Opinion ID: 1379630
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Heading: rights of junior lienholders after a defective foreclosure

Text: It is a black letter proposition that a foreclosure sale is effective only against those lienholders who are given notice. Springer, 80 N.M. at 208, 453 P.2d at 378. In Springer, the junior lienholder, who held a mortgage on only a part of the total land on which the senior lienholder held a mortgage, wanted to redeem pro tanto, paying only a proportion of the senior lienholder's mortgage. This court held that the junior must pay the entire first mortgage, because its rights were neither enlarged nor dimished by [a] defective foreclosure. Id. at 210, 453 P.2d at 380. Western Bank cites Springer as authority for its argument that regardless of the notice issue, PHC's only right as a junior lienholder was redemption. Springer, however, contemplated additional rights: Thus, the failure to join Springer as a junior lien holder, left its rights, including its equity of redemption, unaffected and unimpaired. Id. at 208, 453 P.2d at 378 (emphasis added). In addition, in Springer the failure to notice the junior lienholder was unintentional  a result of a third party's error. Were we to extend Springer's holding to the circumstance of intentional failure to notify a junior lienholder, then we would endorse Western Bank's behavior as the norm. Whenever a bank might wish for a speedy foreclosure, it could target some parties for the sale and leave the rest for a later action. Surely the effects of such a holding would be highly prejudicial when the junior lienholders together might hold more equity than the senior, or when the property's value might be at issue. In Moulton v. Cornish, 138 N.Y. 133, 33 N.E. 842 (1893), a New York court faced with the problem of deliberate exclusion of a junior lienholder first discussed the history of a mortgagee's right to foreclosure. The right stemmed from contract and was immediate and absolute upon default. To mitigate the harshness of these legal procedures, equity gave the debtor a right to redeem his property by discharging the debt. Since this right to redemption clouded the now-in-possession mortgagee's right to sell the property, equity would allow an action by the mortgagee to compel the debtor to exercise his right or forever be barred. In Moulton, the court concluded that the first lienholder could not compel redemption in strict foreclosure, but must instead go through a second foreclosure sale. Other courts, faced with the problem of an un intentionally excluded second lienholder, have discussed the problem of intentional exclusion. See McGraw v. Premium Fin. Co. of Missouri, 7 Kan.App.2d 32, 37, 637 P.2d 472, 476 (1981) (remedy of strict foreclosure not available when junior encumbrancer was omitted intentionally); Chandler v. Orgain, 302 S.W.2d 953, 956 (Tex.Civ.App.1957) (when obligor has duty to notify junior lienholder and fails to do so, obligor may become personally liable). Courts have also viewed the problem of a request for reforeclosure against an omitted junior lienholder as a request to the court to exercise its equitable discretion to relieve the purchaser at a defective foreclosure. See Deming Nat'l Bank v. Walraven, 133 Ariz. 378, 379, 651 P.2d 1203, 1204 (Ct.App.1982) (court speaks of allowing a subsequent reforeclosure). Finally, courts have held that the mortgagee, in exercising a power of sale by foreclosure, must act in good faith, not only for the benefit of the mortgagor, but also for the subsequent lienholders. Seppala & Aho Constr. Co. v. Petersen, 373 Mass. 316, 321, 367 N.E.2d 613, 616 (1977). Taking these principles together, we first suggest what our approach would be to an unintentional failure to include a junior lienholder, and then we apply these principles to the facts here of an intentional omission. Our reasons for this are twofold: the usual case in this area addresses unintentional omission, and many fact patterns will fall beneath that rubric; and the remedy for unintentional omission establishes the baseline of a junior lienholder's rights and puts the remedy for an intentional omission in the correct perspective. When the mortgagee inadvertently fails to notify a junior lienholder, the mortgagee's equitable rights are not diminished and he or she may reforeclose on the junior. By reforeclose we mean that, in the trial court's discretion, the judgment may operate to extinguish the junior lien, with only the right to redeem remaining in the junior lienor, or in a proper case, the senior lienor may be required to conduct a new foreclosure sale at which any junior lienors will be entitled to bid. The omitted junior lienholder, however, should suffer no burden that did not exist at the time of the foreclosure sale to which he or she was entitled notice. The remedy for an inadvertent mistake is the fixing in time of all parties' rights. If Western Bank had not given notice through inadvertence or third-party error, the bank would have been entitled to require PHC to redeem or be foreclosed, but the junior lienholder could not be compelled to pay the costs or expenses of the defective foreclosure. The amount to be paid would have been determined by the mortgage debt, Quinn, 129 So. 690, 693, fixed at the time of the foreclosure sale, when the mortgagee would have gained the benefits of occupation. No mortgage or statutory interest could be added to the cost of the redemption from that date. In this case, however, Western Bank intentionally failed to notify a number of junior lienholders. In this regard we find compelling the Arizona Court of Appeals' logic in Deming, 133 Ariz. at 379, 651 P.2d at 1204, and hold that Western Bank's request that PHC's lien be declared foreclosed by the previously entered judgment was equitable in nature. Here, Western Bank made no showing of excuse or inadvertence; its behavior was inequitable. Western Bank may not, therefore, have the advantage of the court's equitable powers. We remand to the district court to reinstate PHC's judgment lien that was unaffected by the defective foreclosure and unaffected by Western Bank's subsequent attempt to have PHC's lien declared foreclosed by virtue of the previous foreclosure decree and sale. IT IS SO ORDERED. SOSA, C.J., and MONTGOMERY and FRANCHINI, JJ., concur. RANSOM, J., dissents and files opinion.