Case Law Summaries

WMC Mortgage Corp. v. Turner

• Opinion Date: January 12, 2001
• Real Property Law
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MORTGAGES; FORECLOSURE—There is no need to vacate a foreclosure sale because of a priority dispute between mortgagees; resolution of such disputes impacts upon the monies received, not on the property.

A lender filed an action seeking to foreclose on a purchase money mortgage. The property was already encumbered by a previously recorded mortgage. Thus, the second mortgagee named the first mortgagee as a defendant in its foreclosure action. The complaint alleged that the previously recorded mortgage was, “in fact junior to and subordinate to plaintiff’s note and mortgage because it has been paid in full.” The holder of the earlier mortgage acknowledged receiving a complaint, but believed that the foreclosing mortgagee would have to pay the earlier mortgagee’s loan at the conclusion of the foreclosure even if it were a subsequent mortgage. The Court, in a footnote, stated that it could “understand how they may have reached this mistaken belief.” A court rule allows for payment of subsequent encumbrances in a foreclosure action, but only on a condition that “all prior encumbrances of parties to the action, including answering and defaulting parties, have been previously satisfied or ordered paid.” Unfortunately for the holders of the earlier mortgage, the text of the rule in question was only applicable to defendants who have filed an noncontesting answer and who seek to have their subsequent encumbrances included for payment in the foreclosure final judgment. Here, the foreclosing mortgagee failed to send a copy of the entry of default to the earlier mortgagee by ordinary mail addressed to the same address at which the earlier mortgagee was served with process. The earlier mortgagee claimed that had it received such a notice, it would have immediately called an attorney and, presumably, immediately moved to vacate the default. The record showed neither a notice of default nor a judgment of foreclosure. However, counsel told the Court, that a foreclosure sale occurred and the later mortgagee purchased the property for $100. When the holder of the earlier mortgage found out about the sale, it had an attorney write to the attorney for the later mortgagee, asking about “your intention in regard to protection of” the earlier lien. The Court found this letter unmistakably placed counsel on notice that the holders of the earlier mortgage contested the priority of the later mortgage. Foreclosing mortgagee’s attorney did not reply; instead, he obtained the deed from the sheriff’s sale and then caused the property to be resold. The record did not show whether he disclosed the potential cloud on the property to the potential buyers. The lower court, based on the ultimate sale to the unrelated party, denied the motion by the earlier mortgagee to vacate the default judgment because the lower court did not want to “uproot homeowners, innocent third-party purchasers.” It held that the earlier mortgagee had a viable claim, but it could only be for money damages. The Appellate Division held that the lower court erred in two respects. First, a question arose whether the innocent “homeowners” may have been a bank and also just how “innocent” the buyers might have been with respect to knowledge of the claim. In addition, the Court saw no reason “why vacating the judgment as to the priority of the [earlier mortgagee’s] lien would necessarily have an impact upon a third-party good faith purchaser.” It is clear from the foreclosure rules that resolution of the priority of respective creditors impacts not on the sale of the property, but upon the monies received therefrom. Consequently, the Court was convinced that the lower court clearly, and correctly, thought that the earlier mortgagee had a viable meritorious claim and it also thought that it was evident that the lower court would have found excusable neglect. Consequently, the Court remanded the matter to the lower court to allow such a determination be made. Further, “[f]oreclosure is an equitable remedy and is colored by traditional equitable principles. Thus, a litigant seeking foreclosure from the court must proceed with clean hands.” The Court found a “fair amount of doubt” as to whether the later mortgagee acted with clean hands.

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