We are often asked what a lender should do when its second mortgage is being foreclosed by a senior lender. The second mortgage is almost always partially or entirely unsecured and there is little hope that the borrower will repay the loan. Understandably, lenders do not want to “throw good money after bad” by paying attorneys to file pleadings in court only to have the court eventually terminate the junior lender’s mortgage. Regardless of the junior lender's action, termination will occur.
However, the failure of a junior lender to take any action will likely result in the junior lender being unable to make a claim to any surplus proceeds if the property sells for more than what is owed to the senior lender. A December 16, 2014, case from the appellate court underscores the point.
In JP Morgan Chase Bank, N.A. v. Bank of America, N.A., an Illinois appellate court held that because Bank of America had failed to take part in the foreclosure of its junior lien, its right to claim any of the $459,857.53 in surplus funds was foreclosed and eliminated. There was no dispute in the case as to Bank of America’s lien, its amount or priority. However, Bank of America allowed JP Morgan Chase Bank’s foreclosure to proceed without filing an appearance or an answer and Bank of America did nothing to prove its lien amount or position to the court. Because Bank of America sat on its hands throughout the foreclosure case, it lost its right to claim the surplus funds.
Cases like this are prime examples of why junior lenders should always take part in foreclosure cases and ensure that their junior liens are proven in court so that they can have the right to any surplus funds from the sale. Sales that result in surplus funds are uncommon, but they do occur.
Bank of America spent tens of thousands of dollars at the trial court level and on appeal in order to try to have a right to obtain the $459,857.53 in surplus funds, but it could have avoided the entire problem by simply having an attorney answer the senior lender’s foreclosure complaint and had its junior mortgage proven in the case.