Daily Development for Wednesday, February 17. 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; LIABILITY OF FORECLOSING LENDER FOR TITLE DEFECTS: A third party purchaser has no claim for damages against foreclosing lender where lender had failed to provide for naming of junior lienholders as parties defendant, leaving their liens still attached to title. 

First National Bank and Trust in Larned v. Wetzel, 219 P. 3d 819 (Ka. App. 2009)

Bank brought a judicial foreclosure action to sell at foreclosure three parcels owned by Debtor.  Buyers purchased on of the three parcels at foreclosure sale for $200,000.  Bank purchased the other two parcels.  Subsequent to the sheriff’s sale, it was discovered that several judgement lienholders were not named as parties defendant at the sale. 

Debtor (yes, Debtor) brought an action to set aside the foreclosure judgment and sale.  Buyers were named as parties defendant to this action.  A review of the case and the briefs does not indicate why the Debtor filed this motion.  The court granted limited relief in that it refused to set aside the foreclosure judgement or order of sale but did set aside the sheriff’s sale itself.  This apparently would permit a new foreclosure in which the unnamed junior lienholders could be named.  Apparently neither Bank nor Buyers opposed this relief.  Apparently the presence of the unnamed junior lienholders was the cause of the Debtor’s request for relief.

Buyers noted that Bank had included in the foreclosure judgment “expenses for title examination”        and they argued, therefore, that they had been misled into believing that the Bank had actually checked the title and named all judgment lienholders.  They therefore sought over $3000 in damages - interest on the loan that they had taken out to acquire the property.  The trial court awarded these damages and Bank appealed.

Held: Buyers were proper parties to the motion to set aside the foreclosure, and therefore could crosscomplain for the damages, but they were not entitled to a damage claim here because they were responsible for doing their own title check, and thus caused their own damages.

The court noted first that a foreclosure deed is a quitclaim deed, and that in Kansas persons taking a quitclaim have a duty to search the title for themselves.  Further, all parties taking title are on constructive notice of public records. 

Comment 1: Perhaps the unnamed juniors were potential bidders for the property, and that is why the Debtor sought a new sale.  Except for this remote possibility, it is a puzzle to the editor what benefit the Debtor obtained by setting aside the sale.  The Editor should note that the Buyers and the Debtor were both named Wetzel, so perhaps this was a “bail out” of a relative at the initial foreclosure, and the Debtor did not want his relatives or himself stuck with property still subject to judgment liens against Debtor. 

Comment 2: The primary reason the Editor chose this case to report was the clear language that the foreclosure purchase is responsible for checking the title for itself in order to ascertain whether juniors have been named.   Although there may be procedures for reforeclosing against unnamed juniors in certain circumstances, that might have been cumbersome here with parcels selling at foreclosure to different parties. 

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