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Kentucky Amends Foreclosure Sale Rules

real-estate-law-twoBy Richard Nielson

In an effort to create a more uniform process in judicial foreclosure sales, the Kentucky Administrative Office of the Courts has amended the Rules of Administrative Procedure that govern the role and duties of the master commissioners of the circuit court.

The changes, effective as of January 1, 2016, and codified in Supreme Court of Kentucky Order 2015-25, apply to all cases and proceedings referred to the master commissioner of the circuit court. The master commissioner is a court-appointed officer whose responsibilities include conducting judicial sales of real property held to enforce judgments in mortgage foreclosure cases.

Among the changes is the adoption of statewide time frames for sales. Except in cases where property is found to be vacant and abandoned, the master commissioner is now generally required to conduct the sale within 90 days of the court’s entry of the order of sale. In addition, successful purchasers are required to pay the full purchase price within 30 days of the sale. Lastly, the master commissioner’s report of sale must be filed no later than three business days after the sale. Historically, these time frames have varied widely from county to county.

The amendments have also attempted to standardize some terms of judicial sales. With regard to the bidding process, at the time of sale the successful bidder is now required to either pay in full or make a deposit of 10 percent of the purchase price. If the purchase price is not paid in full, the successful bidder is now required to secure the unpaid balance of the purchase price by executing a bond, with sufficient surety, approved by the master commissioner prior to the sale.

Foreclosure plaintiffs, whose judgments the judicial sales are held to enforce, may bid on credit up to their judgment amount in lieu of paying cash or posting a surety bond at the time of sale. However, to the extent a plaintiff’s bid exceeds its judgment amount, the plaintiff may be required to either tender the difference at the sale or execute a sale bond for the difference with sufficient surety at the sale. This portion of the amendment may be the most troubling for mortgage servicers.

At this point it remains unclear what practical impact Kentucky’s new sale bond requirement will have on mortgage servicers who elect to bid at their own sales. The issue has caused some concern in at least one of Kentucky’s 120 counties. In Jefferson County—the jurisdiction where Kentucky’s biggest city, Louisville, is located—foreclosure plaintiffs are only permitted to seek, as part of their initial judgment, the unpaid principal balance remaining due on the subject loan, plus interest. Recovering additional fees, costs and expenses incurred in the servicing or enforcement of the subject loan requires obtaining a supplemental judgment, traditionally sought after the judicial sale is held.

Because plaintiffs may now be required to execute sale bonds to secure payment of any bid amount that exceeds their judgment amount, those wanting to credit bid up to the total debt owed on their loans may be hamstrung by the timing of Jefferson County’s initial and supplemental judgment practice. Obtaining a bond with proper surety is generally a time consuming process that may necessitate more time than the Jefferson County Master Commissioner will allow. Our office is working with her office to try to remediate this risk to mortgage servicers. Because the rule is not entirely clear, other counties may interpret this amendment differently. We will monitor the situation closely and work with other master commissioners and the Administrative Office of the Courts to bring clarity to the issue.

With regard to statutory pre-sale requirements, the amended rules refine the appraisal and advertisement processes.

Before real property may be sold pursuant to a judgment and order of sale, its appraised value must be determined by two disinterested persons both of whom are actively engaged in – or who have at least one year of experience in – the field of real estate. The appraisal must be in writing, signed by the persons making it and filed in the circuit court record prior to sale. This change may prohibit the practice of at least one county that refused to provide court appraised values to the plaintiff prior to the foreclosure sale. Our firm will be working to ensure that this issue is standardized in all counties.

Prior to the auction itself, the master commissioner must also see that the sale is advertised by publication at least once between seven and 21 days before the date of the sale. The advertisement must include the time, place and terms of the sale; a reference to the case number in which the applicable judgment and order of sale was entered; and a description of the property to be sold that includes only the street address (or a description of its location, if there is no street address) and the parcel or property identification number.

While these amendments to advertising rules do much to standardize practice throughout all of Kentucky’ 120 counties, and may reduce advertising costs, because of the shortened timeframes, the amendments may create challenges for mortgage servicers in getting bidding instructions to their counsel on a timely basis. Our firm will be working with each of the master commissioners, and our clients, to ensure that adequate notice is provided.

The revisions also aim at improving oversight and accountability of acting master commissioners. They allow for an audit of a master commissioner’s bookkeeping, accounting and procedural practice by the Chief Justice of the Supreme Court of Kentucky. If that audit uncovers evidence of recurring irregularities, the Chief Justice can now refer the master commissioner to the judges of the local circuit court for potential removal.

For questions regarding these changes to Kentucky rules of practice, please contact Richard Nielson, Nielson & Sherry, PSC, at rnielson@nsattorneys.com.

About Author: Richard Nielson

Richard M. Nielson is the managing partner of Nielson & Sherry, PSC, and the Senior VP and Corporate Counsel for Agility Closing & Title Services, Inc. He is based out of the firm's Louisville, Kentucky office.
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