A basic goal of a foreclosure is to cause the secured property to be sold free and clear of any interests which attached after the execution or recording of the message. This is the procedure designed to generate the highest price and, presumably, to make the lender whole.
Because this approach is so elemental and inherent in the foreclosure process, servicers would typically assume that holders of subsequent junior interests are all accounted for – through publication or notice in nonjudicial states and via service of process in judicial jurisdictions.
Of course, that is the way it is supposed to happen. However, a lack of perfection is not so uncommon. And when a junior party is missed, that person's interest remains intact – untouched by the foreclosure action. In turn, the omission creates a title problem needing resolution.
First, how serious is this dilemma? It will require some attention in any event, but the answer is that it depends upon the interest that was missed. If the foreclosure is ofÂ a $500,000 mortgage on a house worth $800,000, that a $200 judgment was omitted will be of little consequence.
If the untouched party, however, was a $300,000 junior mortgagee, a solution must be pursued because the property cannot be sold if burdened by such an interest (which could and should have been extinguished by the foreclosure).
If the goal of the foreclosure was to extinguish all subordinate interests, how is it that such inferior parties could have been left out? The simple answer is twofold: Either someone made a mistake, or there were special circumstances leading to a purposeful skipping of some party.
Although unwelcome, it is easy to observe how a junior party might be excluded. In judicial foreclosure states, for example, those possessed of interests subsequent to the mortgage are unearthed by a search of the land records – a foreclosure search.
The people who did the search (title company, abstract company or attorney) could have just erred. Maybe they found everyone, but there was a miscue when the search was typed. Perhaps an interest could have been misfiled but still been effective.
Or, the party could have been known, but the process server stumbled so that jurisdiction was successfully attacked after the sale. For example, the process server didn't notice a tenant on the third floor; a partnership is somehow served as a corporation, so service is no good; or when a person was served via a relative at the house, he later argued that there was no such relative – and, somehow, he wins.
Then there is the rarer instance of the volitional act. The holder of a minor interest cannot readily be found in a case where speeding to a conclusion is particularly important. Locating this person will be very time-consuming and is likely to fail, leading to an even more time-consuming and expensive publication of the summons. So, the servicer wisely elects to refrain from serving that party. No matter how sensible that decision may have been at the time, it preserves an interest that remains to be addressed after the foreclosure auction.
Whatever form the post-sale efforts to dispose of the missed party (or parties) take, who might need to pay for it? Assuming the omission was not by choice, the answer depends, in part, upon who was responsible for the junior interest being missed.
If the process server erred, the attorney who engaged them would no doubt attend to the cure – likewise, if the mistake emanated from counsel's office. Where the fault is in the search, the title or abstract company could be expected to pay the cost, but perhaps only to the limit of its liability.
It should be noted that a foreclosure search is not an insurance policy. In New York, for example, liability on a search is only up to $1,000. Insurance can be purchased as part of a search, but that is seldom done.
Having explored the prelude to ultimate resolution, the final actual comfort is that, most often, the interest of the omitted party can be extinguished after the sale in a new and separate action. These can be called by different names in the various states, and precisely how long they take and what the procedures are should be the source of inquiry from the servicer to its counsel in the particular jurisdiction.
Using New York as an example, the most common method to extinguish a preserved interest is denominated a "strict foreclosure." Briefly discussing its essence should demystify the subject.
Assuming the omitted party was indeed subordinate, the only way it could have protected itself was to have redeemed the mortgage – paid it in full – thereby unburdening the property from the lien of the mortgage. This would preserve as viable a tenancy or a junior mortgage or judgment. The strict foreclosure, therefore, is a new action that names the party omitted in the original foreclosure and offers it that right to redeem – the privilege it would have possessed had it been named in the original foreclosure but something it was previously denied because of not being included.
If the missed party does not redeem, whatever interest it had is forever extinguished, just as it would have been had it been a defendant in the initial foreclosure.
As experienced servicers know, anything foreclosed in judicial states (like New York) can take some time, and a strict foreclosure is certainly not immune to delay. These matters can typically consume six months or more, if there are any problems or opposition.
Moreover, if the missed party was a tenant, must the servicer endure the duration of the strict foreclosure action with the tenant reposing at the premises rent-free? Well, they don't have to pay rent, but case law (in New York) supports the proposition that they do have to pay its equivalent – "use and occupation."
It takes a special motion to pursue this, and it does take some explaining to the court to make the point, but knowing this remedy is available is worthwhile. Servicers should ask that it be pursued whenever they are involved in a strict foreclosure against a tenant to determine if the relief is available in other states.
Bruce J. Bergman, author of the three-volume treatise "Bergman on New York Mortgage Foreclosures," is a partner with Berkman, Henoch, Peterson & Peddy PC, Garden City, N.Y., and an adjunct associate professor of real estate with New York University's Real Estate Institute. Bergman is also a member of USFN, the American College of Real Estate Lawyers and the American College of Mortgage Attorneys. He can be reached at (516) 222-6200, ext. 324.