Daily Development for Thursday, October 14, 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

Thanks to Howard Lax of the Michigan Bar for the tip on this one.

MORTGAGES; FORECLOSURE; PRIORITY: Fact that sheriff may declare that the foreclosure sale is "free and clear of liens" does not disturb the priority of a recorded mortgage prior to the foreclosing lien. Foreclosure purchasers must take subject to the prior mortgage and the foreclosure proceeds are payable entirely to the foreclosing lienholder.

Schliewe v. Blazo, No. No 205570 (Mich. App. 10/1/99) (unpublished opinion)

<http://www.michbar.org/opinions/home.html?/opinions/appeals/1999/100199/52 16.html>http://www.michbar.org/opinions/home.html?/opinions/appeals/1999/10 0199/5216.html

Parties with deficiency judgments resulting from a prior foreclosure sale of debtor's property sought to satisfy their judgments in part by executing upon other property owned by the debtor.

The second property produced sufficient sale proceeds to pay one of the deficiency judgment lienholders $100,000. The court does not make clear whether the other deficiency judgment was received any funds, but one would assume that it would since the sale was to satisfy both judgments, which had a common origin at the same point in time.

Two months after the foreclosure sale, but still during the redemption period, parties claiming a $20,000 secured interest under a recorded mortgage on the property sued one of the judgment lienholders for a $20,000 share of the proceeds. Apparently they argued that the foreclosure sale purchasers had been told at the sale that the property was being sold free and clear of liens, and that it would not be fair to the foreclosure sale purchaser to force the purchaser to take the property subject to their mortgage when he had paid value at the judgment lien foreclosure. Therefore, they argued, the judgment creditor should be required to share the $100,000 it received from the judgment foreclosure, since it really was a "windfall" to the extent of $20,000. The debtor ultimately transferred her statutory right of redemption to her sons, who paid off the foreclosure sale purchaser, taking title in his shoes. Although the court mentions this fact, it does not play any apparent role in the court's reasoning.

The Michigan Court of Appeals ruled that the foreclosure sale purchaser took subject to the $20,000 mortgage and that the mortgagees had no right to share in the proceeds. Any representations made by the sheriff were not binding upon the foreclosing judgment creditors, as the sheriff is an officer of the court and not the creditors' agent.

Comment 1: The reason for the mortgagees' desire to share in the existing proceeds perhaps derives from the fact that they were also related to the judgment debtor and were unlikely to want to foreclose on the judgment debtor's sons.

Comment 2: This is all pretty straightforward foreclosure law. But some commentators have been arguing strongly that junior parties should never get a "windfall" return at the expense of seniors. Here the "windfall" is not at the expense of seniors, but rather at the expense of the foreclosure purchaser, who winds up having to pay again for a lien he didn't know existed. The short answer to this, of course, is title insurance. But that's true in many of the "windfall" cases that some have argued ought to come out in favor of the first mortgagee's title insurer. Any difference here?

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

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