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.

CONCLUSION

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.