 Ambush by an Inferior Lienholder By Philip M. Kleinsmith, Attorney Kleinsmith & Associates, P.C. This article applies only to judicial foreclosures, although some attorneys believe it can apply to non-judicial foreclosures by notifying superior mortgagees. This is legally incorrect because a non-judicial foreclosure cannot extinguish superior liens. There have been occasions where the inferior lienholder will use the following methodology in a judicial foreclosure to ambush a superior lienholder and extinguish their lien. A complaint is filed alleging the superiority of superior liens or something to the effect that, although superior, they are “paid in full, but unreleased”. Being confident of their superiority, the superior lienholder does not file anything (answer, etc.) and the inferior lienholder/plaintiff obtains a judgment declaring that (because they have done nothing) the superior liens are void and are of no effect. The inferior lienholder proceeds to the foreclosure sale and obtains a title free and clear of all liens and mortgages. The property is then sold to an innocent third party. At this point, because of the intervention of an innocent third party, the extinguished superior lienholder has no remedy except to sue the debtors on the bare IOU, (i.e. the note). If the debtors are bankrupt, there is no remedy. An exception might be to sue the inferior lienholder in fraud, but the response would be that the superior lienholder defrauded themselves by not responding in the judicial foreclosure. The way to prevent this is to respond in writing by claiming your superiority. In any judicial lawsuit in which you claim a lien superior to the lien being foreclosed, at least this avoids what is discussed above. However, the more intelligent course is to respond and cross-claim for foreclosure yourself (the foreclosure by the second is a default under most mortgages, even if your debt is current). In this way, you will probably force the foreclosing inferior lienholder to pay you off or you can impose your own conditions if the inferior lienholder wishes to assume until the property resells – the transfer by foreclosure is a violation of the due-on-sale clause. Beware! Do not be ambushed by an inferior lienholder! If you have any questions pertaining to this article, please call our office at 800-842-8417. |
