Judicial Foreclosure and Auction Experts...HELP!

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Judicial Foreclosure and Auction Experts...HELP!

Eric M.
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes

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.

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Keith Barton
Real Estate Attorney · Cleveland, OH · Member since 2011 · 140 posts · 89 votes
13y

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.

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  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y

    You are right this is not a subordination issue. And it is not a blanket loan issue regarding the different loan numbers.
    The attorney simply used a template of the judgement and did not properly insert the correct information. They left the words Plaintiff in a few spots which should have been changed to Defendant/Counter-Plaintiff and they left the loan number in from the previous case they worked on in a different county. That loan is entirely unrelated to the case.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y

    Eric Michaels You mentioned earlier that you were hoping to piggyback on the borrowers attempts to get the sale overturned. Have you made their attorney aware of the wrong loan reference on the judgment? This is not your average typo and it's not a frivolous claim, as the lender, the borrowers, the amount and the subject loan do not hang together.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by K. Marie Poe:
    ...

    The question remains, though, what to learn from this and how it changes future actions prior to purchasing at sale.

    My answer to that somewhat rhetorical question: To remember what is always important - pay attention to ALL details. Of course, easier said than done at times.

    For the lesson from this specific thread, that would be that there could be a "substitution of plaintiff" wherever a counter-party is involved. I guess that means I'll have to pay closer attention whenever the "U.S.A." (aka IRS) gets named as a defendant which happens a lot (although I somehow doubt they would take over the case).

    Eric Michaels - was the second also in default, such that they were initiating foreclosure (or maybe even had foreclosure in progress)? With seconds, what I most commonly see is that they BID on the foreclosure of the first, until the bid reaches whatever amount (over the first) that the second was hoping to collect.

    0Reply
  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y

    To some comments, yes, we are working with the Homeowner's attorney and sharing information about errors.
    Steve Babiak I agree with the "lesson" you cite for this situation, but not sure I understand the reference to the IRS being involved. They were not involved in this case but have you seen something similar with the IRS?
    The second mortgage/Community Bank was a HELOC, those can have different types of payment schedules and it is not clear if it was "in default" but the homeowner was definitely behind. When the original counterclaim was made, it shows 11K in past due interest and $700 in late fees due on a $569K HELOC.

    I have been trying to see what attributes of this situation allowed/caused this to happen. Few important questions.
    -Why did the first lender/US Bank step aside and allow Community to push the case forward and receive the judgment? Was it because they felt comfortable in their position with plenty of equity over their balance and they figured let the other party deal with the hassle? Or something else? At some point, I will ask their attorney.
    -Why did Community feel the need to do the counterclaim and not file their own suit? This is the most curious to me. One thing to note is that in the original suit, US Bank listed the Community loan as $390K. They had missed a later modification that raised it to $569K. Community might have felt like they needed to answer strongly to assure that they would be recognized for their $569K and not $390K.
    After reading everything, I think it is very possible causing this confusion was a strategy by Community to achieve just what it achieved. Fool bidders into thinking it was a first and trap a dummy into paying too much. The Attorney for Community is being accused by the Homeowner of some trickery and after I have submitted my affidavit as to what happened, he has already made up some stories about his dealing with me. When the process was only about a month old, the homeowner filed a motion to make Community file their own suit and not piggy back on US Bank. That would have only cost Community a month of time to start over, but they fought it hard, and won. I wonder why they fought so hard...and why the judge allowed them to piggy back rather than make it a cleaner case.

    BTW, I am happy to post more docs for those who are interested. It is a public case.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Eric Michaels:
    ...
    Steve Babiak I agree with the "lesson" you cite for this situation, but not sure I understand the reference to the IRS being involved. They were not involved in this case but have you seen something similar with the IRS?
    ...

    No, I haven't seen the IRS do this sort of thing; I just see the USA Attorney General named as a counter-party in many foreclosure actions where there is an IRS lien. And so maybe I will take closer looks at those in the future, based on this situation you encountered.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Eric Michaels - since you are in a judicial area, a lawsuit would have been filed by the second lender once their borrower defaulted. Can you check whether there was such an action filed? Maybe they didn't file because the payments weren't sufficiently behind (state laws set how many days behind before default can be filed), and so they piggy-backed on the first lender's foreclosure. (Just thinking out loud here).

    Sure sounds like they were establishing confusion, rather than just stepping into the bidding on the first.

    0Reply
  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y

    There was no previous suit filed against the homeowner by either lender.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Eric Michaels - I can't say I've purchased as many of these as you have. But from my experience, since I perform my own checking of public records to see the title issues, it's quite uncommon for a borrower to be current on a second and behind only on the first. I have seen that a couple of times, but usually I see the borrower falling behind on the second, and then at a later time falling behind on the first. So when I see a first and a second, I look for lawsuits from both. Maybe that is something to add to your checklist when you pre-screen properties for sheriff sale purchases.

    In your specific case here, not seeing a lawsuit from the second as plaintiff could have been a tip-off that something odd was going on. Admittedly, I wouldn't have expected the change in loan that you saw, but an irregularity like that would have just kept me away (the dollars involved might have too, but that is another matter that more depends on market conditions and demand in that price range).

    Interestingly enough, in my area the properties at sheriff sale are auctioned in sequence based on the lawsuit docket number; lawsuit docket numbers are issued in chronological order based on filing date, with four leading digits to indicate year. So what happens is that the seconds usually are scheduled for auction before the firsts, based on what I mentioned previously in this post. A few times the second and first both were on schedule for the sheriff sale on the same day; when that happens the attorney for the second will usually just postpone, because nobody in their right mind will bid on that second when the first will be auctioned shortly thereafter. Quirks like this are the sorts of things that auction buyers have to understand ...

    1Reply
  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y

    Quick update:
    Court hearing today. The attorney for the lender/counter plaintiff requested more time to respond to our "new issues" brought up. Asked for 21 days and then 21 more for us to respond to him. We got it down to 14 and 14, then the judge admonished him for the many errors (loan numbers, counter plaintiff vs plaintiff) in the Judgement paperwork. He even found more than you all had helped me find. In addition, there were similar errors in the public posting/newspaper ads. The judge told him that he didn't see how he could possibly approve this sale and suggested the lender should consider agreeing to vacate the sale but he could not order that. He had to give them a chance to respond to our filing.

    The judge all but said they couldn't win but even afterward the attorney was unrelenting. Even so I am feeling better about my chances of getting my money back, just have to wait out the process.
    I wasn't happy about waiting an extra month but after the hearing my attorney informed me she had been just diagnosed with Hodgkins Lymphoma. High cure rate and she is upbeat but it helped put things in perspective for me. I can wait another month for the money. Not a big deal in the scheme of things.

    Thanks again to all those who helped.

    2Reply
  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    FINAL UPDATE: Attorney for the lender decided to give up and filed papers to Annul the sale. Took 3 months but I get my money back!

    The key was the mistakes made in the wording of the judgement and public notice, not the fact that it was difficult to determine which loan was up for auction. So I got lucky because some paralegal made mistakes. Otherwise I would have been out 2-300K. It is still very much an issue that you need to go through the FC court documents with a fine tooth comb before bidding. The FC data services cannot be trusted 100%.

    Thanks all for your help.

    4Reply
  • Tim Czarkowski
    Involved In Real Estate · Jacksonville, FL · Member since 2012 · 217 posts · 42 votes
    13y

    Congratulations, what a nightmare.

    0Reply
  • Dustin DuFault
    Investor · Fernandina Beach, FL · Member since 2012 · 95 posts · 14 votes
    13y

    Wow, Congratulations Eric!

    I have to admit to an increased heart rate while reading this thread. I just took title to my first auction sale, so I'm relatively green in that regard. I have been researching real estate for quite a bit longer than that however, and feel like I can uncover most issues myself.

    This was definitely eye opening study on the importance of watching out for nuances in the case history. I can see already I'll be able to learn a lot on the Bigger Pockets forum :)

    Thanks for sharing, and I'm sorry you had to go through all that!

    0Reply
  • Ibrahim Hughes
    Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    Congrats Erik. Lesson learned. And I'm sure you agree that paying legal fees to get this done is a lot better than paying legal fees AND losing that $200-300k.

    0Reply
  • Eric M.
    OP
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    Yep, my attorney was about $2500

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Great news Eric, and definitely worth waiting for!

    What was your plan if the sale hadn't been overturned? Would you have let the senior lien foreclose and walked away? Or would have tried to negotiate a discount on the first? Was the deal at all salvageable?

    You've made statements in other threads regarding your view that buyers taking a property subject to a senior lien have a moral obligation to pay the senior lien. In your case, it would have been an accidental obligation. Given your adamant statements about such obligations, I'm curious what your back up plan was.

    1Reply
  • Keith Barton
    Real Estate Attorney · Cleveland, OH · Member since 2011 · 140 posts · 89 votes
    13y

    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.

    2Reply
  • Dave Wood
    Investor · Sarasota, FL · Member since 2012 · 21 posts · 1 vote
    13y

    @eric michaels- That probably didn't work right because I don't know what I am doing, hopefully I got lucky.

    Wow. Quite a roller coaster. I am new to buying at auction and am doing research through the public records. You mention using a FC data service. Can you recommend one to me?

    Thanks!

    0Reply
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