By Melanie J. Thompson, Esq. and Michele M.Bradford, Esq.

Orlans PC *

USFN Member (DE, MA, MI, DC, FL, MD, NH, PA, RI, VA)

Delaware Superior Court Judge Danielle Brennan issued a decision on June 1, 2023, that has important implications for junior lienholders. Previously, lenders foreclosing in second position were entitled to the proceeds of Sheriff sales. The new decision, REO Trust 2017-RPL1 v. Short Sale, LLC, provides that sale proceeds must be distributed to the senior lienholder first, and then any remaining proceeds will be distributed to the foreclosing junior lienholder.

The June ruling originally stated that if the sale proceeds were insufficient to satisfy both the senior lien as well as the foreclosing junior mortgagee’s lien, the property would remain encumbered by its mortgage. Subsequently, a motion for reargument was filed, and the Court issued an amended ruling on August 1, 2023, deleting the sentence regarding retaining the mortgage lien. Accordingly, whether sale proceeds are sufficient to satisfy the debt owed to a foreclosing junior mortgagee, the junior mortgage will be divested by the sale.

This represents a major change in Delaware foreclosure law. Junior lienholders may elect not to foreclose unless there is sufficient equity in the property to pay off the superior liens as well as the foreclosing lien.  Mortgagors may be more likely to default on junior mortgages, knowing that lenders are unlikely to foreclose. Real estate purchasers may be less likely to bid on properties, given the uncertainty surrounding junior mortgage foreclosure sales.

The foreclosing junior mortgagee filed an appeal on August 28, 2023, which could take six to 12 months before the Delaware Supreme Court issues a final decision. The Superior Court’s ruling may likely be overturned.

In response to the Court’s ruling, the Sheriff of New Castle County announced new rules for Sheriff sales, retroactive to June 1, 2023. The Sheriff now requires a 40-year title search when scheduling all foreclosure sales. If the foreclosing lender is in a junior position, they are not permitted to credit bid. Foreclosing lenders in a junior position who are the winning bidder will be required to post 20% of the high bid amount at the time of sale. The remaining 80% of the bid must be paid by the listed due date in the form of an attorney check or cashier’s check. Sale proceeds will only be distributed by the Sheriff to foreclosing lienholders in first position.  Where the foreclosing lienholder is in a junior position, the Sheriff will turn over the sale proceeds to the Court clerk, and the foreclosing lienholder must petition the Court for the proceeds. It is unknown how the Court would rule on such a petition or whether the Court will distribute funds. The Court may wait for the Supreme Court’s decision on appeal before disbursing funds.

The Sheriff of Kent County will hold sale proceeds for junior lienholders until the appeal is decided. The Sheriff of Sussex County has not issued a statement on how he will proceed in response to the Court’s decision.

The Superior Court’s ruling is very harsh for junior mortgagees. Since the outcome of the appeal is unknown, the distribution of proceeds from junior mortgagee sales is in limbo, which also affects senior mortgagees. The requirement to provide the Sheriff with a 40-year title search will increase costs for all lienholders proceeding to sale in New Castle County.

We do not recommend proceeding to sale on junior liens at this time due to the uncertainty as to whether the debt will be satisfied.

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USFNews - Oct. 18

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