Reforeclosure Helps Remove Omitted Junior Liens
Recently, we helped a client who bought real estate at a foreclosure sale but realized that the plaintiff’s attorneys forgot to include a junior lien in the foreclosure lawsuit. Luckily, there is a process in Florida to eliminate that junior lien, even after the foreclosure lawsuit is complete and the property is sold at auction – a Reforeclosure.
Any omitted junior lienholders still retain their liens even after the foreclosure is completed. Why would a junior lienholder be left out of a foreclosure lawsuit? Maybe the foreclosing attorney made a mistake and didn’t do a full or proper title search. Maybe the foreclosing attorney made a mistake and didn’t properly review or catch the junior lienholder in its title search. We’ve seen many situations lately where homeowner and condominium associations foreclose without even doing a title search, so they name no junior lienholders – just another reason never to buy a property at a homeowner or condominium association foreclosure sale.
The reforeclosure lawsuit may be filed by the purchaser at the foreclosure sale, whether that purchaser is the plaintiff or any third-party bidder. The lawsuit is really a motion to compel redemption in a suit brought de novo. In English, that means that the omitted lienholder is served with a brand new lawsuit or a motion within the previous lawsuit (de novo or “from the beginning), and has a set period of time typically 30 – 45 days to pay off the plaintiff’s lien (redemption). As you can see, redemption is a two-part process: (1) the omitted junior lienholder is served with a lawsuit and given the right to pay off the plaintiff, and (2) they have to fail to do so, which removes their lien from the property.
One potential problem with a reforeclosure lawsuit is that the junior lienholder has the right to pay off the plaintiff’s loan, rather than the amount the third-party bidder paid at the auction. Consider a case where the property has equity – let’s assume the plaintiff’s loan is for $100,000, the property is worth $250,000 and the third-party bidder did well in making a successful bid of $130,000. The third-party bidder believes she has $120,000 of equity on her $130,000 investment – a great deal! However, if there was a second mortgage for $200,000, upon a reforeclosure that second mortgage would only need to redeem for the amount of the plaintiff’s loan – $100,000. The foreclosure buyer would get the redemption amount of $100,000, but their additional $30,000 would be lost, as would the property. The foreclosure buyer goes from having equity of $120,000, to a loss of $30,000!
While this may seem scary, the alternative is to have property that is unmarketable because it is subject to the omitted junior lien, who may then itself foreclose! The above scenario is possible, however I have never seen a junior lienholder pay the money to redeem or pay off the plaintiff. Although it is possible for such an outcome, it is unlikely from a practical perspective.
If you have questions about foreclosure, lien priority, or reforeclosure, please contact us to schedule a free initial consultation to discuss your options at 727-261-0224 or email me directly at firstname.lastname@example.org. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Clearwater-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Clearwater, Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.