Judicial Foreclosure and Auction Experts...HELP!

[Eric M.]

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.

[Keith Barton]

Eric Michaels
I know I'm rather late to the game and that this is no longer an issue - but I thought you guys might like a little explanation of a few points....

I've represented parties in a number of foreclosure lawsuits (Ohio - judicial foreclosure) where the "aggressor" has changed part way through the suit. Forgive me if I tell you basic info you already know....

1) Any lien-holder may foreclose on the lien (under proper circumstances.) Examples of liens include 1st mortgage liens, 2nd (and so on) mortgage liens, tax liens, HOA lien, mechanics' liens, judgment liens, etc....

2) The plaintiff must notify all lien-holders (and anyone else who may have an interest in the property) by naming each as a defendant to the foreclosure action. This is why a title company must perform a judicial report before the suit is filed, while the suit is pending if it goes on long enough, and just before judgment is granted.

3) Claims, Counter-Claims, Cross-Claims...
-The plaintiff files a complaint against a defendant to assert a claim.
-The defendant files an answer to defend against the claim.
-The defendant can file a counter-claim to assert a claim against the plaintiff.
-A defendant who wants to protect their lien's interest must file a cross-claim to say - hey, I've got a claim against one of the other defendants (the property owner).

I represented an HOA who filed foreclosure against a unit owner (before I started representing the HOA). The bank and the county were named as defendants and filed cross-claims. As an aside - this was in Cuyahoga County (Cleveland), Ohio. At one time the worst place in the country for foreclosures (i.e., the most.) The court was overwhelmed: HUGE mess.... it made no sense for the HOA to continue taking the lead: a) no money to finish the suit; and, b) the HOA would get no money, as the property not worth enough to cover all liens. We didn't want to drop the suit because we wanted them someone who would pay HOA fees.

I told the bank - you keep pursuing under your cross-claim. We didn't dismiss because we wanted the foreclosure and it would've taken forever to start over. We told the judge what we were doing and he had no problem with it - which is as it should be.

If we dismissed our claim, it would not have affected the validity of the cross-claims - the show must go on. if the property owner makes a deal to satisfy 1 lien-holder but not the others, that 1 lien-holder must still continue asserting their claim (or cross-claim) or risk losing the right to foreclose on the property in the future.

The bank filed, and was granted, its motion for summary judgment. The bank ordered the sheriff sale. The bank bought the property at sale.

The priority of the 3 liens was 1) county taxes, 2) bank, 3) HOA. Proceeds were not enough to cover all liens. I had a few cases like this.

I don't know enough of Eric's situation to say why there was a concern about the lien not being discharged at sheriff sale. (which is what it sounds to me like Eric was saying.) Their are times when a property is subject to a prior lien after sheriff sale, but I've never taken the time to research under what conditions that would happen.