[WSBARP] Foreclosure Fun!

Mon Oct 30 09:45:48 PDT 2017

The theory is, of course, that the lender deserves their security back (or its value) and not a windfall.  So in that sense, yes, it is #3 but the 'full value' of #3 below - where it equals just paying off the juniors under your #1, I have never seen happen - but then again, in this market...

Traditionally, if the first is out bid, the Trustee tenders the funds into Court and the junior lienors show up to fight over what is left.  In most cases, it is hard to imagine a junior lienor showing up to buy the property subject to the first by outbidding your second.  That said, I have had sales where the "I've attended a seminar" buyers show-up and think that the property's only debt really the is $28,000.00 owed on the HELOC and I've had to be VERY clear when calling a sale that there is a first out there.  In your case, with a double FMV to debt, you are pretty likely to run into actual sophisticated bidders who understand what is going on and see the equity.  I do not actually see how your client can avoid that result.  There are some rather questionable ethical tactics about where a sale is set and how many times it is postponed in order to diminish interest that I have seen happen but - if you're acting as the Trustee, that's a huge problem to me.  If you're representing your client only, I suppose that's somewhere on the spectrum of zealous advocacy.

One thing you might consider, if you're only representing the Lender, is just seeing if you can negotiate down the juniors based on the impending foreclosure.  I am sure you have thought of that, and it is only worth doing in fact specific cases that do not sound a lot like yours, but just throwing it out there.

Lastly, just mentioning that I know of at least one case where an attorney went after a lender for only foreclosing on the second when there was their first in default as well, arguing that it was being done specifically to prejudice the rights of junior lienors and harm the debtor while the Lender got a windfall.  I do not believe the matter ever reached Court as, if my faulty memory serves, the Lender itself failed in the interim, but it is an interesting argument.

Anyway, not Patrick but there's my two cents.

Sincerely,

Richard L. Holland

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From: wsbarp-bounces at lists.wsbarppt.com [mailto:wsbarp-bounces at lists.wsbarppt.com] On Behalf Of Paul Neumiller
Sent: Friday, October 27, 2017 3:37 PM
To: 'WSBA Real Property Listserv' <wsbarp at lists.wsbarppt.com>
Subject: Re: [WSBARP] Foreclosure Fun!

Hold on.  (I am doing a nonjudicial foreclosure.)  Are you saying that the surplus funds go to pay off the junior lienholders that I thought I was going to wipe out?  So:

  1.  If Creditor doesn't go to sale, then Creditor ends up paying off the junior lienholders in order to sell the property free and clear. (Not a Good Result)
  2.  If Creditor goes to sale and no one bids, junior lienholders get wiped out and Creditor gets the property. (A Good Result but may be unlikely considering FMV of property is double the loan amount.)
  3.  If Creditor goes to sale and someone bids and if Creditor has to bid up to or over the amount of junior liens, then Creditor gets the property but also has paid the amount of the junior liens.  (Basically the same result as option #1 above.  Not a Good Result).

Are we having fun yet?  I have some extra facts that may now come into consideration.  Creditor, for reasons I can't disclose, reaaaally wants the property back.  Also, Creditor actually has two deeds of trust recorded against the property and I am foreclosing on the second one right now.  The plan is that if Creditor is outbid at the foreclosure sale under the second Deed of Trust, Creditor was then going to foreclose under the first deed of trust.  The fact that the property is still subject to the lien of Creditor's first deed of trust may dampen third party bidders at the sale under the second deed of trust.

Patrick, is this also your analysis?

[Paul Neumiller]

From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> [mailto:wsbarp-bounces at lists.wsbarppt.com] On Behalf Of Patrick McDonald
Sent: Friday, October 27, 2017 2:34 PM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Foreclosure Fun!

The junior lienholders would be entitled any surplus funds before the owner. If you foreclose nonjudicially, see RCW 61.24.080(3). If you foreclose judicially, see RCW 61.12.150.

Patrick McDonald

_______________________
Pody & McDonald, PLLC
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Seattle, WA 98101-3106
T: 206-467-1559
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> [mailto:wsbarp-bounces at lists.wsbarppt.com] On Behalf Of Paul Neumiller
Sent: October 27, 2017 2:15 PM
To: wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>
Subject: [WSBARP] Foreclosure Fun!

Thinking aloud here and need confirmation (or a slap down if needed).  Representing Creditor, I started a foreclosure action against Debtor.  Creditor accepted a Deed-in-Lieu in order to get possession quickly (and start repairing the property).  The DIL contains non-merger language so the lien of the deed of trust did not merge into the fee ownership of the property. Trustee Sale Guarantee discloses large liens against property.

So I am thinking through the ramifications if Creditor continues with the foreclosure action.  The benefit is eliminating the large liens.  The only risk that I have been able to identify (other than my additional atty fees and the time delay) is if someone tries to outbid Creditor at the foreclosure sale.  BUT, it seems to me that any excess money goes to the owner of the property so if someone successfully comes in with $1 million then Creditor gets the surplus funds as the owner (Good Result).  And, if Creditor wants to be the successful bidder at the foreclosure sale, Creditor could bid the price up even higher than $1 million because the surplus funds go back to Creditor anyway as owner of the property (again, Good Result).

I am missing something here?  I got the non-merger language blessed by the title company (and the underwriter) so I am fairly confident the non-merger language is effective.  The title company agrees with my analysis but I still have the fear of the unknown.  Is my analysis correct?  Are there other risks I need to consider in foreclosing on property already owned by the foreclosing lender?

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