JUDICIAL FORECLOSURE Necessary Proper Party Distinction Clark v. Fuller

1
JUDICIAL FORECLOSURENecessary / Proper
Party DistinctionClark v. Fuller
2
1914 Fuller mortgages to Hall - 350.00

• Clark owns mortgage as Executors of Halls
  estate.
• 1927 Stearns judicial foreclosure of 3
  mortgages on property. Goldbergs purchased from
  Stearns at foreclosure action.
• Superior Mortgagee not a necessary party.
• Superior Mortgagee is a proper party.

3
Necessary Party

• One who is indispensable to the adjudication of
  the rights at issue.

4
Proper Party

• One who is appropriate to the action by existing
  claim but not necessary to adjudication. Joinder
  of proper party is supportive of judicial
  efficiency.

5
Foreclosure Purpose

• To give the foreclosure purchaser essentially the
  title to the land as it stood at the time of the
  execution of the mortgage.
• Therefore prior mortgage holders are not
  necessary parties as land may be sold subject to
  their liens, but they may be joined as proper
  parties to have the amount due them liquidated.

6
THE OMITTED PARTY PROBLEM

• Farwell purchasing at the sale under the first
  mortgage, acquired the entire right of the owner
  of the first mortgage, and the entire equity of
  redemption, subject only to the second mortgage,
  while Murphy purchasing at the sale under the
  second mortgage, in a proceeding against Cady
  alone, acquired nothing by his

7
continued

• Purchase, so far as the lots covered by both
  mortgages were concerned, for the reason that
  Cadys interest had been entirely divested by the
  previous sale on the first mortgage. So that
  Farwell owning the entire property in fee,
  subject only to the second mortgage, and Murphy
  owning only the interest represented by the
  second mortgage, Farwell had an absolute right to
  pay the second mortgage and extinguish its lien.

8
continued

• Farwell would have taken Cadys interest just as
  Cady held it, that is, subject to Murphys
  mortgage. But he would have taken it, the whole
  of it, as well against Murphy as against Cady
  himself.

9
continued

• What, then, were the rights of these purchasers?
  Farwell acquired the interest of all the parties
  to the first suit, including the interest
  represented by the first mortgage, and the equity
  of redemption subject only to the second mortgage.

10
continued

• Murphy having proceeded in his suit against Cady
  alone, could by a sale, after Cadys entire
  interest had been divested by the first sale,
  only have acquired the interest represented by
  the second mortgage, so far as the two lots
  covered by the first were concerned. Farwell
  then, as owner of the fee, subject to the second
  mortgage, had the right to pay it.

11
Continued

• The general rule is that lack of knowledge or
  notice of the subordinate interest of another
  person in the mortgaged land does not excuse a
  foreclosing mortgagee from making such person a
  party to his suit. If it fails to do so, the
  subordinate interest, regardless of whether it be
  legal or equitable and one of ownership or lien,
  is not subject to the decree.
• Exception - The bona fide purchaser rule. A
  purchaser at the foreclosure sale who acquires

12
continued

• the legal title for which he pays value without
  notice of the unjoined interest qualifies as a
  bona fide purchaser and thus will take free of
  such an interest if it is equitable only.
  Similarly, under the familiar type of statute
  avoiding unrecorded conveyances as against
  subsequent purchasers, a purchaser on foreclosure
  sale who buys without knowledge or notice of an
  outstanding but unrecorded interest may take free
  and clear of it

13
continued

• just as effectively as though its holder had been
  joined in the foreclosure action. Moreover,
  while there is authority to the contrary, there
  is recent case law for the proposition that the
  foreclosing mortgagee can qualify as a bona fide
  purchaser under such statutes. Other statutes,
  either explicitly or as interpreted, go beyond
  this and have the effect of concluding an
  unjoined party whose interest was not recorded as
  effectively as

14
continued

• though he had been made a party to the suit.
  Under the most extreme of these, this is true
  even though the mortgagee at the time he began
  his foreclosure action had actual knowledge of
  the unrecorded interest. It seems highly
  desirable to protect both the foreclosing
  mortgagee as well as a purchaser on foreclosure
  sale against interests that are acquired but
  remain unrecorded prior to the beginning of a
  foreclosure action. That protection

15
continued

• should extend at least far enough to cut off all
  such interests of which there was no actual
  notice before suit, or actual knowledge during
  the pendency of the litigation.

16
Rights of omitted owner.

• If the omitted party is owner of the entire
  redemption interest, the foreclosure sale is
  entirely void as to his or her interest. The
  omitted owner may then redeem the land by paying
  the mortgage debt to the foreclosure sale
  purchaser. When the omitted owner redeems, he or
  she redeems the title to the land, and in so
  doing, cuts off any further interest of the
  foreclosure sale purchaser in the land. Lien is
  said to be revived.

17
continued

• Unlike the case in which the party omitted is a
  junior lien holder, the foreclosure sale
  purchaser has no further right to redeem from or
  pay off the owner-mortgagor. If the junior
  subsequently forecloses his or her lien, the
  judicial sale thus held will convey the original
  mortgagors interest to the buyer at the second
  sale but the original mortgagees interest
  (revived for this purpose) will remain in the
  hands of the buyer at the original sale.

18
continue

• Note that the amount of the revived first lien
  is the balance which was previously owing on it
  prior to the first foreclosure sale. This may be
  more or less than the amount the purchaser at the
  first sale bid when buying the property. If it
  is more, the original purchaser obtains a
  windfall (assuming that the buyer at the second
  sale ultimately pays off the senior lien) but
  this is not surprising, since if the property is
  more valuable than the price paid by the original
  sale purchaser, he or she could have simply sold
  it for that higher

19
continued

• price and gained a similar windfall. On the
  other hand, if the purchaser at the original sale
  paid more than the amount of the senior lien, the
  second foreclosure sale will deprive him or her
  of title to the property, and replace it with a
  lien for a smaller amount than the purchasers
  original investment.

20
continued

• Revived lien - the junior may tender to the buyer
  at the senior foreclosure sale the balance which
  was owed on the senior lien at the time of
  foreclosure, and by so doing in effect compel an
  assignment of a revived senior lien to the
  junior lienor. The junior thus becomes the
  holder of two liens, a senior and a junior, and
  may then foreclose either or both of them. Note
  that unlike the case in which an omitted owner
  redeems, the term redemption here does not
  refer to the vesting of title to the property in
  the junior, but merely to the

21
continued

• juniors power to compel an assignment to him or
  her of the senior lien. Sometimes it is said
  that, by tendering payment of the balance owing
  on the senior lien, the junior becomes subrogated
  to the senior mortgagees rightrights which have
  now, by the first sale, been vested in the sale
  purchaser.

22
Rights of foreclosure purchaser.

• Purchaser at the original sale may take one of
  three avenues to obtain reimbursement or acquire
  title (1) redemption, (2) re-foreclosure, and in
  some states, (3) strict foreclosure.
• Even if the junior lien holder redeems the senior
  debt from the original sale purchaser, the
  position of the parties is not really changed
  significantly. The buyer from the senior
  mortgagee can simply pay off the senior lien in
  the juniors hands, using the very dollars which
  the junior paid the buyer when he or she
  redeemed.

23
continued

• (1) The redemption by the senior foreclosure
  purchaser will have priority simply because the
  purchaser stands in the shoes of the foreclosed
  mortgagor.
• The result of all this is that an equitable
  redemption by an omitted junior holder is always
  an act that the senior sale purchaser can easily
  nullify if the purchaser wishes to do so. (Note
  Not true with statutory redemption which will end
  the matter.)

24
continued

• (2) An alternative route which the senior sale
  purchaser may take is to reforeclose the first
  mortgage. When junior is joined, lien is
  terminated, with or without payment according to
  amount of foreclosure sale proceeds.
• (3) The third method available to the senior
  sale purchaser, when an omitted junior lien
  holder is discovered, is usually termed strict
  foreclosure. It is not available in all
  jurisdictions. In substance it amounts to a
  judicial decree that the junior lien be canceled
  unless the junior pays off the senior debt within
  a court-determined period.