by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Here's a cute, and somewhat surprising, mortgage case. Are New Jersey DIRTers aware of the appeal plans on this one? Shepherd's indicates no activity.
MORTGAGE; FORECLOSURE; REVIVAL OF JUNIOR LIEN: When a mortgagor reacquires property following foreclosure of a senior mortgage, the lien of a junior mortgage is revived. Old Republic Insurance Co. v. Currie, 665 A.2d 1153 (N.J. Super. Ct., Chancery Div. 1995).
Husband and wife owned property subject to a first mortgage. In 1974, they executed a second mortgage that was eventually assigned to the Plaintiff. Four years later, they filed a petition in bankruptcy and the bankruptcy court fixed the amount of the lien of the second mortgage. After the bankruptcy proceedings were concluded, the mortgagors lost the property through a foreclosure of the first mortgage. Some time later, one of the mortgagors reacquired the property. Three years after that, the second mortgagee discovered the mortgagor's ownership. Plaintiff mortgagee re-recorded its mortgage but made no attempt to verify the identity of the new owner. Nine years later, the mortgagee confirmed the identity of the mortgagor as its debtor and brought this action in mortgage foreclosure.
The trial court could find was no modern case law on the subject and relied on cases from the 19th century through the 1930s to conclude that, where a mortgagor reacquires property following foreclosure of a senior lien, a junior mortgage is revived as a lien on the property even though the mortgagor's personal indebtedness may have been extinguished in bankruptcy.
The court advanced three theories in support of this conclusion. (1) Where the mortgagor is the purchaser at the foreclosure sale, it is effectively paying the senior mortgage and the junior mortgage moves up in position. The result is not changed where the mortgagor does not purchase the property at the foreclosure sale but reacquires it after the foreclosure sale. (2) The mortgagor's allowing foreclosure of the prior mortgage is a breach of the mortgagor's warranty to defend title against all lawful claims if given in the junior mortgage. That warranty is not affected by the foreclosure of the prior mortgage. (3) Where the junior mortgage contains a warranty of title from the mortgagor, the mortgagor's reacquisition of the property is for the benefit of the junior mortgagee under the doctrine of after acquired title. The after acquired title inures to the benefit of junior mortgagee.
The mortgagee argued that, since the mortgage was reinstated, it was entitled to interest at the contract rate (12.5%) from the date of reinstatement - over eleven years - making the interest greater than the debt itself. The court on its own motion decided that the mortgagee was not entitled to interest from the date that the mortgagor reacquired the property or the date that the mortgagee re-recorded its mortgage. The mortgagee's failure for eleven years to verify the identity of the mortgagor and notify her of the re-recording prejudiced the mortgagor as to the amount of interest due on the debt. Had the mortgagor been notified of the mortgagee's re-recording earlier, the mortgagor might have been able to pay the debt sooner. The court reduced the amount of interest due to reflect a reasonable period of time following the re-recording of the mortgage to permit the mortgagee to learn the identity of the mortgagor. Any claim to more interest was barred by laches.
Comment: The editor will restrain his ordinary tendency to make a snap judgment here, and simply raise the following questions as "food for thought:"
1. Of course, if there is a deficiency judgment against the borrower, it will reattach. The instant case seems to go beyond this and actually restore a mortgage lien that had been "sold out," including various contract rights.
2. It would appear that the court's after acquired property analysis would give the mortgage priority over anyone who had actual knowledge of the prior existence of the mortgage, even without re-recording.
3. It would appear that the court's ruling would create a defiency right against the reaquired subject property even in a non-recourse loan. Conceivably, it would also create a new claim for a mortgagee barred by statutory anti-deficiency rules (such as purchase money anti-deficiency claims). Of course, a court would have to interpret the statutory policies of the anti-defiency rules to resolve this issue.
4. Although the court denied the increased interest rate here, it apparently views the mortgagee's claim for contract interest as consistent with its overall theory. The reattaching mortgagee presumably would also reinstate various other contract remedies, such as control over leases, escrow accounts, insurance requirements, possession rights, etc., that would massively change the power of its position as compared to a deficiency judgment lienholder.
5. In short, this case establishes a major disincentive for the borrower, who might in fact be the logical best user of the foreclosed property, to acquire it again. Does the protection of the junior justify this result? Remember that the junior would have a deficiency judgment in most cases even without this rule.
6. Does the senior mortgagee have an interest in this? If the borrower, or those acquiring for the borrower, cannot safely bid at the sale, does this have the effect of repressing bidding? Does it affect the post foreclosure value of the property in the hands of the foreclosing lender, if it acquires the property? If so, then should we permit a rule that favors the junior at the expense of the senior, or should we conclude that the senior's interest in a "wide open market" for the property is part of the senior's priority claim? Couldn't we just say that all of the juniors rights and expectations, including title covenants, are subject to the known possibility that the senior will foreclose?
7. In states like New Jersey, a judicial foreclosure state, there is always the possibility that the junior can join the foreclosure and bid in its debt. If the junior concludes that there is insufficient value in the property to bid at that time, why should the junior have a "second bite at the apple" if circumstances later change the and property goes up in value?
6. A number of states with statutory redemption provisions have statutory language that would prevent the lien of a foreclosed mortgage, or even a deficiency claim from such mortgages, from reattaching to property when the borrower reaquires it. These statutes are designed to make the statutory redemption right more meaningful, but they probably would change the outcome in the subject case as well.
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