Search Twice, Foreclose Once

The old adage of "measure twice, cut once" can be appropriately adapted to lien foreclosure actions. Failing to identify all lienholders, including those considered to be junior lienholders, and naming them as parties to a foreclosure action can be costly. A bank recently learned this valuable lesson. In Deutsche Bank National Trust Co. v. Mark Dill Plumbing Co., 903 N.E.2d 166 (Ind.Ct.App. 2009), the bank foreclosed on its mortgage without adding three junior judgment lienholders to the foreclosure action. After the bank purchased the property at a Sheriff’s sale, it learned of the junior lienholders. In order to quiet title on the property, the bank filed an action to remove the judgment liens belonging to the junior lienholders. The junior lienholders requested that the bank's equity of redemption be foreclosed and another Sheriff's sale be held to satisfy the amounts owed to them.

The trial court entered summary judgment on behalf of the junior lienholders and ordered the property to be sold again at Sheriff's sale On appeal, the court rejected the bank's argument that the junior liens should simply be removed from the title of the property under a theory of "strict foreclosure." In Indiana, "strict foreclosure" can only be resorted to under special and peculiar circumstances. The court found no special or peculiar circumstances to exist. The junior liens were properly recorded and the failure to add the junior lienholders to the forfeiture action was a result of the bank's negligence.

When junior lienholders are not made parties, the foreclosure and sale cannot be enforced against them. The purchaser at the foreclosure sale simply stepped into the shoes of the original holder of the real estate and took such owners’ interest subject to all existing liens and claims against it. The Court concluded that these junior lienholders had valid liens against the title held by the bank and they were entitled to have the property sold again to satisfy their liens.