Is the Sheriff Entitled to a Commission on Real Property Sold Under the Auspices of the Bankruptcy Court?
By Bruce Buechler[i]
The following is a familiar fact pattern for those involved in real estate. A borrower defaults under a mortgage and note. The lender commences a foreclosure action. Once a final judgment of foreclosure is entered, a writ of execution is issued, and the sheriff schedules a sale to sell the real property. Either before or the day of the foreclosure sale, or within the borrower’s time period to exercise its right of redemption of equity, the borrower files for bankruptcy under Chapter 7 or 11 in an attempt to obtain more time to sell the property. Ultimately, the real property is sold pursuant to a bankruptcy court sale process, usually pursuant to section 363 of the Bankruptcy Code. The sheriff then seeks a commission in connection with the bankruptcy court sale of the real property. Question: is the sheriff entitled to a commission?
Today, due to tight budgets and limited revenue sources, one can expect to see the sheriff (and other governmental entities) seeking to more actively exercise their alleged rights in bankruptcy in order to collect revenue. While the fact pattern described above is simple and occurs with some frequency, the sheriff’s entitlement to a commission, if any, is primarily based on the applicable state law where the foreclosure sale was pending. If the sheriff does not actually sell the real property, (i) in certain states, such as Georgia, North Dakota and Virginia, the sheriff would not be entitled to any commission; (ii) in certain states, such as Colorado and Idaho, applicable state law entitles a sheriff to a fixed commission; (iii) in some states, nothing; and (iv) in certain states, such as New Jersey, New York, Hawaii and West Virginia, the statute is ambiguous and courts are split as to the sheriff’s entitlement to a commission and, if so, how much.
By way of example, under New Jersey State law, a sheriff only has a right to a commission pursuant to N.J.S.A. 22A:4-8 “where a sale is made by virtue of an execution….” The statute also states that the sheriff would be entitled to a commission “when the execution is settled without actual sale and such settlement is made manifest to the officer, the officer shall receive 1/2 of the amount of the percentage allowed herein in case of sale.” Mathematically, under N.J.S.A. 22A:4-8, the maximum fee to the sheriff is calculated as follows: 6% of all amounts not exceeding $5,000, and 4% of all amounts exceeding $5,000, plus reimbursement of actual disbursements. Thus, in the fact pattern above, while the sheriff did not sell the real property, as it was sold under the auspices of the bankruptcy court section 363 sale process, the sheriff could assert a commission for 1/2 of the regular commission, which could result in a sheriff’s fee of potentially hundreds of thousands of dollars depending on the sale price of real property.
Interestingly, there is a split in the New Jersey case law as to whether a “settlement” occurs when there is a sale of the real property pursuant to a bankruptcy court sale process and order. Thus, under New Jersey law, the sheriff could only be entitled to a commission if (i) the sheriff sold the property, which it did not in the fact pattern, or (ii) the execution was settled, which is questionable in our fact pattern.
In Jacoby v. Eseo, 329 N.J. Super. 119, 122 (App. Div. 2000), the court had to “determine the Sheriff’s entitlement to fees after a foreclosure sale has resulted in a default by the high bidder and the forfeiture of a deposit.” Id. at 121. The court determined that the sheriff was only “entitled to a commission on the amount of the forfeited deposit rather than the amount bid.” Id. The court held: “we conclude that the Legislature intended that the fees recovered by the Sheriff be related to the sums recovered by the creditor as a result of the sale. Fees calculated on the bid which was never performed failed to meet that intention.” Id. at 124. Thus, the Jacoby court approved of a commission to the sheriff based on the $20,000 deposit posted, not the bid price that was not paid.
In In re Bejjani, 2003 Bankr. LEXIS 2150 (Bankr. D.N.J. September 2, 2003), the bankruptcy court determined that the sheriff had no entitlement to a commission based on the sale of the real property pursuant to the bankruptcy court’s sale order. In Bejjani, the debtor filed a voluntary Chapter11 petition in March 2002. Prior to commencing the bankruptcy case, the lender commenced an action in New Jersey state court to foreclose on real estate owned by the debtor. A judgment in foreclosure and writ of execution were issued pre-petition. The sheriff was not notified of the bankruptcy filing, so the sheriff scheduled a foreclosure sale, which was discontinued when the sheriff was advised of the bankruptcy. Thereafter, pursuant to an order of the bankruptcy court, the real property was sold.
The issue before the court was whether the sheriff was entitled to a statutory commission.
The bankruptcy court held:
The parties’ actions did not produce a settlement or resolution of the foreclosure action. A settlement under the statute applies to the situation where a plaintiff and defendant settle the action and satisfy the writ of execution absent an actual auction sale by the sheriff. The statute has no application to a sale approved by order of the Bankruptcy Court after a bankruptcy petition has been filed. The Court-ordered sale of the Property did not constitute a settlement for purposes of N.J.S.A. 22A:4-8. The Sheriff’s cross-motion is denied to the extent it seeks a commission. To rule differently would reward the Sheriff an impermissible windfall from the bankrupt estate.
In summary, the Bankruptcy Court-approved sale of the Property by the Trustee did not constitute a settlement under N.J.S.A. 22A:4-8, thereby precluding the Sheriff’s entitlement to a statutory commission. The Sheriff’s Cross-Motion for Turnover of Funds is, therefore, denied. However, the Sheriff is to be reimbursed $266.00 in actual out-of-pocket expenses for actions taken after the bankruptcy filing but before receiving notice of the filing.
Id. at 13-14.
A different New Jersey bankruptcy judge faced with the same issue reached the opposite conclusion. In In re Smith (Dobin v. Golden), ___ B.R. ___, 2019 WL 1590077 (Bankr. D.N.J. April 9, 2019), the Chapter 7 trustee commenced an action against the sheriff and the secured lender asserting that the sheriff had no right to a commission because the trustee sold the debtor’s real property pursuant to a bankruptcy court order. The bankruptcy court denied the trustee’s motion and held that the bankruptcy sale was a settlement within the meaning of N.J.S.A 22A:4-8 entitling the sheriff to receive one-half of the statutory commission, which commission was calculated based on the amount of the foreclosure judgment, and directed that the commission be paid by the bankruptcy estate effectively as part of the secured lender’s costs. The facts of the Smith case are as follows: the bank obtained a final judgment of foreclosure in New Jersey state court on January 4, 2017 on real property in the amount of $307,632.33. The sheriff’s sale was then scheduled and adjourned several times. Before the sheriff’s sale could be conducted, the debtor filed for bankruptcy. The bankruptcy court approved of the trustee’s sale of the real property for $1,015,000. The sale closed on November 1, 2018. From the sale proceeds, the bank was paid $335,232.90. The sheriff sought a statutory commission. The bankruptcy court held that the sheriff was entitled to one-half of the commission based on the amount of the foreclosure judgment.
It is submitted that the Smith decision was wrongly decided because of the improper reliance it placed on the 1859 decision of Sturges v. Lackawanna & Western Railroad Co., 27 N.J.L. 424 (Sup. Ct. 1859), that a “settlement” within the meaning of N.J.S.A. 22A:4-8 should be broadly defined. Sturges was not a real estate foreclosure action, as the plaintiff directed to the sheriffs of three counties to levy on personal property. Subsequently, the plaintiff “withdrew the executions.” Id. The Sturges court’s broad statement must be tempered by is holding allowing “the sheriffs may lawfully claim the percentage on the value of the goods by them respectively levied on. If the value of the goods exceed the amount due on the execution, then they may each, in proportion to the value of the property levied on.” Id. at 427. The key is the sheriffs levied on personal property and thus incurred costs to safeguard the personal property entitling them to a commission before the plaintiff decided to withdraw the executions.
Additionally, the New Jersey Appellate Division in Regency Savings Bank. v. Southgate Corporate Office Center, 388 N.J. Super. 420 (App. Div. 2006), certif. denied, 189 N.J. 429 (2007), noted that while a subsequent New Jersey Supreme Court decision “cites Sturges with approval, it certainly did not accept [it] as applicable in the context of a mortgage foreclosure sale settlement….” 388 N.J. Super. at 428. Thus, Sturges is of questionable support in a real estate mortgage foreclosure.
In Regency, the sheriff sought a statutory commission in a mortgage foreclosure where the parties settled after the judgment of foreclosure and writ of execution were issued, but before the sheriff conducted a sale. The settlement, which the court stated was “complex,” essentially required the defendant to pay Regency a nonrefundable payment of $250,000 to cancel the sheriff’s sale and provided the defendant with 90 days to refinance the property. The Appellate Division, affirming the trial court, held that the sheriff’s commission was based only on the $250,000 settlement payment, nothing more. The court stated:
Therefore, we hold that when a sheriff’s sale pursuant to a mortgage foreclosure is cancelled by the plaintiff because of a settlement with defendant, the sheriff’s percentage fee under N.J.S.A. 22A:4-8 must be based, not on the amount of the judgment or the value of the property, but on the amount of the settlement.
Id at 429. The Regency case makes clear that the term “settlement” within the meaning of N.J.S.A. 22A:4-8 means exactly that, a settlement between the parties, not a sale of the real property authorized by another court. Thus, a sheriff should not be entitled to any commission based on a sale of the real property and sold pursuant to a bankruptcy court sale process.
N.J.S.A. 22A:4-8 states that “when the execution is settled without actual sale and such settlement is made manifest to the officer….” In our typical case, there was no sale effectuated by the sheriff. The sheriff in no way aided in the sale of the real property pursuant to the bankruptcy court sale order or in the debtor’s efforts to locate the buyer. There was no settlement between the debtor and lender. As noted by the New Jersey Supreme Court in Sturges, a commission is due the sheriff for a sale of personal property “if anything is done between them by which a sale is rendered unnecessary, that must be considered a settlement within the meaning of the act.” 27 N.J.L. at 426. That did not happen in our hypothetical case. There was no agreement between the debtor and lender that rendered the sheriff’s sale unnecessary. The sheriff, if allowed the commission, would be receiving a windfall. Thus, the law should follow the decision in Bejjani which denied the sheriff a commission.
In sum, whether the sheriff is entitled to a commission in a real property foreclosure sale when the property is sold under the auspices of the bankruptcy court will depend very much on the jurisdiction where the foreclosure action was pending in. This is an issue parties and counsel should be very aware of because if a commission is due, it could possibly result in hundreds of thousands of dollars being owed to the sheriff that could reduce the amount to be received by the secured lender in the event the property was underwater or may result in the bankruptcy estate having to pay additional claims in light of the foreclosure action, thereby reducing the amount of funds available for other creditors under the Bankruptcy Code’s distribution waterfall. Thus, all parties should be forewarned that the sheriff may come looking for money.
[i] Bruce Buechler is a partner and vice chair of the Bankruptcy, Financial Reorganization and Creditors’ Rights Department of Lowenstein Sandler LLP. He can be reached at [email protected]. The views expressed in this article are solely those of the author and do not reflect those of Lowenstein Sandler LLP or any of its clients. Mr. Buechler thanks Raymond Cooper, a summer associate, for his assistance on this article.
Teaching children about wealth management and why there has never been a better time
By Annabel Bosman is Managing Director and Head of Relationship Management at RBC Wealth Management
As we approach the end of week sixteen in lockdown, I am breathing a sigh of relief at having successfully navigated another week of juggling work and client commitments with the increasing demands of my children – age six and nine.
My day job is to lead RBC Wealth Management International’s relationship management efforts in the British Isles, but my toughest challenge right now is educating and entertaining my new junior co-workers each day.
While my children’s school has done a great job at setting up daily tasks and learning activities, there is only so much ‘teaching’ they can take from me without World War III breaking out. So instead of rigidly sticking to the school curriculum each day, I have taken the opportunity to educate my young children about a topic that is often not discussed enough in school — money.
What I do for a living has become a central discussion in our co-working space — also known as the dining table. I have found that investment concepts can be grasped quite well by young children and this has led to some interesting conversations about which businesses are doing well in the current situation, and those that are not. Children are often more logical than adults, and in my house, this logic is helping them grasp the basics of an investment philosophy. As a result, I have even passed conversations around stock markets off as maths classes!
For young children like my own, helping them learn the basics of managing money is something that will hopefully set them up well in life. There are some great tools to help them do this – we use GoHenry, which provides children with a pre-paid card to learn about budgeting. Likewise, encouraging conversations around how they spend virtual money whilst gaming on apps like Roblox can give some really important lessons around how you look after the money you have earned – and how if something seems to be too good to be true, it probably is.
The most important thing is not to underestimate your children. Whether it is the application of a “mummy-tax” when they want chocolate or applying interest rates (albeit nominal!) if they want to borrow money, teaching our children the basics around money is something we can all do.
Incorporating new lessons
The first step is to identify the best way to approach teaching these topics in a way they will understand. Resources such as the Usborne Money for Beginners are really helpful to start conversations. There are also several YouTube clips and even TikTok channels dedicated to helping children think about money. I tend to think about what is important to them and use that as a catalyst to start conversations; for example, it could be how they can monetise their love of the gaming app Roblox.
Ending the taboo
Any conversation that leads to a greater awareness around financial discipline and security has to be a positive, no matter what the age – and there are certainly parallels with my experience and that of my clients. There seems to have been a shift in HNW and UHNW families’ willingness to talk about money. Whereas previously it was seen as very un-British to speak about money, the pandemic has meant that a more open conversation is taking place.
Whatever our financial position, we often bury our heads in the sand when it comes to money, and don’t always have a clear financial plan, but when we start to put down on paper what’s going in and out, we immediately start to feel more in control, thus becoming more engaged. It can be uncomfortable to have that conversation with your family, but we regularly speak with our clients about all manner of sensitive subjects including putting wills in place, inheritance and protecting loved ones. Naturally, this is also bringing conversations to the fore around succession planning, legacy, philanthropy and even one’s own mortality. When times are good, it’s easy to not have these thoughts at the forefront of your mind, but in challenging times like these, it highlights how essential it is to talk. And just as with my children, there are plenty of apps and websites that can help you take the first steps.
Varying generational approaches
There is no one way to educate your children about money — what worked for one generation will not necessarily work for the next. Different generations have had to address the different approaches they might take in thinking about money and try to reach a common language to agree on common goals. Whilst many of us grew up with physical pocket money from our parents after completing household chores, today’s young children rarely even touch money, they receive their allowance on an app.
A 2019 study commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit found that seven in ten younger affluent respondents think that their beliefs about wealth are very different to those of their parents; with a similar percentage, 78%, believing that wealth is less easily attained or preserved today. Early, open and continuous dialogue can only help confront obstacles head on and smooth the path ahead.
These talks also allow HNW individuals and their families to talk about how they can address their non-financial goals, such as fighting climate change or supporting social agendas – something that the younger generation is acutely focussed on. Indeed, more recent social events have led to an ongoing and overdue debate around what privilege looks like and how society needs to change.
With the summer holidays fast approaching, the struggle to keep children occupied will continue, but without the pressure of the school curriculum. This is an opportunity to continue discussions with children about where money comes from and where its value lies.
I have found it tremendously empowering to talk to my children about money and getting back to basics — it may not be school learning, but it is real life learning. And as I say to my clients, the initial step to start a conversation is always the hardest.
From accountants to advisors: changing roles and expectations
By Chris Downing, Director for Accountants & Bookkeepers at Sage
The line between strategic advisor and traditional accountant is blurring. Over the last year, 82% of accountants said their clients were demanding a wider service offering, including business and technology implementation advice. In the current climate this transition has only been accelerated.
Clients increasingly expect their accountants to take a more active role in change management and predicting their cashflow months into an uncertain future. This is enabling businesses to tackle the challenges of day-to-day operations, while keeping an eye on what the post-COVID world will look like, and the support they will need to return to strength.
To solve these new and complex, expectations accountants must develop a different way of working. They will be required to increasingly supplement the traditional, compliance and reporting aspects of their work with business advice and consultancy. To do this, accountants need the ability to move quickly and efficiently, with a firm grounding in technology and data control.
Get straight to the point
The priorities of yesterday are very different to the goals of today. Where businesses once focused on driving growth and efficiency, the objective for many now is continuity – understanding what government support is available and for how long. In the current climate, speed of delivery and client care are top of the agenda.
But the way accountants go about this is very important. Rules are changing every day – the definition of an ‘essential business’, government support and bank loan programmes are constantly in flux. In normal times, an accountant’s role is to ensure their clients are aware of and reactant to these changes. Yet, how much value does this create for them in the ‘now’?
To be valuable, new information must be delivered quickly but it should also be succinct. It isn’t useful for clients to be bombarded with email updates, or reports running into hundreds of pages, trying to explain the week’s changes. With so much present noise, it’s the accountant’s task to break through the information overload and provide the client with crucial resource only.
To understand client pain points and get to the heart of what they really need, a running dialogue is essential. Building individual client relationships will unlock the potential to deliver tailored experiences that meet their business demands. Armed with this insight, accountants can then distil complex information into digestible chunks.
A more entrepreneurial spirit
Sharing insight is only the start. The other half of the story relies on consultancy. In the Covid-19 environment, the routine aspects of an accountant’s work are being supplemented with the transformative changes they can make for clients. Cashflow projections for the next six months are crucial, but even more so is the advice an accountant can offer on improving the financial outlook of a business.
To provide this balance, accountants should embrace a more entrepreneurial way of thinking. Not only advising on how clients can meet current challenges, but also how they can innovate to drive new revenue streams in the future. Part of this means being willing to step outside of their comfort zone. Many firms are already investing in the skills and technologies they need to service novel demands – like advising on relevant accounting and finance technologies.
While many businesses remain closed to the public, even as lockdown eases, they have increased capacity and flexibility to shift operations towards what will be most effective and profitable. Clients will be open to changing their business focus to meet demand spikes in other areas as they do not have to account for a disruption to customer service. For example, many distillers shifted production from beverages to hand sanitiser while bars and restaurants were closed.
With their contextual understanding of client finances, accountants are uniquely placed to advise their clients on change and guide them through the transformation process. Though this requires a more innovative model of accounting, and one that is willing to embrace the latest technologies.
Truth in the cloud
Business advice needs to be backed by data, especially for accountants engaging directly with the CFO. Scenarios need to be modelled, analysed, tracked and compared over time to arrive at the most effective proposal for the client. This is outside the wheelhouse of traditional accounting, but it’s becoming necessary in an industry heavily disrupted by new technologies.
To keep up with the ever-growing need for rapidly available data and analytics capabilities, more and more accountants are turning to the cloud to consolidate and use their data estate, while automating the time-consuming tasks of data management. Indeed, the majority (91%) of accountants have said new technology has delivered fresh value to their business in the last year, whether it increases productivity or frees up more time to focus on client needs.
Against the backdrop of coronavirus and technological disruption, a new breed of accountant is quickly emerging. Innovation is possible for those who stay ahead of client expectations and are aware of their needs, embrace an entrepreneurial mindset and adopt the latest cloud and automation technologies. In this way, an accountant becomes an integral part of their client’s business.
Preparing for the new normal and building a financial plan
By Donna Torres, director of small business at Xero UK
There is some light at the end of the tunnel for small businesses. As the lockdown continues to ease many retailers and hospitality businesses are now opening up again, or preparing to return soon.
Preparing for what’s around the corner has always been key to business success. Whilst there is still much uncertainty, it’s more important than ever that businesses get in control of their finances and create a solid plan.
Having a strong understanding of your cash flow and a plan for the months to come is vital to helping you prepare for what’s ahead. If you’re unsure where to begin, here are five ways to start:
Financial experts Lauren Harvey (Founding Director of Full Stop Accounts) and Jonathan Graunt (Founder of accountancy firm FD Works and Xavier Analytics) recently spoke with Xero about the uplift in businesses taking an interest in their finances and understanding their financial position.
Businesses should be using this time to review their processes and really understand their numbers. It can be helpful to reflect on your original statement – what do you really want your business to do? And has the pandemic changed this? Use this as the fuel to drive your business vision forward.
Consider the risks
The government has provided SMEs with a number of support schemes, but the conditions and capital being offered is changing.
For example, the Furlough Scheme will currently only run until the end of October and the deadline to furlough new employees has now passed. The government will also gradually be reducing the amount it pays under this scheme. Make sure you’ve accountanted for this in your financial plan so you have a clear picture of how furlough tapering off will impact your business and any adjustments you might need to make.
If you’ve taken out one of the Government backed loans, now is the time to start building repayments into your financial plan. Building a solid plan will also help to ensure that you use the money in the best way to support your business in the long-term. It can be tempting to fight the most immediate fires with your capital, but try to think about the longer term health of your business – and where the money is going to have the most impact.
Adapting to a change in demand
Covid-19 has forced businesses to adapt to a lot of changes and SMEs should be thinking carefully about how their customer demand has changed. What do customers expect from you now? For example, many are still apprehensive of shopping on the high street. This might mean some of the options you offered during lockdown like deliveries or online services should remain.
Communicate with your customers as much as possible to get an accurate view of what they need from you now and in the future. How can you fulfil this? Then it’s important to look at the numbers and scrutinise which areas are going to provide the most return on investment.
Financial Planning: where to start?
For financial planning to be effective, it’s helpful to get into habits that will provide an accurate snapshot of how your business is performing. Reconciling bank transactions daily, creating a daily simple cash flow check-in habit and examining your profit and loss statements weekly will give you a better understanding of where your business stands.
Apps like Float or Fluidly will help to give you an accurate look at your cash flow in an easy to read visual. And the recently launched Xero Short-term Cash Flow tool can help you project your bank balance 30 days into the future, showing you the impact of existing bills and invoices if they’re paid on time. You can then work out which invoices you should follow up on.
Some people can find this task daunting, but your accounts aren’t just being kept for reporting to HMRC, they are also there to give you invaluable insight into your business and to plan for the future.
Ask for help
Your accountant is there to help you to understand your finances. This is likely to be one of the biggest economic challenges you have ever faced as a small business owner. Now, more than ever, it is time to lean on your accountant to help create a robust plan.
If you do not understand something, or need guidance or clarification, get in touch and ask for their expertise and advice. If their advice doesn’t help, ask them to explain it again.
You can also check out Xero’s online guide to managing cash flow here.
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