DD 4/4/07 Can you omit your own junior lien from foreclosure of senior lien you also hold?

Daily Development for Tuesday, April 4, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

MORTGAGES; FORECLOSURE; OMITTED JUNIOR LIENHOLDERS: Mortgagee holding both first and second mortgages on same property, that effects a release of the junior mortgage as a party defendant in the foreclosure of the first, enjoys treatment as an “omitted junior lienholder” and continues to have a lien against the foreclosure sale purchaser.

Abdoney v. York, 903 S. 2d 981 (Fla. App. 2005) (pet. for review denied)

A, an attorney, obtained a note and secured by a second mortgage on P’s property, securing an indebtedness for legal fees.  A apparently had an understanding with P that A would not foreclose this mortgage.   A’s was one of three junior mortgages.

P later defaulted on the first mortgage, which instituted a judicial foreclosure proceeding, and, to prevent being sold out in the first mortgage foreclosure sale, A paid that mortgage while the foreclosure proceeding was ongoing.  The mortgagee dismissed A as a defendant and the parties filed a joint stipulation for substitution of plaintiffs.  The court substituted A as the foreclosing mortgagee, and A amended the complaint, but did not inclujde himself in his capacity as a junior lienor.

At the foreclosure sale, York, a third party,  bought the property, creating a surplus.

A then sent York a letter demanding satisfaction of his mortgage, which of course had not been foreclosed away.  After some failed negotiations, A filed a foreclosure action which sought foreclosure against P (again), foreclosure against York, statutory redemption by A as a redemptioner and “lien foreclosure” (whatever that adds).  York responded by alleging slander of title and praying for a finding that A, who had notice of the prior foreclosure sale, was foreclosed away as a junior lienholdeer.

The trial court granted summary judgment to York on the issue of whether A’s lien was still valid, holding that it had been extinguished by the issuance of the filing of the certificate of sale in the first foreclosure action.

On appeal: Held: Reversed. 

The court held that, although A’s mortgage might have been deemed cancelled if A had acted in bad faith, otherwise A’s mortgage will not be deemed foreclosed.   It was unaffected by the prior sale, as A was not a party to that lawsuit.  The court noted that York had constructive and actual knowledge of A’s mortgage when she bought at the foreclosure sale. 

The court concluded that the only remedies available in favor of York were to reforeclose the mortgage (which would be equitably reinstated for this purpose) or to pay off A. As to A, the court held that it had the rights to redeem or to foreclose itself.  As to the redemption right of the junior, the court doesn’t say so, but presumably  the right is to pay off the first mortgage (reinstated, as noted) and be subrogated to it.  This is the conclusion reached in the Nelson and Whitman hornbook, which the court cited for authority.  So A  could not get title by exercising statutory redemption from its junior lien position  because that lien had not yet been foreclosed.  So the Florida statute didn’t apply to it. 

Although York was not the foreclosing , the court concluded that she would be deemed the equitable owner of that mortgage reinstated for purposes of dealing with A.  Again, this is consistent with the general approach for “omitted junior lienor” situations.

What makes the case unusual is the fact that the junior lienholder,. A,* omitted himself from his own foreclosure sale.* He did so purposefully.  The court states that, notwithstanding this odd situation, it could find no authority that would justify departing from the general rule that the lien of a junior mortgagee is not affected by a judgment..  If further noted that York was fully aware of A’s junior mortgage at the time she bid at the sale. 

Comment 1: Although York may have been aware of A’s claim, she could not, of course, have anticipated just what a court would do with the situation.  The first  mortgagee originally had named A in the foreclosure, then, at the time that A paid off the first mortgagee that mortgagee dismissed A as a party defendant (likely at A’s behest.)  Who knew what outcome would emerge from that?

Comment 2:   Junior liens who are not made parties to foreclosure sales are, in fact foreclosed away in at least one instance - parties taking their interest (and in some states those recording a prior interest) after the filing of the lis pendens associated with the foreclosure.  Although such parties sometimes are served and joined, the general rule is that they would be bound by the foreclosure in any event. 

The purpose of serving and joining junior lienholders is in part jurisdictional and in part Constitutional - government cannot terminate their property interests without notice and an opportunity to be heard.  But both notice and opportunity were available to A here.  What precise benefit is served by permitting A to escape joinder?

Comment 3: Note that in most jurisdictions a foreclosing mortgagee can avoid foreclosing away a desirable junior lease by the simple expedient of not joining that lessee as a party defendant.  Is that the same issue as we face here?  Certainly the junior lessee in many of these cases would prefer to be foreclosed away, but cannot get itself into the foreclosure action as a defendant.  This device elevates the significance of being named as a party.  But should the mortgagee be able to perform such manipulation of its own interest?  Shouldn’t we first know why the forceclosing mortgagee might do this?  We really aren’t told. 

What if the purpose was to work a fraud on the foreclosure sale purchaser, who might have had constructive knowledge of the junior and could have studied the foreclosure file to make sure the junior was named, but had no actual knowledge of the problem?  Should that matter?  (Apparently wasn’t the case here.)

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