Mortgages/security devices - Parties to the proceeding

Learning Outcomes

This article explains parties to mortgage and security device proceedings, including:

• Identifying and classifying all persons with interests in mortgaged property—mortgagors, current owners, junior and senior lienholders, guarantors, and future interest holders—for purposes of a foreclosure or other enforcement proceeding
• Distinguishing necessary, proper, and indispensable parties and predicting, on typical MBE-style fact patterns, whose interests will be bound, cut off, or left untouched by the judgment
• Evaluating the consequences of omitting junior or senior interest holders, including effects on marketable title, surviving liens, redemption rights, and access to foreclosure sale surplus
• Relating each party’s procedural status to equitable and statutory redemption, surplus distribution, and deficiency judgments so you can track both property and personal-liability outcomes
• Applying joinder and priority principles step by step to determine who must be joined to deliver clear title to the foreclosure buyer and who may be safely left out of the action
• Spotting common exam traps such as unjoined current owners, unrecorded but known junior interests, and foreclosures brought by junior rather than senior mortgagees, and selecting the answer that most accurately states the surviving interests

MBE Syllabus

For the MBE, you are required to understand rules about parties in actions involving mortgages and other security devices, with a focus on the following syllabus points:

• Who must be joined in judicial or power-of-sale foreclosures to cut off interests in the property
• Distinctions between necessary, proper, and unnecessary (and, in civil procedure terms, indispensable) parties
• Consequences of failing to join junior lienholders, current owners, tenants, and senior lienholders
• Interaction between parties’ status and equity of redemption, statutory redemption, and surplus proceeds
• Effect of foreclosure judgments and sales on parties personally liable on the note versus parties with only an interest in the land

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. In a mortgage foreclosure action, which of the following is a necessary party?
   1. The mortgagor
   2. The mortgagee
   3. Any junior lienholder
   4. All of the above
2. If a junior lienholder is not joined in a foreclosure proceeding, what is the effect on that party’s interest?
   1. The junior lien is extinguished
   2. The junior lien survives the foreclosure
   3. The junior lien is transferred to the proceeds
   4. The junior lienholder loses the right to redeem
3. In a foreclosure action, which party is not required to be joined?
   1. The mortgagor
   2. The mortgagee
   3. A senior lienholder
   4. The current owner of the property

Introduction

In any proceeding involving a mortgage or other security device—especially foreclosure—identifying the correct parties is critical. The law distinguishes between parties who must be joined (necessary parties), those who may be joined (proper parties), and those whose interests are unaffected by the proceeding. Failure to join the correct parties can affect the validity of the judgment, the marketability of title, and the rights of redemption or surplus proceeds.

Most foreclosure questions on the MBE are really priority and parties questions in disguise. You must know:

• whose interests a particular foreclosure can cut off, and
• whose interests remain on the property after the foreclosure sale.

Key Term: Foreclosure Sale
A court-supervised or power-of-sale auction of the mortgaged property to satisfy the debt secured by the mortgage or deed of trust.

In almost all jurisdictions, foreclosure is primarily an in rem proceeding: it is aimed at the property and the interests in that property, not automatically at personal liability on the promissory note. That is why understanding which interest holders must be joined is more important for the MBE than the procedural details of the foreclosure itself.

Parties to a Mortgage Proceeding

Necessary Parties

Certain parties must be joined in a foreclosure or enforcement action for the judgment to bind them and to ensure clear title after sale.

Key Term: Necessary Party
A person whose interest in the mortgaged property will be directly affected by the outcome of the proceeding and whose absence would prevent complete relief as to the property or risk multiple or inconsistent obligations.

The following are generally necessary parties in a mortgage foreclosure:

• The mortgagor (borrower)
• The current owner of the property (if different from the mortgagor)
• All persons holding junior interests (e.g., junior mortgages, judgment liens, subordinate security interests, some easements) that are subject to being cut off by the foreclosure

Each category requires a bit of unpacking.

Mortgagor and Current Owner

The mortgagor originally gave the mortgage and usually signed the promissory note. If the mortgagor later conveys the property, the current owner holds the equity of redemption.

Key Term: Equity of Redemption
The mortgagor’s and other interest holders’ right, before the foreclosure sale, to stop foreclosure and reclaim the property by paying the full amount due (plus costs and interest).

• If the mortgagor still owns the property, joining the mortgagor is enough to bind both personal liability (if sought) and the property interest.
• If the mortgagor has conveyed the property, the record owner at the time of suit is a necessary party because that owner’s equity of redemption and title are being cut off.

Common MBE twist: A borrower (O) gives a mortgage to Bank, then deeds Blackacre to B “subject to” the mortgage. Bank later forecloses. To cut off B’s ownership, Bank must join B as a defendant; otherwise B’s ownership interest and equity of redemption survive.

Junior Lienholders and Other Subordinate Interests

Key Term: Junior Lienholder
Any party whose interest in the property is subordinate to the mortgage being foreclosed and who risks losing that interest if joined and the property is sold.

Examples:

• Second and third mortgages
• Judgment lien creditors
• Certain mechanics’ and materialmen’s liens (depending on state priority rules)
• Purchasers at later foreclosure or execution sales whose interests are junior to the mortgage in question

All junior lienholders whose interests the plaintiff wants to cut off are necessary parties. If they are joined and proper notice is given, the foreclosure will terminate their interests, and their protection shifts to the right to share in any surplus proceeds.

Key Term: Surplus Proceeds
The portion of the foreclosure sale price that remains after paying the foreclosing mortgagee and the costs of sale, ordered to junior lienholders and then to the mortgagor (or owner).

Even unrecorded junior interests can be necessary parties if the foreclosing mortgagee has actual notice of them. On the MBE, however, you can usually assume the examiners are focused on recorded junior interests and obvious possessory interests (e.g., a buyer in possession who recorded).

Future Interest Holders

Holders of vested remainders, executory interests, or other future interests that are subordinate to the foreclosed mortgage are ordinarily treated as junior interest holders. They are necessary parties if their interests will be cut off.

Example: “To A for life, then to B.” A grants a mortgage. A’s mortgage is foreclosed. To cut off B’s remainder, B must be joined as a defendant.

Key Term: Indispensable Party
In civil procedure language, a party whose absence is so prejudicial that the court cannot, in equity and good conscience, proceed without them; in mortgage cases this typically includes the current owner and all junior interests the plaintiff seeks to extinguish.

For MBE purposes, treat current owners and targeted junior lienholders as effectively indispensable: the foreclosure cannot cut off their interests if they are omitted.

Proper Parties

Other parties may be joined but are not strictly required for a valid foreclosure.

Key Term: Proper Party
A person whose interest is not directly affected by the foreclosure of the particular mortgage, but whose participation might be useful for complete adjudication or convenience.

The classic example is a senior lienholder.

Key Term: Senior Lienholder
A creditor whose lien has priority over the mortgage being foreclosed (e.g., an earlier-recorded mortgage or tax lien).

Senior lienholders are proper but not necessary parties:

• Their senior interests are not cut off by a junior foreclosure.
• The foreclosure buyer takes subject to the senior lien whether or not the senior lienholder was joined.
• Joining them may be convenient (e.g., to determine payoff amounts or priorities among multiple seniors), but their absence does not affect the validity of the sale as to joined parties.

Other typical proper parties:

• Guarantors on the principal note (if the plaintiff wants a personal judgment)
• Parties with independent disputes about the property (e.g., boundary claimants) whose rights will not be cut off by the foreclosure

Unnecessary Parties

People with no interest in the property itself—general unsecured creditors, for example—are unnecessary. Joining them does nothing for title and is not required for a valid foreclosure judgment.

Effect of Omitting a Party

The effect of omission depends on the type of party.

Omission of a Necessary Party (e.g., Junior Lienholder, Current Owner)

If a necessary party (such as a junior lienholder or the current owner) is omitted from the proceeding, their interest is not extinguished by the foreclosure. The purchaser at the foreclosure sale takes subject to the omitted party’s interest.

This has two predictable consequences:

• Title is not “clean”—the omitted interest still encumbers the property.
• The omitted party retains both its lien or ownership interest and its equity of redemption.

The foreclosure is still valid as between the plaintiff and the joined defendants, so the foreclosing mortgage is satisfied from the sale proceeds, but the omitted junior lienholder can usually foreclose its own lien or redeem from the foreclosure buyer.

Omission of a Proper Party (e.g., Senior Lienholder)

If a proper party (such as a senior lienholder) is omitted, their interest remains unaffected, and the foreclosure proceeds as to the interests that are joined.

The key exam point: A foreclosure of a junior mortgage does not affect senior mortgages, whether or not senior lienholders are named.

Redemption and Surplus Rights

Key Term: Statutory Right of Redemption
A post-sale right in some states allowing the mortgagor (and sometimes others) to redeem the property from the foreclosure buyer within a specified time after the sale by paying the sale price plus costs.

All parties whose interests are being foreclosed (mortgagor, junior lienholders, and current owner) have:

• A pre-sale equity of redemption; and, in some states,
• A post-sale statutory right of redemption.

If they are properly joined and the sale is held, their property interests are cut off, but their rights to:

• share in surplus proceeds, and
• assert any deficiency judgment claims or defenses

are preserved and shift to the proceeds or the personal judgment.

Key Term: Deficiency Judgment
A personal judgment against a party liable on the note for the difference between the debt and the foreclosure sale price when the sale price is insufficient to satisfy the debt.

Who can redeem?

• The mortgagor and any grantee who took subject to or assumed the mortgage
• Junior lienholders
• In statutory redemption states, sometimes even the foreclosure buyer’s grantees (subject to statute)

If a necessary party is omitted, that party retains its full redemption rights as if no foreclosure had occurred, and the foreclosure buyer must deal with that party’s interest.

Joinder Rules and Civil Procedure Overlay

Joinder is governed by general civil procedure rules (e.g., FRCP 19 in federal court), using the concepts of necessary and indispensable parties. In the mortgage setting, the property rules largely determine who falls into each category.

Courts will usually require joinder of:

• the record owner, and
• all known junior interest holders,

before entering a final foreclosure judgment. If a truly indispensable party cannot be joined (e.g., sovereign immunity), the court may decline to proceed at all.

Key Term: Indispensable Party
A party so central to the dispute that, if they cannot be joined, the court must dismiss the action rather than risk prejudicing their rights or producing inconsistent obligations.

On the MBE, the analysis usually stops at: “Will this person’s interest be cut off by the foreclosure? If yes, they are a necessary (and effectively indispensable) party.”

Worked Example 1.1

A bank holds a first mortgage on Blackacre. The owner, O, later grants a second mortgage to Lender2. O defaults on the first mortgage, and the bank files a foreclosure action, naming O but not Lender2. The property is sold at foreclosure. What is the status of Lender2’s interest?

Answer:
Lender2’s (the junior mortgagee’s) interest is not extinguished by the foreclosure because Lender2 was not joined as a party. The purchaser at the foreclosure sale takes the property subject to Lender2’s mortgage. Lender2 still has both its lien and its equity of redemption.

Worked Example 1.2

Suppose a senior mortgagee is not joined in a foreclosure action by a junior mortgagee. What happens to the senior mortgage?

Answer:
The senior mortgage remains on the property. The foreclosure by the junior mortgagee does not affect the senior mortgagee’s rights, and the purchaser at the sale takes subject to the senior mortgage. The senior lienholder was only a proper party, not a necessary party.

Worked Example 1.3

Owner (O) borrows from Bank and gives Bank a mortgage on Blackacre. Later O sells Blackacre to Buyer (B), who assumes the mortgage. O then defaults. Bank sues only O on the note and forecloses, naming O but not B. After the sale, Bank seeks a deficiency judgment against O. What is the status of B’s ownership?

Answer:
B’s ownership is unaffected by the foreclosure because B, the current owner and holder of the equity of redemption, was not joined. The foreclosure sale can satisfy Bank’s claim against O and may support a deficiency judgment against O personally, but as to the land, the buyer at the foreclosure sale takes subject to B’s title and equity of redemption. Bank should have joined B as a necessary party to cut off B’s ownership interest.

Worked Example 1.4

First Bank holds a $200,000 first mortgage. Second Bank holds a$50,000 second mortgage. The property is worth $240,000. First Bank forecloses, properly joining Second Bank. The property sells for$230,000 at the foreclosure sale. How are the proceeds distributed?

Answer:
Sale proceeds pay, in order:

1. Costs of sale and foreclosure;
2. First Bank’s debt ($200,000);
3. Any remaining surplus (here, roughly $30,000 minus costs) to Second Bank up to its$50,000 claim;
4. Any remaining surplus after junior liens to the mortgagor or current owner.
   Because Second Bank was joined, its lien is cut off, but its protection shifts to its right to the surplus proceeds.

Exam Warning

Failing to join all necessary parties in a foreclosure action can result in the purchaser taking title subject to omitted interests. Always check for junior lienholders, future interest holders, and the current owner, and classify each as necessary, proper, or unnecessary.

Revision Tip

When analyzing a foreclosure question, list all parties with any interest in the property. For each one, ask: (1) Is their interest junior or senior to the mortgage being foreclosed? (2) Will the foreclosure attempt to cut off that interest? From there, classify each party as necessary, proper, or unnecessary for the proceeding.

Key Point Checklist

This article has covered the following key knowledge points:

• The mortgagor and the current record owner (if different) are necessary parties to a foreclosure action because their equity of redemption and title are being cut off.
• All junior interest holders (e.g., junior mortgages, judgment liens, subordinate future interests) whose interests the plaintiff seeks to extinguish are necessary parties.
• Senior lienholders are proper but not necessary parties; their liens are not affected by the foreclosure, and the buyer takes subject to them whether or not they are joined.
• Omission of a necessary party means that party’s interest and redemption rights survive the foreclosure; the purchaser takes subject to that interest.
• Omission of a proper party leaves that party’s interest unchanged but does not affect the validity of the foreclosure as to joined parties.
• Equity of redemption belongs to the mortgagor, current owner, and junior lienholders; some states also provide a statutory right of redemption after sale.
• Proper joinder of necessary parties is essential to obtain clear title through a foreclosure sale and to reallocate junior interests into surplus proceeds.
• Deficiency judgments concern personal liability on the note and require joining parties personally liable, but are conceptually separate from the parties needed for an effective in rem foreclosure.

Key Terms and Concepts

• Necessary Party
• Proper Party
• Junior Lienholder
• Senior Lienholder
• Equity of Redemption
• Statutory Right of Redemption
• Foreclosure Sale
• Surplus Proceeds
• Deficiency Judgment
• Indispensable Party