Judicial Foreclosure and Auction Experts...HELP!

42 Replies

I admit that I am freaking out a bit about a problem I have run into. I consider myself pretty experienced in REI. I have bought dozens of properties at sheriff sale and researched 1000's and I am in the middle of a situation that I have never seen nor heard of.....and I am currently out $500K cash as a result.
My attorney is working on it and it might get resolved but I wonder if anyone else knows about this.

I am in a judicial state. When I research properties up for auction I use a respected 3rd party information service and I research title via the county recorders office and do a little other digging. I read the Lis Pendens filing but I don't read every filing made during the court process.

It is a long story but here is the bottom line in my current case. A Lis Pendens was filed by lender A on loan 123. This was recorded in all the databases and in the county recorder. There was a also junior mortgage which was named as a defendant as normal. 18 months later the case has made to to auction. The case is published with the same case number and the same plaintiffs and the same subject loan in all the databases and the recorders office. Several people bid at auction and I "won". Lucky me.

Well it turns out that at some point during the 18 month period through some counterclaim process by the junior lender, the loan being foreclosed actually CHANGED to the junior loan. The case number stayed the same, the case proceeded under the same original plaintiff, all the databases and the county recorder office continued to show the subject loan as was Lender A and Loan 123. However, the loan being foreclosed at auction is now lender B and loan 456.

I am still reading through the minutiae of the court filings but this is just stunning to me. I have never heard that the subject loan of a foreclosure could switch midway through a case with no outward change to the case. This seems crazy. My lawyer said it is very rare. An official title search would not even catch this change.

Has anyone else run into this? I wonder why, in all the books, seminars and classes I have taken this was never mentioned. Seems like kind of a big deal.

I research so many properties, I don't know how I will have the ability to read hundreds of pages of court docs on every case before buying.

I've bought a fair amount at auction and I HAVE NOT heard of this. With that said, though the horse already left the barn I will say that i DO read every page of the foreclosure file after i win the bid but BEFORE i pay the entire balance. They give us 24 hours in Florida after the deposit is paid before the final amount is due.

I will lose sleep tonight from this, auctions are a very scary thing for me. The more i learn, the more scared i get.

I'm a bit confused though, wouldn't the judgement amount show this issue clearly?

Eric,
I'm with Aaron on this one. I buy at auction, and I double check the actual case file before paying full amount, or before if not positive. Sometimes the LP doesn't specify the mtg., only the property and defendant. I've never heard of this situation. That said, if this happened what ever amount you paid above the second mtg. Judgement, would go to pay down the first. I don't think this situation could legally happen in Florida. The suit couldn't be assigned, to foreclose on a different mtg. It would have to be a totally separate action/case number/court filing.
PLEASE keep us informed on this.

Good point Wayne about the paying down part. I'd be curious to learn what the other mortgage face value is and the market value of the property. Seems odd this situation could occur with multiple bidders at the 500k bid price range. The other bidders missed this too? I don't have big enough marbles yet to bid over 250k on anything.

Situations like this make me wish there was some investor club that could be self insured by events like this. "It came out of nowhere" type losses. It would never work of course but the auctions would be a little safer.

I was in the Marion county fl auctions once and some random home buyer came in (we always had a few new idiots each week) anyways this guy proceeds to bid 175k on a 2nd mortgage that the first was WAY under water, nobody bid against him. I was drinking at the time a bottle of water and I spit what i was drinking on my partner once i realized what was going on. I then said fairly loud "are you out of your %#%() mind" We all know how professional I am :) The guy blew me off and after the auction i told him to go to a title company and do a emergency search and pay whatever he has to. He again blew me off. A week later he came in, gave me an envelop with a 50 dollar starbucks card in it turned around and left quickly. The note said thanks for the warning. He lost 7500 dollars on the deposit, i help save him the other 170kish. He never came back.

Not to hijack the thread, but at what point do you warn a competitor he is missing something major. I'm not sure what i would of done if the bidder was my nemesis. I'd like to think I couldn't watch someone lose that kind of cash. 500k mistake just seems so unlikely that nobody would of tried to sell that information to a known investor. Seems even more unlikely the room didn't know what was going on.

Random thoughts, i type fast...sorry :)

Here the auctions are online, and anonymous until the auction is over. In the typical "kill or be killed" attitude of most veteran bidders, they love seeing a newbie blow his wad on a second or HOA with a big mtg.

Not looking forward to anything shifting online. My local county auctions are like a bad episode of storage wars.

@Eric Michaels I'm curious about the "counter claim" you say the jr. lender made. What were the original amounts of Loan 123 and 456? Is the original amount of the Lender A's 123 senior lien now reduced in any way by this counter claim? I know you are still reading the filings, but I'm wondering if there's something in there that makes it clear what happened between the senior and junior lender in this case.

Wow, that's scary. Maybe you could have your attorney file a motion on behalf of the defendant to have the sale vacated due to the erroneous paperwork. If it's vacated or canceled you could file to get the funds returned.

I had a scare on my last purchase from the courthouse where all my research was clean.
When the buyers agent ran a title search a superior lien showed up that would have wiped out the one I purchased.

Luckily it turned out to be an unrecorded satisfaction that took about a month to resolve due to the lender no longer existing.

Hope you can resolve this.

Originally posted by Wayne Brooks:
Eric,
I'm with Aaron on this one. I buy at auction, and I double check the actual case file before paying full amount, or before if not positive. Sometimes the LP doesn't specify the mtg., only the property and defendant. I've never heard of this situation. That said, if this happened what ever amount you paid above the second mtg. Judgement, would go to pay down the first. I don't think this situation could legally happen in Florida. The suit couldn't be assigned, to foreclose on a different mtg. It would have to be a totally separate action/case number/court filing.
PLEASE keep us informed on this.

So overages on foreclosure of a junior lein would go to the senior lien holder in a judicial foreclosure? In CA, overages on a junior lien at trustee's sale go to any subsequent jr. lienholders, and if there are none, the overages would go to the owner.

When a junior lien forecloses judicially, do they name the senior lien holder in their case?

K. Marie,
Yes, all lien holders are listed as defendants. Anyone with an interest in the property.

So in this case, the house is conservatively worth about 900K. The first mortgage balance is $488K and the second mortgage is $600K, so there is not overage from the 2nd on this auction.

As I said, it is a long story. I'll tell a little more and if anyone wants to look, it is 871 Smith in Glen Ellyn Ill.
One of the unusual things was there was a previous HELOC for $250K (this is a 3rd loan) from a few years earlier than the first mortgage that was still showing outstanding. It had not been released or subordinated. I thought is was strange that it hadn't been released, but this house was a tear down that had been rebuilt so on those, it is not that unusual to have 3 mortgages or old ones still around. It was also possible the balance on the HELOC was zero and that is why they hadn't released it. But I assumed that was senior to the one I was bidding on.
At the auction, they started the bid low and 6 people were bidding including a lender rep (I did not know which lender it was). The bidding went up and I stopped bidding at $511K simply because I ran out of available cash. The bidding stopped at 530K and the guy who won is a regular bidder but he looked shocked that he won. After I dropped out, the others dropped fairly quickly.
After the auction, I told him congrats and he asked why I stopped and what I thought it was worth. I mentioned that even with the 250K in front of him, he probably got a good deal. He looked shocked and I figured he had not researched the house and just bid along with the others.
2 days later I get a call from an attorney for "the lender" he says the top bidder reneged and he was wondering if I was still interested. I told him yes, but with 2 questions. I had never received a call like this and wanted to call the sheriff to make sure this was kosher and I was concerned this was not a first mortgage. Over the next couple of days, I called the sheriff who told me it was unusual but ok. I just needed to agree on a price with the attorney and come pay as usual.
I talked to the attorney about the HELOC. At this point, I still had no inkling the auction was not for the original mortgage that the LP was filed under. The attorney specifically said he didn't think there were any mortgages in front of him but he would check. We went back and forth for a couple of days and he ended up getting the lender on the HELOC to email me saying they had simply forgotten to release the old HELOC. The attorney never mentioned that there actually was this other mortgage that was senior to his or that this case was unusual in any way.
So I am thinking grandslam. I don't even have to pay the 250K I thought I might have to. I call the attorney back and say I am in, he asks what price...I figure what the heck so I say $500K and he says sounds good. He lets the sheriff know and I go the next day to pay.
It still gets better. I go to the sheriff. By this time it is a week after the actual auction had taken place. When I go in to pay the asst who does the paperwork says how glad she is to get this one done and what a pain it has been. I know her a bit so I ask what happened with the high bidder. She says he put his deposit down and then got cold feet the next day. She said he was worried that it was a second mortgage. She said, they tried to tell him it wasn't but he didn't listen. She thought he was confused because there was a trust involved or something like that. I said to her, it is a first mortgage right? She says yeah, don't worry, you are the smart one for taking over as auction winner. BTW, they even gave the first bidder his deposit back, which shocked me. Hearing the top bidder thought it was a second didn't concern me much since I thought it was the HELOC he was worried about. But to be sure I went straight home and did the title research again showing yes this was the first mortgage.
Fast forward 3 weeks to the confirmation hearing which is the final legal step of the process. I generally don't even show up but I did this time. The homeowner was there with his attorney and they raised an issue with the way the auction was handled and why the winner at 530K had turned into 500K. To me that was normal stuff, they will try anything to delay or quash a sale. But he asked me to talk afterward. I sat down and he started quizzing me about how the bidding happened. I was still trying to keep the deal together at this point so I didn't give much info. Finally at the end, he says....you do know this is a second mortgage right. I say I don't think it is and we go back and forth, me showing the docs that say it is and him saying how at some point in the process it switched. He pulled a couple of pages out of a stack and quickly showed me where things seemed to switch and he implied it was some type of error. At this point my head started to spin thinking I was out $500K and I just wanted to get out of there to call my attorney and read the whole case file. He said he was going to file a motion to set aside the sale.
I ran home and immediately started redoing the title search and looking at the LP and everything still was showing it was a first.
But the next day I say the file and started to see that it might not be. My attorney confirmed that it was a second and that she was aware this could happen (switching of a subject mortgage in the middle of a case) but had never seen it.
Best I can tell, after the initial filing, the defendant/second lender filed a very aggressive counter claim against the homeowner. For some reason that I don't know the first lender who filed the LP just faded away and never even made another filing. Apparently that is unusual for the original filer to just allow their case to be usurped. Essentially they let the aggressive 2nd lender take the reins. There was never any overt ruling that things had switched. It just sort of happened. The judgement that ended up being entered 15 months later was on behalf of the "counterplaintiff/defendant" not the original plaintiff. (I don't think I would have even noticed this slight change because the amounts due on both mortgages were similar , or known what it meant had I read the 200+ pages of filings)
And then the case went to auction...still announced as the original case name and number and referring to the original loan...but that was not the loan up for auction.

At this point, I am going to piggyback on the homeowners motion to set aside the sale. I will emphasize the unusual way the bid fell to me and the fact that 2 people told me it was a first mortgage. I know they probably didn't have the obligation to tell me the truth but I'll use anything I can at this point. I think it is possible that the sheriff did still think it was a first also. I will bring up the fact that they bent the rules by giving the first bidder his deposit back. This judge usually likes a really clean case before confirming so I am hopeful the sale can be set aside.

I contacted the foreclosure data service I use to tell them they might have a flaw in their system if this can happen without them knowing. They didn't seem to have heard this could happen. They say they are looking into it, but it does spook me how much money I have committed in the past believing I had done all the homework and was confident I knew what I was buying...but in reality it was dumb luck I had not been caught up with this. Huge lesson learned. Just hoping it doesn't end up as expensive as it currently is.

Thanks for your feedback.

Wow, that is scary. But your explanation does jog my memory. I have seen a few cases here that ended up with a Count 1, and a Count 2, on the same case. I guess this could be the result of a counterclaim filed filed by a defendant mortgage co. Which would mean there is one case number with two different actions being pursued? The few I've seen like this, I passed on because I wasn't sure what was going on.
Here one bidder could not be substituted for another after the sale. The first bidder would lose their deposit, and the plaintiff would have to go to court for a new sale date.
Best of luck with this. Hopefully you and the owner can get the sale vacated. But remember, the judge will not see it as his responsibility to undo "your mistake". So, I would pursue some different procedural issue as a basis to vacate the sale.

Never been a huge fan of picking up a deal from another investor. Huge red flag... Keep us posted, hope you dodge this bullet.

timeo Danaos et dona ferentis.

Again, I saw there was a red flag with the unreleased HELOC. He didn't have time to resolve it before he had to pay so it was perfectly reasonable that he backed out. (I thought)

I had time and I resolved that. So I thought that obvious red flag was cleared.

@Eric Michaels It took me awhile to figure out what's going on here. But in appears that the judgment that was awarded and foreclosed on was in favor of a defendant, in this case a junior lender. So, because the case name never changed from that of the plaintiff's, you assumed the foreclosure was on the first? Is that correct?

It's interesting to me that your attorney says that this situation is rare but does happen. Defendants and counter claims do sometimes prevail, the case name wouldn't change, so of course it could happen. But how do you plan for that? From the comments here, it appears that some investors buy at sale and then read the details of the case before paying in full.

This case really makes me wonder how anyone can feel secure buying at a judicial foreclosure. My investor friends in other states say they prefer judicial because the court case "takes care of everything" in one fell swoop. I guess they mean by naming every possible lien holder and creditor with an interest as a defendant. In this case, a defendant that answered was awarded a judgment, but not the plaintiff. It didn't take care of everything.

I had something similar but less complicated happen to me. The owner of the first mortgage foreclosed an HOA lien because of some procedural error so it appeared that the first was being auctioned but it was actually the HOA lien. Thankful it was not for a whole lot of money and I have already nearly recouped my cost by renting the place. It should have been caught by me but I was a little too eager and green It certainly should have been caught by my title agent but he had no experience with foreclosure auctions even though he told me he had. Needless to say I have switched title agents to someone who I know for a fact works with a lot of the other bidders.

I wish you the best of luck, I'm sure it will turn out alright. It sounds like you did all you could. Please keep us updated.

Buying at auction is certainly not for the faint of heart or the inexperienced. Sometimes you just have to jump in and learn the hard way. I'm still glad I started buying at auction and I learn something on every deal I do.

First off, I no longer feel as bad about Andrew Luck killing my 6 team parlay during this weekend's Vegas trip. Thanks for helping me regain some perspective.

Second... being a non-judicial guy, I am not as up to speed as I should be, so I don't know how valuable the advice will be, but having screwed up a time or two in my own right I thought I would give this a go.

The way it works here, the trustee is responsible for providing some basic information, loan numbers being one of them. It seems as though the initial loan number was not the one presented at sale. While this is an elementary point of your anecdote, it might be what saves you. If the number that was provided was inaccurate and published as such during any part of the foreclosure process, you should have a damn good case to vacate the sale.

As for how this happened... the amount of homeowner involvement and the pro-activeness of the "attorney for the lender" seem VERY fishy to me. If this was the deal that you thought it was, everyone with access to it would have bought it, and they certainly wouldn't have gone out of their way to contact someone else to sell it to them. I know that there are guidelines and rules to keep this kind of thing from happening, but that's when people's friends and brother in-law's get phone calls, not the guys who get second at the TS. At least that's the way it works in my world.

Anyway- I hope this is made right and I hope this exposes some major flaw in the process that allowed it to happen this time, and that is corrected as well. Please keep us updated as to all progress as this is one of the more critical and outlandish things I've encountered during all of my time on BP.

First of all thank you all for your responses. As I said, I have an attorney working on this so I wasn't expecting "legal" help from BP but was mostly hoping for just a little pick me up...."it is going to be ok, we understand"
Which is exactly what I got! THanks!
I tell you, it isn't easy "pleading ignorance" for me, no matter how much money is involved. I know that at the end of the day, it is my responsibility to check every possibility.

But for all the reading and learning I have done for many years, I had never heard of this. I was aware of counter suits, but never knew they would continue to retain all the markings of the original suit. And never imagined that there could be something that a thorough title search would not catch. So as much as anything, I am wanting to put this info out there so someone else researching this business might be alerted to this possibility.

I have read the entire court file now. It is a doozy, there are at least 2 other lawsuits that have been filed relating to this case. They are not relevant to me but interesting none the less and contain more lessons for us.

Apparently during the case, the homeowner and the 2nd mortgage lender had some meetings in which they told him if he were to sign another of his properties over to the bank, they would stop the foreclosure on this one. He signed it over, they sold it, and then 6 months later resumed the foreclosure process saying he had no record of that promise in writing. The judge sided with the bank because the law requires any credit agreement to be in writing but the homeowner is suing on that separately.
Another thing that muddied things up for me re the involvement of the 2nd mortgage lender was the fact that in the original Lis Pendens, the case referred to a 2004 2nd mortgage of $390K as the 2nd mortgage. However, in 2007, that HELOC had been increased to $569K.

In reading the file, the 2nd mortgage lender, who is referred to as defendant/counterplaintiff is definitely the one pushing the case forward. The Plaintiff doesn't really do much. I figured that was because the first was confident they were covered and the 2nd was scrambling to make sure they got their piece, and to make sure the court knew their piece was 569K, not 390K.

But I was looking for that one smoking gun that should have told me, yes this auction is definitely for the second mortgage ...or even yes, this auction is definitely NOT on the first mortgage. I never found it.
In fact, check out this document, which should be the one to clear the whole thing up. It is the court's "Judgement for Foreclosure Sale" http://www.biggerpockets.com/files/user/eric3/file/judgement-for-the

When I read it, I see that the defendant/Counterplaintiff (DCD) was the one that motioned for judgement, again they were the one pushing the case.
But check out point 3. It says "Plaintiff" is entitled to judgement of foreclosure. That seems clear as day who the judgement was in favor of. Look at the top of the page and the Plaintiff is the original plaintiff..the FIRST mortgage holder. That tells me the Plaintiff, US Bank won, not the "counterdefendant/plaintiff". It seems like those words matter.

#5 seems to be confirming that yes, the CDC does have a valid lien, which seems normal. They might have been pushing it to simply establish their 569K lien was valid.
Further down it indicates the CDC is entitled to recover costs and that their claims were true, and they are entitled to relief and it establishes how much....but I don't really see that that "relief" should now be in front of the first.

In Redemption section, it says if the HO don't pay the CDC, the property may be sold at the PLAINTIFF's discretion to satisfy the amount due the Plaintiff. Again, it seems like the cdc is entitled to be paid but the sale is still in control of the plaintiff.

In retrospect, if I had read this before paying, would I have known it was the 2nd up for auction? I don't know. Hopefully it would have raised enough flags for me to specifically ask, but I still don't think it would have been clear.

Do you think it is clear?

Item #6 in the Judgment for Foreclosure and Sale states, "The mortgage described in the complaint and hereby foreclosed appears of record in the Office of the Recorder of Deeds of COOK County, Illinois as Document No. 612450096"

This mortgage (Doc No. 612450096) is for a home in Streamwood, IL - COOK COUNTY (111 Mayfield Dr Streamwood, IL). This home in Streamwood was also foreclosed & sold at the COOK COUNTY Sheriff Sale on 10/7/2011.

This is extremely odd, being that your sale for took place in DuPage County, and all other language refers to the home in Glen Ellyn. I'm assuming this is a clerical error by whoever prepared the document.

A major error like having an incorrect document number, from a different county, in the Judgment should help you in getting the sale vacated.

@Eric Michaels I was looking at all the loans listed against the property (on my title company subscription service) I was wondering if you could have known which loan was foreclosing from the the loan number cited in Paragraph 6. None of the (many) loans against the property match that loan number. Then I too noticed that it says that the loan is recorded in Cook County. I checked the Cook County recorder and the borrower/defendants never had any property or loans in their names in Cook County (unless it was a property or loan in an entity that was controlled by the borrowers).

Is Paragraph 6 a mistake and could you use the irregularity to overturn the sale?

Other than that, the order does mention "Defendant/Counter-Plaintiff" in the usual place where the "Plaintiff" would go. So, if you had read this order before paying, you might have noticed that. You might not have known exactly what it meant, but I bet you would have noticed it and questioned it. Maybe that's what happened with the first winning bidder and why he backed out.

Yes, I saw this weird document number too. That is not even the format that DuPage county uses. Ours would be 2006-XXXXXX. I hadn't noticed it actually said COOK or looked it up though. Thanks

Yes, that is something I will mention. I mentioned the fact that it says Plaintiff is entitled to Judgement. She says that the attorney for the counterplaintiff actually would have been the one to draw up the document and they probably used a standard form with Plaintiff in there. Maybe an old case was the cook county one.

She described these errors as "minor" and thought they wouldn't help which bummed me out. They seem kind of major to me! I think she doesn't want me to get my hopes up. But I am going to use anything I can.

Thanks again for showing concern and helping.

I'm in agreement with your attorney that it's a minor error to use the word Plaintiff where it usually goes on a judgment doc. But it's not minor to use a different a loan (from a different county!) as the subject of the foreclosure action. Please post back after you talk to her about that. I can't believe this won't help you (or the borrower) overturn the sale. Or "vacate the judgment" as you say in judicial land.

@Eric michaels -
I'm getting into this post about 72 hours late, however my quick take is that your normal research methods did not pick up the fact(s) that a 1st had become subordinated to a junior position and you bid it as a 1st.

Given the fact most sales are cried 'without any representation...'. It leaves few tools for your counsel.

As a so called title geek, I'm in favor of accomplishing two things:

1) Find the error of my ways, and
2) Implement changes to my system to eliminate or reduce a risk in the future

I sympathize with your unenviable position, particularly because you're both stuck, distracted and hemorraging expenses, all at the same time and potentially for naught.

I find it useful to take a break from the conflict and see if there's other ways to either approach a problem (and turn lemons into lemonade) or to at least find a way to extricate myself from the situation, stop the bleeding and go into salvage mode.

In the meantime, what can you do to make profits while the pontificators attempt to find a legal loophole for your problem file?

@Rick H.

The first mortgage was never subordinated to a junior position.

The first mortgage holder, US Bank, filed the original foreclosure.

The second mortgage holder, a local community bank, then took over the case in an attempt to foreclose on their second mortgage. Again, a subordination agreement was never recorded.

The case number was never changed. This makes it extremely difficult to spot that the second mortgage is the one actually being foreclosed on. You would have to spend hours searching through the actual courthouse file to spot this. No normal title search would spot this issue.

The fact that the loan number cited in the Judgment is wrong is definitely a major issue.

Originally posted by Jake Kucheck:
... being a non-judicial guy, I am not as up to speed as I should be...

The way it works here, the trustee is responsible for providing some basic information, loan numbers being one of them. It seems as though the initial loan number was not the one presented at sale. While this is an elementary point of your anecdote, it might be what saves you. If the number that was provided was inaccurate and published as such during any part of the foreclosure process, you should have a damn good case to vacate the sale.
...

In my area which is judicial, the parties involved and the court case / docket number are provided - the loan information is supposed to be found in the case docket - but the loan info isn't provided separately. Not sure if the situation in this thread came about from a loan number or not, but it appears that Eric did have access to the case docket.

The peculiar thing to me is the fact that documents from two different counties are involved. With seeing that, I expect some kind of blanket loan, or cross collateral, or substitution of collateral to be in place. From my own personal approach, when the paperwork pre-auction is odd in some way, I will investigate why, and I usually just pass on those - too "iffy".

I wish I had something new I thought would be beneficial to add - the judicial process does allow for a challenge, and that is already happening here, so I think that's your best hope for now.

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