The Omitted Junior Lienor

a computer learning exercise by

Dale A. Whitman

On this web page, and the pages linked to it, you will find a learning exercise designed to help you understand what happens when a mortgage is foreclosed, but the foreclosing mortgagee fails to include someone as a party who has a subordinate interest (usually a junior lien) in the real estate. We call that person an "omitted junior lienor."

Ordinarily, a well-advised mortgagee will want to make all junior interest-holders parties, since doing so will wipe out their interests and hence will make the property more valuable and attractive to potential bidders. So this exercise is really about mortgagees who "goof" and fail to do their homework. (You'll recall that the foreclosing mortgagee doesn't have to worry about making senior interest-holders parties to the foreclosure action; they can't be affected by the foreclosure anyway.)

Here's the situation with which we'll work: Mark Roberts has borrowed $30,000 from Mary Easton, giving her a mortgage on Mark's real estate as collateral. However, Mark is having financial problems, and is in default on his debt to Mary. Shortly after borrowing the money from Mary, Mark went to Friendly Finance Co. and borrowed from it an additional $7,000, secured by a second mortgage on the same land. Here's a little diagram of the situation:

MR------------> ME

($30,000 First Mortgage)

MR------------> FF

($7,000 Second Mortgage)

As you know, there's no legal rule dictating the order in which two mortgagees must foreclose their mortgages (provided that they are both in default). Let's assume that Mary Easton (ME) loses patience first and institutes a judicial foreclosure action. However, she doesn't bother getting a title examination made, and so doesn't learn about Friendly Finance's (FF's) second mortgage. Consequently, she doesn't make FF a party to the foreclosure action.

[Click here to go to the next page.]