A chapter 7 trustee brought an adversary proceeding objecting to (1) a claim filed by a sheriff for a commission based on a prebankruptcy foreclosure sale that does not take place and (2) a claim by the secured creditor for reimbursement to the extent it was liable for payment of the commission. The bankruptcy court treated the parties’ pleadings as cross-motions for summary judgment.
Prior to bankruptcy the secured creditor obtained a final judgment of foreclosure and a writ of execution authorizing sale of the debtor’s residence. The foreclosure sale was scheduled by the sheriff and then postponed numerous times for various reasons.
Before the foreclosure sale could be held, the debtor filed a chapter 13 bankruptcy that was converted to a chapter 7. The chapter 7 trustee obtained court approval for an auction, and the property was sold for $1,015,000. The secured creditor was paid its claim of ~$340,000 at closing out of the sale proceeds.
Under state law the sheriff was entitled to a commission paid from execution sale proceeds of 6% of the first $5,000 and 4% of the excess. In addition:
When the execution is settled without actual sale and such settlement is made manifest to the officer, the officer shall receive ½ of the amount of percentage allowed herein in case of sale.
The sheriff argued that he was entitled to a commission based on the bankruptcy sale price. The trustee objected arguing (1) the trustee’s sale was not a “settlement,” (2) the state statute was preempted by the Bankruptcy Code because it conflicted with the underlying objective of providing equitable distribution of the debtor’s assets among creditors, and (3) even if the sheriff was entitled to compensation, it should be calculated based on the secured creditor’s recovery, not the total auction price.
Initially there was also a dispute about whether any commission should be added to the secured creditor’s claim and paid out of the bankruptcy estate assets or should be the sole responsibility of the secured creditor. However, since the costs awarded in the foreclosure judgment could include the sheriff’s fees, the trustee ultimately agreed to pay any commission out of estate funds as part of the secured creditor’s claim.
The court followed the lead of a few other bankruptcy courts in finding that the trustee’s sale constituted a settlement that entitled the sheriff to a commission. Based on the plain meaning of “settlement” using the definition in Black’s Law Dictionary and state case law: “[A] ‘payment or satisfaction of a mortgage’ and ‘anything … done between [the parties], by which a sale is rendered unnecessary, … must be considered a settlement.'”
The court disagreed with another bankruptcy decision cited by the trustee holding that settlement means that the parties have settled the action so that it would not include a bankruptcy sale. This contrary decision viewed the commission as an impermissible windfall to the sheriff.
A second bankruptcy case cited by the trustee held that the sheriff was not entitled to a commission when a chapter 13 debtor cured defaults and obtained a reinstatement of the mortgage loan. “Simply put, interpreting [the state statute] to include reinstatement of a mortgage in the meaning of ‘settlement’ is counterproductive to the fresh start sought by a debtor through filing for bankruptcy.”
The Smith court was not persuaded by either decision. It distinguished both cases on the grounds that they were Chapter 13 cases and “[s]addling debtors with an additional expense would diminish the viability of chapter 13 as a means of saving one’s home. A chapter 7 presents no such concern.” Thus, the court concluded that the sheriff’s commission was not preempted because it did not conflict with the goals of a chapter 7 bankruptcy.
This left the question of whether the commission should be calculated based on the distribution to the creditor or the full auction price. As a starting point, the court noted that in an execution sale the sheriff is effectively an agent of the foreclosing creditor and is analogous to an auctioneer who should look to the seller (creditor) for compensation.
Along those lines, an 1837 state supreme court decision reviewed the legislative history of the act back to 1799 and concluded that a sheriff was entitled to a commission based only on the amount paid to the creditor, not on any excess proceeds. The bankruptcy court saw “no reason to anger the spirits of early American jurisprudence” and thus confirmed that the commission should be based on the amount of the foreclosure judgment rather than the full bankruptcy sale price.
Accordingly, the court ruled that (1) the sheriff was entitled to payment of the one half statutory commission (2) to be paid out of the bankruptcy estate as part of the secured creditor’s claim (3) calculated based on the amounts due under the foreclosure judgment.
It appears that the secured creditor is responsible for paying the sheriff’s statutory commission. In this case since the commission was allowed as part of the secured creditor’s claim and it was significantly oversecured, the secured creditor did not have to come out of pocket to pay the commission. Otherwise, it looks like the creditor might end up with an unreimbursed liability. This could be an unpleasant surprise if the creditor did not consult with local counsel in determining its enforcement strategy up front.
Vicki R. Harding, Esq.