After defendant defaulted on a $1.3 million mortgage and note, the bank foreclosed. Despite the appointment of a receiver, during the pendency of the foreclosure action, the bank incurred a host of expenses. One of those was $40,000 for marketing commissions to a real estate marketing company. After the auction, a surplus in excess of $250,000 remained. In reviewing the expenses submitted by the bank, the court initially rejected them all finding that the receiver should have addressed them, but later allowed the bank to recover taxes and insurance (without interest).
On appeal, the court agreed that the loan documents allowed the bank to pay the assorted expenses in maintaining the property throughout the foreclosure and to recover those costs when the property was sold. It disagreed, however, that the marketing costs were recoverable, notwithstanding that such marketing may have resulted in higher auction bids. As far as costs for appraisals and environmental assessments, the appellate court agreed with the trial judge in finding that once a receiver is in place, the receiver acts to maintain the property, including paying its expenses. Once the bank successfully installed the receiver, it no longer had any authority to pay for any expenses. Furthermore held the court, the receiver would in any event not have been permitted to pay these expenses as they were incurred not to maintain the property, but like the marketing costs, incurred to maximize the bids. This held true even if the bids were maximized, something that would benefit both the bank and the borrower.
It is important to remember that when banks foreclose, especially when the property is “above water” with equity, the property owner is entitled to recover that excess. Often, however, and unlike this case, if the owner does not object, the bank’s demands are agreed to by the court. Vigilance is crucial at this point especially if there has been no meaningful opposition to the foreclosure action. Please contact us if this issue is relevant and you have any questions.