The Risk Manager, Winter 2009

ByLawReader Senior Editor Stan Billingsley

Editor’s Note: This article is one of a series that LawReader.com has agreed to provide for Lawyers Mutual’s newsletter as a bar service. LawReader.com provides Internet legal research service specializing in Kentucky law. For more about LawReader go to LawReader.com.

In a foreclosure suit the foreclosing plaintiff must name as parties all those known to have an interest in the property at the time the petition is filed, even if that interest is unrecorded . This includes holders of mortgages, tax liens, lis pendens, and in some instances bankruptcy liens. There is no statutory requirement to name those who acquire a lien after the filing of the foreclosure suit and lis pendens notice of foreclosure (Minix v. Maggard, 652 S.W.2d 93 (Ky.App., 1983)). By joining the lien holder in the foreclosure suit the existence of the lien is included in the judicial sale notice. The court then resolves the priority of liens and claims.

Of special concern are lis pendens on the real estate to be foreclosed. Recall that a lis pendens is notice that there is a lawsuit that concerns the title to real property or some interest in the property. A lis pendens must include a legal description of the real property and the lawsuit must involve the property. The notice is effective from the time it is recorded in the county court clerk's office (Breslin v. Gray, 143 S.W.2d 452; 283 Ky. 785 (Ky, 1940)). This recording gives notice to the defendant (debtor) who owns the real estate that there is a claim on the property.

Recording the lis pendens also informs the general public, to include those interested in buying or financing the property, that there is a potential claim against it. The effect of a lis pendens on a foreclosure sale is illustrated in Cumberland Lumber Co. v. First and Farmers Bank of Somerset, Inc. (838 S.W.2d 403 (Ky. App., 1992)). There the Court held that “… one who acquires an interest in property, whether by purchase, lien or other encumbrance, after the filing of a lis pendens notice, takes that interest subject to the results of the litigation. Actual knowledge of the pending action is not necessary to bind the pendente lite purchaser.”

To avoid a claim of malpractice by a client or third party in bringing a foreclosure action it is essential that all liens, including lis pendens, be identified. To do this the chain of title to the property must be meticulously searched. If you are not experienced in running titles, employ someone who is.

I recommend that the lawyer for the plaintiff first carefully search the title. Next prepare and file the foreclosure suit. Then file the lis pendens notice for the foreclosure suit. Always double back to the clerk’s office in a few days to confirm that some error in the clerk’s office did not result in an intervening lien being filed. If an intervening lien is filed, the complaint can be amended. This confirmation is a critical part of risk managing a foreclosure suit because too frequently liens are received by a county court clerk, but are not promptly entered into the appropriate lien book. More than once an unlucky lawyer has been blindsided by a lien that was filed prior to his title search, but recorded afterwards.

Local lawyers are often retained to represent a bank or a large law firm handling a high volume of foreclosure suits at foreclosure sales. These clients make malpractice claims if the sale is missed, the bid is not in exact accordance with instructions, or the representation is in any way unsatisfactory. They take the position that the amount they were willing to bid is the fair market value of the property. Often, the local appraisal and the actual value of the real estate are considerably less. Should you find yourself facing such a claim be aware that under some circumstances it is possible to set aside the sale notwithstanding the error. What follows is an overview of the possible claims repair efforts that should be considered.

When an attorney makes an error regarding a foreclosure sale he may make a motion to set aside the sale. Granting this motion is within a trial court’s discretion if supported by adequate grounds. Grounds for set aside include:

• A trial court may set aside a sale if the sales price is so inadequate in price as to “shock the conscience of the court” or the sale “create(s) the presumption of fraud” or “irregularity” and that “substantial evidence of unfairness” is shown. Maynard v. Boggs, 735 S.W.2d 342 (Ky. App., 1987).
• A Master Commissioner’s error in advertising the property requires that the sale be set aside unless it is clear that no prejudice resulted. An example of this is when a series of advertisements published regarding a judicial sale of property listed the incorrect date on which the sale was to occur. Carnett v. Wright (Ky. App., 2003), Unpublished, NO. 2002-CA-001033-MR.
• It is well established in Kentucky that "the [c]ommissioner of the court must conduct a sale according to the terms and conditions of the judgment. If he does not, the sale must be set aside unless it is clear that no rights of an interested party were prejudiced by the deviation." Carnett v. Wright (Ky. App., 2003), Unpublished, NO. 2002-CA-001033-MR.

One lawyer got burned when he relied on the oral representation from someone in the Master Commissioner’s office that he would be notified of the sale date. He received no notification and missed the advertised date. The Court in denying his motion for set aside held that “we do not consider appellant's counsel not receiving special notice of the sale date as even close to sufficient reason for setting aside the sale, notwithstanding the assurance given his secretary by the mysterious individual who answered the Master Commissioner's telephone. Kissell Co. v. Chadwick, 737 S.W.2d 710 (Ky. App., 1987). There are a number of Kentucky cases on foreclosure set aside motions. Start your research with Ky. Joint Land Bank Lexington v. Fitzpatrick, 36 S.W.2d 25; 237 Ky. 624 (Ky, 1931).

The best risk management for foreclosure sale representations is either claims avoidance or claims prevention. The fee paid a local lawyer is small and the malpractice exposure large. Is a $100 fee worth the risk of suffering a malpractice claim and paying a deductible of several thousand dollars – or is this business better avoided? If you accept the representation, prevent malpractice by careful calendaring. Have at least a dual calendaring system (manual or computer) with your secretary keeping a matched calendar. Establish a third party tickler system as an additional safeguard. Calendar all critical dates with adequate lead times for preparation. Conduct a personal, monthly review of all foreclosure sales matters.