Special Considerations for Bringing a Foreclosure Action by a Junior Lienholder

In a standard foreclosure action, the lienholder with a first position of priority files suit to foreclose out all junior lienholders and recover the outstanding balance on a promissory note secured by the mortgage.  But what happens when a junior lienholder decides to foreclose on its lien?  The scenario is much the same as it would be for a senior lienholder moving to foreclose, but special considerations must be taken into account.

When a senior lienholder files an action to foreclose on a piece of real property, all known junior lienholders are named as defendants in order to foreclose out their interests in the property so that title may pass cleanly to the next purchaser.  However, a suit by a junior lienholder may not work so efficiently.  Specifically, a determination must be made as to whether the senior lienholder should be made a part of the foreclosure action and what happens to that senior lien both before and after the judicial sale.

The first issue is whether a senior lienholder can be made a party to a foreclosure action brought by a junior lienholder.  The answer is no.  A senior lienholder is neither an indispensable party to the action nor a proper party to it.  An indispensable party is any necessary party that is so essential to a suit that no final decision can be rendered without further joinder.  Sudhoff v. Federal Nat. Mortg. Ass’n, 942 So.2d 425, 426 (Fla. 5th DCA 2006).  The only party to a mortgage foreclosure action that can be considered “indispensable” is the fee simple owner of the property.  This is due to the fact that “a foreclosure proceeding resulting in a final decree and a sale of the mortgaged property, without the holder of the legal title being before the court will have no effect to transfer his title to the purchaser at said sale.”  Jordan v. Sayre, 3 So. 329, 330 (Fla. 1888).  In other words, the fee simple owner is an indispensable party because, without him or her, the foreclosure proceeding would be void.  However, a junior lienholder is still capable of foreclosing out junior lienholders without the necessity of the senior lienholder being party to the action because foreclosure of those junior lienholders has no effect on the senior lienholder’s rights to the property.

Further, a first or senior mortgagee is not a necessary or even proper party to foreclosure proceedings brought by a second or junior mortgagee.  Cone Bros. Const. Co. v. Moore, 193 So. 288, 290 (Fla. 1940).  This is because, unlike a junior lienholder’s interest which is transferred from the property to the fund that stands in the place of the property, a senior lienholder’s security interest remains with the property even after the foreclosure sale.  Garcia v. Stewart, 906 So.2d 1117, 1120 (Fla. 4th DCA 2005).

Another issue to consider is what happens to any surplus proceeds after the judicial sale brought about by the junior lienholder’s foreclosure action.  Such proceeds are to be distributed among the other junior lienholders only and in order of priority.  If there is a dispute over priority, the court is required to prioritize the interest of the competing junior lienholders, as well as the amounts due each.  Citibank, FSB v. PNC Mtg. Corp. of Am., 718 So.2d 300, 302 (Fla. 2d DCA 1998).  A senior lienholder to the foreclosure action is not entitled to any proceeds from the sale as a senior lienholder cannot be foreclosed out and its lien remains tied to the property.  Surplus proceeds cannot be used to reimburse the purchaser for payments that are owed to the first mortgagee after the judicial sale.  Miller v. Stravos, 174 So.2d 48, 49 (Fla. 3d DCA 1965).  The dynamics of a junior lien foreclosure sale are as follows:  “[t]he successful bidder at a junior lien foreclosure takes title subject to the prior liens. The purchaser takes the property charged with the primary liability for the payment of the prior mortgage and must therefore service the prior liens to prevent loss of the property by foreclosure of the prior liens.”

Garcia v. Stewart, 906 So.2d 1117, 1120 (Fla. 4th DCA 2005).  The senior liens remain on the foreclosed property and the senior lienholder may still foreclose on the real estate to satisfy the outstanding senior lien.  Id at 1121.  This scenario remains the same regardless of whether the senior lien is already in default.  Id.

The junior lienholder moving to foreclose on the property may exercise its right of redemption, or in other words, it can pay off any senior liens to protect its interest in the property.  In Florida, the right of redemption is statutory and provides:

“At any time before the later of the filing of a certificate of sale by the clerk of the court or the time specified in the judgment, order, or decree of foreclosure, the mortgagor or the holder of any subordinate interest may cure the mortgagor’s indebtedness and prevent a foreclosure sale by paying the amount of moneys specified in the judgment, order, or decree of foreclosure, or if no judgment, order, or decree of foreclosure has been rendered, by tendering the performance due under the security agreement, including any amounts due because of the exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorney’s fees of the creditor. Otherwise, there is no right of redemption.”

Fla. Stat. § 45.0315.  Exercising a right of redemption is typically utilized by junior lienholders, or the fee title owner, in an attempt to prevent a foreclosure sale by the senior lienholder.  However, a junior lienholder that is moving to foreclose may also pay off the any senior liens in order to allow title of the property to pass cleanly at the foreclosure sale.  In this situation, the junior lienholder can purchase the property at the judicial sale without the concern that the senior lienholder will move to foreclose against the junior lienholder after it takes title to the property.

If the senior lienholder institutes a foreclosure action while the junior lienholder’s foreclosure action is still pending, the junior lienholder must pay all the senior lienholder’s litigation expenses, including attorney’s fees if applicable, to extinguish the senior lien.  In that scenario, it may be the best course of action to allow the senior lien to be foreclosed and then wait for any proceeds to be disbursed.  However, the junior lienholder must consider its place of in the priority line with other junior lienholders and whether it will be entitled to any disbursement of surplus proceeds.

It is not the norm for a junior lienholder to seek foreclosure when a senior lien remains on the property.  For this reason, certain considerations must be taken into account to determine if and how the junior lienholder should proceed with foreclosing on the property.

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