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11. How should the $200,000 surplus arising from the sale of the parking garage be distributed?
A businessman owned a hotel, subject to a mortgage securing a debt he owed to a bank. The businessman later acquired a nearby parking garage, financing a part of the purchase price with a loan from a financing company, secured by a mortgage on the parking garage. Two years thereafter, the businessman defaulted on the loan owed to the bank, which caused the full amount of that loan to become immediately due and payable. The bank decided not to foreclose the mortgage on the hotel at that time, but instead properly sued for the full amount of the defaulted loan. The bank obtained and properly filed a judgment for that amount. A statute of the jurisdiction provides: «Any judgment properly filed shall, for 10 years from filing, be a lien on the real property then owned or subsequently acquired by any person against whom the judgment is rendered.» There is no other applicable statute, except the statute providing for judicial foreclosure of mortgages, which places no restrictions on deficiency judgments. Shortly thereafter, the bank brought an appropriate action for judicial foreclosure of its mortgage on the hotel and of its judgment lien on the parking garage. The financing company was joined as a party defendant, and appropriately sued for foreclosure of its mortgage on the parking garage, which was also in default. All procedures were properly followed, and the confirmed foreclosure sales resulted in the following: The net proceeds of the sale of the hotel to a third party were $200,000 less than the bank's mortgage balance. The net proceeds of the sale of the parking garage to a fourth party were $200,000 more than the financing company's mortgage balance.
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Foreclosure is a process by which the mortgagor's interest in the property is terminated. The property is generally sold to satisfy the debt in whole or in part. Generally, the priority of the mortgage is determined by the time it was placed on the property. When a mortgage is foreclosed, the buyer at the sale will take title as it existed when the mortgage was placed on the property. Thus, a foreclosure will terminate interests junior to the mortgage being foreclosed, but will not affect senior interests.
Junior mortgages, liens, leases, easements, and all other interests will be wiped out if they are junior to the mortgage being foreclosed. If a lien senior to that of the mortgagee is in default, the junior mortgagee has the right to pay it off in order to avoid being wiped out by its foreclosure. Thus, those with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action. Failure to include a necessary party results in the preservation of the party's interest despite foreclosure and sale.
Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer takes subject to such an interest and does not become personally liable on such senior investments.
The proceeds of the foreclosure sale are used, first, to pay expenses of the sale, attorneys' fees, and court costs, and then to pay the principal and accrued interest on the loan that was foreclosed, next to pay off any junior liens or other junior interests in the order of their priority, and finally, any remaining proceeds are distributed to the mortgagor. If the proceeds of the sale are insufficient to satisfy the mortgage debt, the mortgagee can bring a personal action against the mortgagor/debtor for the deficiency.
A is correct. The bank received a judgment for the full amount of the businessman's defaulted loan. Under the applicable statute, the bank's lien was properly recorded and applied to all property owned by the businessman during the 10-year time period, including the parking garage. (The bank may have decided on this course of action because it deemed the businessman's equity in the garage was significant and the timing was bad for a hotel foreclosure.) The foreclosure sale of the bank's mortgage on the hotel was insufficient (by $200,000) to pay the businessman's debt to the bank. After the financing company was paid in full from the funds generated by the foreclosure sale of its mortgage on the parking garage, the additional funds generated by that sale ($200,000) would be paid to the bank not as a deficiency judgment, but because of the unsatisfied amount of the prior money judgment.
B is incorrect. The judgment lien was properly filed against the businessman. The parking garage was subject not only to the original mortgage with the financing company, but also to the judgment lien from the bank as the second priority. As a result, the businessman would not be entitled to any funds from a surplus until the interests of both creditors (bank and financing company) are paid in full.
C is incorrect. The foreclosure sale of the financing company's mortgage on the parking garage was sufficient to pay the businessman's debt to the financing company in full. And, because the bank's judgment lien was properly filed against the businessman, the lien has second priority once the financing company's loan was paid in full, and the surplus proceeds will be paid to the bank, not kept by the financing company.
D is incorrect. As explained above, the bank will receive the surplus proceeds because the garage was sold for more money than the debt owed. The proceeds from this sale will go towards the bank's judgment lien because it has second priority.