Daily Development for Wednesday, October 6, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

MORTGAGES; FORECLOSURE; SALE "FREE AND CLEAR OF LIENS;" RIGHTS OF SENIOR MORTGAGEES: Where a junior lienholder petitions the court for a sale "free and clear of liens," with mortgagees paid in the order of priority, a senior lienholder properly served is bound by the foreclosure if it fails to appear either to contest the procedure, and if it also fails to establish its claim in the procedure, it will lose its lien without being paid.

Galt Alloys, Inc. v. KeyBank National Association, 85 Ohio St.3d 353, 708 N.E.2d 701 (Ohio 1999)

Judgment creditor brought a foreclosure action naming the lender, Keybank, as the first lienholder, attaching a preliminary judicial report to the complaint identifying Keybank's interest. The judgment creditor sought a foreclosure of all liens and a sale free and clear of liens with payment of lienholders in order of interest. The lender was served July 17, 1996. On August 29, the clerk of courts sent a copy of its order directing the plaintiff to complete service and/or file a motion for default judgment. (No grass grows in the Stark County Common Pleas Court.) On September 17, Keybank received a court order called an "assignment notice," advising that the action had been "set for a nonjury trial on September 30, 1996, at 8:30 a.m. on a standby basis for the entire week" and giving notice that "the court will expect the remaining parties to work out the lien order and provide the court with an appropriate decree of foreclosure prior to the assigned trial date."

On September 30, the court entered judgment of foreclosure and sent a notice to all parties, including Keybank, that an entry which may be a final appealable order had been filed. It further ordered that proceeds of the sale be used to pay the judgment lienholders "subject to the interest, if any, of [KeyBank], which interest, if any, shall be established by [KeyBank] by a preponderance of evidence within fourteen (14) days after the date of the Sheriff's sale of the premises." On February 5, 1997 the property was sold, and thereafter the lender was served with a copy of the proposed order of confirmation.

Keybank never made an appearance, and the court entered its order of confirmation ordering that the Keybank not receive any of the proceeds.

Later, Keybank attempted to set aside the sale on procedural grounds, but lost. In this challenge to the sale, the court apparently assumed the validity of the Ohio foreclosure terminating Keybank's lien.

Comment 1: Not all jurisdictions customarily permit a sale "free and clear of liens" like this Ohio case, but the procedure is not unheard of. An interesting question is whether, if the senior mortgagee had appeared, it could have prevented a foreclosure of its lien if it so desired. It is the general view that one right of seniority of mortgages in American law is that senior mortgagees can pick the time for foreclosure of their lien. But, since the senior did nothing at all, it got blown away!! A nice object lesson to lawyers who might have a tendency to shelve notices pertaining to mortgages junior to their own client's lien without reading carefully the text of the notice.

Comment 2: Some states have judgment lien foreclosure statutes that provide for sale free and clear of all judgment liens. Perhaps this case is merely an application of a special Ohio judgment lien foreclosure provision, and the device could not be used by a junior mortgage holder. Can Ohio mavens elucidate?

Comment 3: As indicated in a separate posting of reaction from Dale Whitman, this case touches the same nerve that has been tweaked in several prior discussions. Should junior mortgagees receive a "windfall" advance in priority as against careless senior mortgagees? Here, of course, at this juncture, there is some difficulty because the proceeds have already been distributed. But should the trial court in the first instance have permitted a distribution of proceeds without taking into account the senior's claim?

MORTGAGES; FORECLOSURE; PROCEDURE; NOTICE OF SALE: A party served as a defendant in a mortgage foreclosure action has no right to separate notice of the sale, either as a matter of state law or Constitutional Due Process.

Galt Alloys, Inc. v. KeyBank National Association, 85 Ohio St.3d 353, 708 N.E.2d 701 (Ohio 1999)

The facts of this case are set forth under the heading: "Mortgages; Foreclosure; Sale "Free and Clear of Liens." About a year after the foreclosure, Keybank, a senior lender foreclosed away by that foreclosure after it was served but never appeared in the foreclosure proceeding, asked the court to vacate the sale and order of distribution because Keybank did not receive notice of the actual sale date. This motion was denied, and the case ultimately reached the Ohio Supreme Court. The Supreme Court reviewed decisions regarding due process, quoting language regarding the required notice of the pendency of the action. In the a prior case, the court had held that a bidder who defaulted had a right to notice of the second sale. The court distinguished that case from the current case on the basis that the prior case, , the bidder had never been served with process or joined as a party.

Additionally, KeyBank did not assert here that, had it known of the sale date, it would have appeared or taken steps to assure that the property was sold at a higher price. KeyBank's interest could have been fully satisfied from the proceeds of the sale if KeyBank had appeared and claimed its interest in a timely manner. Accordingly, it was not the sale, but the distribution, that jeopardized KeyBank's interest.

 The Court rejected "KeyBank's proposition of law insofar as it implies that actual notice of every party of the date, time, and location of a Sheriff's sale is, in every foreclosure case, a constitutionally required element of due process. Actual notice of the date, time and location of a sheriff's sale need not necessarily be give to every defaulting defendant in a foreclosure sale.

Where a party has been served in compliance with the Civil Rules and has thereby been provided an opportunity to answer and appear to protect his or her interests in connection with a foreclosure sale, but has neither answered nor appeared, due process does not require that the party be given additional specific notice of the date, time and place of the sheriff's sale.

Also see: Budco Enterprises v. Panny, 125 Ohio App.3d 310 (Union County Ct. of App., 1998)

[This summary is by DIRT contributor Ken Kuehnle of the Ohio bar]

Plaintiff brought a foreclosure action in which defendants were properly served but did not answer. Plaintiff took a default judgment and the sale notice was published in a newspaper advertisement. After the first sale went "no bidno sale", a second sale was held and the property sold. Upon plaintiff's motion to confirm the sale, defendants made their first appearance by filing a motion to vacate the sale on the basis that they never received written notice of the time, date, and place of the sheriff's sale. After pussyfooting around with suggestions that the plaintiff had correspondence with the defendants and obviously knew how to contact them, the court bodyslammed the defendants. "[T]here is a growing trend in other courts of this state to hold that due process does not require actual written notice of the time, date, and place of a foreclosure sale when an interested party is served with notice of the foreclosure action, is served with notice of a motion for default judgment, and chooses not to participate or exercise its opportunity to be heard." Once the defendants "failed to respond to the complaint for foreclosure and the trial court granted default judgment against him and his wife, the Pannys were not entitled to written notice of any further proceedings. Therefore, [defendants were] not denied due process or any property right by not receiving actual notice of the foreclosure sale.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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