judgment pre-dates filing of NED, garnishee can be a
junior lien holder (assuming all other requirements are met).
But they can reach excess funds held by the PT as custodian for
the judgment debtor, after all lienholders have been paid in
accordance with C.R.S. § 38-38-111. TCF Equipment Finance,
Inc. v. Public Trustee for City & County of Denver, 297 P.2d 1048
(Colo. App. 2013).
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What Fees and Costs Can Be
Claimed?
21
C.R.S. § 38-38-111
C.R.S. § 38-38-111 states that junior lienors may be
paid up to the “unpaid amount of each such lienor’s
lien plus fees and costs” from the overbid proceeds.
• But, the statute does not provide any guidance as to
what fees and costs may be included.
•
•
Exception: Fees and costs of publication and mailing
required to notify unclaimed overbids shall be paid
from overbid funds held in escrow.
22
Fees and Costs – Overbids & Redemption
•
Remember, only those who file a Notice of Intent to Redeem
but are not redeemed out are entitled to overbid proceeds
(C.R.S. § 38-38-111(2)).
•
Can a lien holder add fees and costs at the time of filing the
Notice of Intent to Redeem (i.e. post-foreclosure sale) in order
to make it more expensive to be redeemed out and increase
their potential recovery from known overbid amounts?
23
Fees and Costs – Overbids & Redemption
•
Other than per diem interest, likely no.
•
The redemption statute states that a redeeming lienor may pay
fees and costs of the holder of the interest that is being
redeemed. C.R.S. § 38-38-302(7). Thus, a lienor who is
redeemed themselves may recover their fees and costs.
•
But, the statute does not expressly authorize a lienor to include
their fees and costs in the Notice of Intent to Redeem, or an
overbid.
•
Accordingly, it stands to reason that fees and costs may not be
included post-foreclosure in a Notice of Intent to Redeem or an
overbid.
24
What Fees and Costs May be Included?
•
C.R.S. § 38-38-107 is the general foreclosure fees & costs statute.
Allowable fees and costs include:
•
“(a) costs and expenses allowable under the evidence of debt, deed of trust, or
other lien being foreclosed;” AND
•
“(b) Reasonable attorney fees and the costs incurred by the holder or the
attorney for the holder in enforcing the evidence of debt, the deed of trust, or
other lien being foreclosed or in defending, protecting, and insuring the
holder's interest in the foreclosed property or any improvements on the
property…”
25
Statutory Examples
–
Any general or special taxes or ditch or water assessments levied or accruing
against the property and any governmental or quasi-governmental lien, fine,
penalty, or assessment against the property
–
The premiums on any property, casualty, general liability, or title insurance
acquired to protect the holder's interest in the property or improvements on
the property
–
Sums due on any prior lien or encumbrance on the property, including the
portion of an assessment by an HOA that constitutes a lien prior to the lien
being foreclosed; except that any principal that would not have been due in
the absence of acceleration shall not be included in the sum due unless paid
after the expiration of the time to cure the indebtedness pursuant to this
article
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Statutory Examples
–
The reasonable costs and expenses of defending, protecting, securing, and
maintaining and repairing the property and the holder's interest in the
property or the improvements on the property, receiver's fees and
expenses, inspection fees, court costs, attorney fees, and fees and costs of
the attorney in the employment of the owner of the evidence of debt
–
Costs and expenses made pursuant to a valid court order to bring the
property and the improvements on the property into compliance with the
federal, state, county, and local laws, ordinances, and regulations affecting
the property, the improvements on the property, or the use of the property
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So…What Else is Allowed?
•
Other than those expressly mentioned by the statute, what are
fees and costs “incurred … in defending, protecting, and
insuring the holder's interest in the foreclosed property or any
improvements on the property?”
•
There is very little guidance from Colorado or other states as to
what fees and costs may be included.
28
Not Allowed
•
Colorado courts have declared the following as unrecoverable:

Property improvements and repairs made prior to the
execution of the deed of trust, or pre-foreclosure. Rowe v.
Tucker, 560 P.2d 843 (Colo. App. 1977) (caretaking, repairs of
machinery, replacement locks and windows, etc.)

Future interest payments on unpaid balance of the loan or
any other pre-payment penalties. Kirk v. Kitchens, 49 P.3d
1189 (Colo. App. 2002).

Purchaser’s attorneys’ fees. Davis Mfg. & Supply Co. v.
Coonskin Props., Inc., 646 P.2d 940 (Colo. App. 1982) (prior
version of statute).
29
Future or Anticipated Expenses Allowed?
•
Other than interest, the fees and costs allowable in the
redemption context only include those actually incurred as of
the date of the redemption statement—i.e. past expenses.
(C.R.S. § 38-38-107.)
•
There is no similar express limitation on fees and costs
allowable in the overbid context.
•
However, given the interplay between redemption and overbid
proceeds, it is reasonable to presume the same limitation on
overbids.
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Rich Benenson
(303) 352-1203
[email protected]
Kerry LeMonte
(303) 352-1244
[email protected]
31
Questions?
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