Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC
Claude Pepper once said, “Life is like a bicycle. You don’t fall off until you stop peddling”. In a few reported decisions, borrowers attempting to save their homes by purchasing them at a foreclosure sale or by re-purchasing them from a lender who completed its foreclosure – directly or indirectly, through a family member being used as a straw purchaser – may have unwittingly fallen off their bicycles.
Under theories of equitable re-attachment, liens thought to have been extinguished can be potentially revived when a foreclosed borrower repurchases his property. Although there are only a few reported cases dealing with this issue, the theory may be applicable in many states.
In one New Jersey case, Old Republic Insurance Co. v. Currie, 665 A.2d 1153; 284 NJ Super. 571 (Ch. Div. 1995), a husband and wife owned a property subject to a first mortgage. Sometime later, they executed a second mortgage, which was recorded among the land records. As the years progressed, the borrowers faced increasing financial difficulty. The borrowers tried various plans to turn their situation around and retain their home, none of which worked. Finally, after attempting to save their home by filing a bankruptcy petition, and after relief from the automatic stay was granted to the lender, their first mortgage company foreclosed. For whatever reason, presumably because of the property’s value, the second mortgage company elected not to bid at the foreclosure sale held by the first mortgage company. However, three years after the foreclosure, the second mortgage company discovered that one of the mortgagors reacquired the property. It was then that the second mortgage company attempted to assert its equitable rights based on reviving the lien, by re-recording its mortgage that was presumably extinguished at the earlier foreclosure sale.
The trial court could find no modern case law as precedent, and instead relied on cases (some of which were over a hundred years old) to reach its decision. After analyzing the facts presented, the court held that where a mortgagor reacquires property following foreclosure of a senior lien, a junior mortgage is revived as a lien on the property, even though the mortgagor’s personal indebtedness may have been extinguished in bankruptcy. In reaching this decision the court advanced three theories.
First, the court relied on the payment theory. That is the court held that where the mortgagor is the purchaser at the foreclosure sale, he is effectively paying the senior mortgage. The junior mortgage therefore, moves up in position. The court felt that effectively the same result also occurs where the mortgagor reacquires the property after the foreclosure sale, but not actually at the judicial sale itself.
Second, the mortgagor allowed foreclosure by the first mortgage holder, which is a breach of his warranty to defend title against all lawful claims as required under the executed loan documents. The warranty contained in the second mortgage documents is not affected by the foreclosure of the prior mortgage and therefore remains in full force and effect.
Third, where a junior mortgage contains a warranty of title from the mortgagor, the mortgagor’s subsequent reacquisition of the property is for the benefit of the junior mortgagee. That is, the mortgagor has warranted that the mortgaged premises shall be secured for the debt and that the mortgagor will produce the property if the debt is not paid. Thus, when the mortgagor reacquires the property, the mortgagor then must provide the property as security for the debt as promised. Once the title is reacquired, the title then also inures to the benefit of the junior mortgagee.
However, in a later case, Mooney v. The Provident Savings Bank, 705 A.2d 816, 308 N.J. Super. 195 (Ch. Div. 1997), the New Jersey court held that a junior mortgage is not revived where the second trust lender was given notice of the sheriff’s sale and an opportunity to bid at the first foreclosure sale but failed to do so. Again, the decision not to bid at the Sheriff’s sale was presumably reached by reviewing the senior lien and the value of the property. The Court made a point of also noting that there was no fraudulent or collusive conduct on behalf of the Borrowers in reacquiring their former property. The borrowers in this case, also had filed a Chapter 7 and were given a fresh start discharge in bankruptcy, relieving them of all personal liability of the debts secured by the mortgages. After the bankruptcy discharge was granted, the first mortgage lender foreclosed on the property. The court stated that the remedy of reviving the lien of a previously extinguished mortgage is purely equitable in nature. Its purpose is to undo what otherwise would be an unjust and unconscionable result. Since no wrong was committed, the second mortgage company could have protected its interest by bidding, and since there was no other fraudulent or collusive conduct, there was no basis for relief to Provident. Finally, the court found that there was no breach of any covenants since they were discharged along with the debt in the bankruptcy proceeding. The court went through strained reasoning in an attempt to distinguish this case, stating that it disagreed with the holding in the Old Republic case.
In another reported decision from California, DMC, Inc. v. Downey Savings and Loan Association, 99 Cal.App.4th, 190, 120 Cal.Rptr.2d 761 (Cal.App. Dist.4, 2002), similar facts faced the court. In this case, Sharon Henry purchased a property with a first mortgage in favor of Accredited Home Lenders and a second mortgage in favor of DMC. Accredited foreclosed and the property was sold to Aspen Limb. Aspen Limb sold the property back to the former owner, Sharon Henry who financed the re-purchase with a new deed of trust to Downey Savings. After learning that the former owner reacquired the property, DMC filed suit to foreclose and determine priority. California also following the rule of re-attachment, held that any and all wiped out junior liens are revived and re-attach upon the reacquisition of the property by the former foreclosed owner. California law, however, also held the new purchase money mortgage has priority over the reattaching liens. In deciding this matter, the court reviewed a few cases on this point of law, including Duer v. Jaeger, 186 N.Y.S. 584; 113 Misc. 743 (1921) and Arizona Transamerica Financial Services, Inc. v. Lafferty, 856 P. 2nd 1188 (175 Ariz. 315, 1993), The court wrote:
“To make these second mortgages over into first mortgages would be wrong. The person who took the new purchase money mortgages parted with the money which made possible the reviver. If the defendants (revived junior lien holder) be accorded a lien subordinate to that of the plaintiffs, they will have lost nothing, and indeed have gained much. They had a second mortgage, they lost [it], they had [it] again.”
Of course, this entire body of law is problematic. It can sometimes be difficult identifying prior owners who may repurchase property after the loan collection matter has been closed. Clearly, a lender who advances money unsuspectingly to purchasers, who may not have disclosed that they were prior owners of a property, should not be held in jeopardy. Moreover, it can be argued that a lender who purchases a property at its own foreclosure sale is a bona fide purchaser. If the lender thereafter sells the property back to the original owner, through no collusion to wipe out the junior liens, then the junior lienholder should not be protected by the revival of the lien and the subsequent re-attachment rule, especially where it was given notice and an opportunity to protect its interest. On the other hand, in those cases where the purchase money mortgage company is aware of the possible reattachment of the former junior lien holder’s lien, the purposes of the reattachment rule in discouraging collusive foreclosures may have stronger policy concerns.
Aggressive creditors, may wish to monitor situations where the mortgagor may attempt to re-purchaser their former home, either directly or indirectly through a straw party. In situations where the former mortgagor has re-acquired his or her former home, local counsel should be notified and thought be given as to whether an argument exists to revive the former lien. Once the lien is revived, the lender thereafter may need to monitor applicable statute of limitations, bankruptcy filings and subsequent transfers. However, if a bankruptcy has been filed, no collection of the debt amount can be attempted – although the lien may survive the filing. A valid lien certainly may give the junior mortgagee additional rights, that were previously thought not to exist.