Who gets the leftover money after a foreclosure sale? Indiana's latest ruling spells out how mortgage lenders can secure surplus funds ahead of borrowers
Who gets leftover foreclosure sale money? Indiana’s Court of Appeals just clarified how surplus funds are divided between mortgage lenders in a real-world dispute.
Susan Sanders owned a property in Middletown, Indiana, with two mortgages. The first, for $131,000, was eventually assigned to US Bank Trust National Association, not in its individual capacity but solely as Trustee for RCF 2 Acquisition. The second, for $44,000, was assigned to ABS Loan Trust VI.
In June 2018, Sanders and her husband filed for Chapter 12 bankruptcy. By January 2022, the bankruptcy court approved an agreement allowing ABS to seek foreclosure on the property, but only for an in rem judgment – meaning against the property itself, not personally against Sanders.
In June 2022, ABS filed a foreclosure complaint on its second mortgage, seeking an in rem judgment and the right to proceeds from a sheriff’s sale. RCF responded, asserting its first mortgage was superior and filing its own in rem foreclosure claim. Sanders did not answer either complaint.
In March 2023, the trial court entered an order confirming RCF’s first-priority lien and ABS’s subordinate lien. The court ordered the property sold at a sheriff’s sale and set the order for distributing proceeds: first to costs, then property taxes, then RCF, then ABS (as proven by later application), then any other parties if funds remained.
The property was sold at a sheriff’s sale for $215,244.69, with Sanders’ husband as the buyer. After paying RCF’s judgment, costs, and taxes, $41,409.29 remained. RCF received its share, and the remaining funds were held by the court clerk.
ABS moved to freeze the surplus, stating it was entitled to payment as the junior mortgagee. Sanders filed her own motion, arguing that ABS’s lien was extinguished by the sale and that the surplus should go to her, especially since her bankruptcy discharge barred further claims against her.
The trial court froze the funds. ABS then filed for summary judgment, supported by an affidavit of debt, seeking the surplus to satisfy its remaining claim. Sanders opposed, arguing ABS was too late and that its lien did not attach to the proceeds. She also said ABS’s actions violated her bankruptcy discharge.
After a hearing, the trial court granted summary judgment for ABS, holding that its in rem judgment attached to the surplus and that ABS’s interest was superior to Sanders’s claim. Sanders appealed.
On August 27, 2025, the Indiana Court of Appeals affirmed. The appellate court explained that under Indiana law, a junior mortgagee’s lien attaches to any surplus proceeds remaining after a sheriff’s sale, provided the lienholder’s rights were adjudicated in the foreclosure action. The court found that both RCF and ABS had their claims properly established, so ABS was entitled to the surplus before Sanders could claim it.
For mortgage professionals, this case is a clear reminder: if you’re a junior lender, your right to surplus funds from a foreclosure sale is protected – as long as your claim is established in court. The decision underscores the importance of timely and proper filings in foreclosure actions to secure your place in line for any remaining proceeds.
This case offers practical guidance for mortgage servicers, lenders, and legal teams on handling surplus funds in foreclosure. The lesson is straightforward: know your lien priority and make sure your rights are on the record to protect your interests and those of your clients.
