Finder’s Fees for Recovering Overbid Monies From a Foreclosure Sale - House Bill 16-1090

This legal article is written as an outline regarding the new law that was implemented in the State of Colorado, which could potentially affect the rights of an individual/business entity that collects a finder’s fees for recovering overbid monies from a foreclosure sale.

House Bill 16-1090, effective August 10, 2016, made some changes to the law regarding overbids from a foreclosure sale.  Generally, it imposes a burden on the Public Trustee - in cases of an overbid of twenty-five dollars of more - to make reasonable efforts to identify an owner’s current address and mail notice of an overbid (C.R.S. § 38-38-111(2.5)) and thereafter imposes a burden on the country treasurer - in cases of an overbid of five hundred dollars of more - to commence publication of notice of the overbid (C.R.S. § 38-38-111(3)(b)).  Concurrently it made changes related to finder’s fees for recovering overbid monies.  These changes were codified in C.R.S. §§ 38-38-111, 38-13-128.5, and 6-1-105.  

C.R.S. § 38-38-111 (Treatment of an overbid - agreements to assist in recovery of overbid prohibited - penalty - definition) contains the majority of these provisions.  Colorado law now forbids agreements for compensation to recover or assist in recovering any amount due to the owner from the public trustee.  The statute states, “[a]n agreement to pay compensation to recover or assist in recovering an amount due to the owner from the public trustee under subsection (2) of this section is not enforceable.”  C.R.S. § 38-38-111(2.5)(c).  The prohibition on these agreements is applicable to proceeds of foreclosure sales conducted on or after the effective date of August 10, 2016.

 The legislature further imposed penalties on anyone that induces or attempts to induce another person to enter into one of these agreements, specifically “[a] person who induces or attempts to induce another person to enter into such an agreement commits a misdemeanor, as defined in section 18-1.3-504, C.R.S., and is subject to imprisonment in county jail for up to six months, a fine of up to ten thousand dollars, or both.” C.R.S. 38-13-128.5(2); See also, C.R.S. § 38-38-111(2.5)(c).  Additionally, this action was included in C.R.S. § 6-1-105 (Deceptive Trade Practices) as a deceptive trade practice.  Specifically, the legislature has defined that it is a deceptive trade practice to:

 (iii)  Knowingly enters into, or attempts to enforce, an agreement regarding the recovery of an overbid on foreclosed property if the agreement concerns the recovery of funds in the possession of:

(I)  A public trustee prior to transfer of the funds to the state treasurer under section 38-38-111, C.R.S.; or

(II)  The state treasurer and does not meet the requirements for such an agreement as specified in section 38-13-128.5, C.R.S.;

 C.R.S. § 6-1-105(1)(iii).  If an action is believed to be a deceptive trade practice, the attorney general and district attorney are empowered inter alia to investigate (C.R.S. § 6-1-107), bring injunction action (C.R.S. § 6-1-110(1)), institute a civil action for civil penalties (C.R.S. § 6-1-110(2)), or seek criminal penalties (C.R.S. § 6-1-114).  Private parties may also bring a civil action for civil penalties (C.R.S. § 6-1-113).

           There are two exceptions to the law that are relevant to an individual/business entity that collects a finder’s fees for recovering overbid monies from a foreclosure sale. 

           First, the law only applies to “agreements with owners,” which as defined does not include beneficiaries.  The statute forbids “[a]n agreement to pay compensation to recover or assist in recovering an amount due to the owner from the public trustee.” C.R.S. §38-38-111 (emphasis added).  Owner is defined as “the record owner of the property as of the recording of the notice of election and demand or lis pendens.”C.R.S. §38-38-111(5).  A notice of election is the document recorded to start the foreclosure process, and a lis pendens is a recorded notice that a lawsuit has been filed concerning real estate, involving either the title to the property or a claimed ownership interest in it.

          Second, agreements for compensation to recover or assist in recovering an unclaimed overbid may be entered into under certain conditions.  There are provisions in C.R.S. § 38-38-111 that require that monies from an overbid not claimed within six months from the date of sale shall be transferred to the administrator of the county, as further described below. C.R.S. §38-38-111(3). Once the monies have been transferred to the administrator, and if the recovery is one thousand dollars or more, the agreement may be entered into after  “at least two years after the date of the transfer”  (C.R.S. § 38-13-128.5(1)(a)); the agreement must be in writing and signed by the owner (C.R.S. § 38-13-128.5(1)(b)(I)); the agreement must describe the property and the date of the foreclosure sale from which the overbid was derived (C.R.S. § 38-13-128.5(1)(b)(II)); and the agreement must set forth the nature of the services to be provided (C.R.S. § 38-13-128.5(1)(b)(III)). There are certain limits imposed on the compensation that can be paid, namely twenty percent of the amount of the overbid if entered into at least two years but not more than three years after the date of transfer or thirty percent of the amount of the overbid if entered into more than three years after the date of the transfer. C.R.S. § 38-13-128.5(1)(b)(IV). As referenced above, the statute imposes penalties if the requirements of the statute are not complied with. C.R.S. § 38-13-128.5(2). 

          The general flow of money from sale is as follows.  When the property is sold by the sheriff, all of the sale proceeds must be deposited into the registry of the court. Any unclaimed remaining overbid from a foreclosure sale held prior to September 1, 2012, shall be transferred by the officer [of the Court] to the county treasurer. C.R.S. 38-38-111(3)(a). Any unclaimed remaining overbid from a foreclosure sale held on or after September 1, 2012, shall be held by the officer [of the Court] in escrow.  In either case, the remaining overbid shall be held for six months from the date of the sale. Id.  If the unclaimed remaining overbids exceed five hundred dollars and have not been claimed by any person entitled thereto within six months after the date of sale, the funds shall be transferred to the state treasurer as part of the “Unclaimed Property Act.”  See, C.R.S. 38-38-111(3)(b).