Navigating Junior Liens in Ohio Foreclosure Cases

Ohio courts have jurisdiction in foreclosure cases if, among other things, all necessary parties are before the court, including all parties with an interest in the subject property. The appearances of junior priority liens on preliminary and subsequent title reports when foreclosing from a senior lien position guide the actions of foreclosure counsel and direct the actions relative to proceeding a foreclosure case.  Similarly, any foreclosure action initiated by a junior/inferior priority lienholder requires a review of the rights afforded any priority creditors to the action.  In either case it is important to review with counsel the implications of all liens and/or exceptions indicated on a title report, whether appearing on initial title reports or after the lis pendens date. The following is inclusive, but not exhaustive, as some of the more complex issues relative to junior liens and priority are fact determinative.

Foreclosing From a Priority Position

Through judicial foreclosure process, Ohio law provides a priority creditor the right to extinguish the rights in a property of all parties to the action with an interest. That includes the mortgagor, the mortgagee, subsequent holders of title, junior lienholders, and all other claimants whose claims or interests in the property attached subsequent to the mortgage and prior to the filing of the foreclosure petition.  In order to foreclose or cut off any such right of a junior lien, and in order to convey it to the bona fide purchaser for value, the party holding the right must be joined in the action. If he is not joined, that right survives in him and the bona fide purchaser for value takes subject to it, clouding a conveyance of title free and clear of encumbrances. Thus, the holder of any such right or interest is a "necessary party" in order to foreclose and convey his right or interest¹.

Since Ohio is a largely race/notice state as to the priority of recorded instruments, the later-recorded deed or mortgage would lose priority to an instrument intervening beforehand with only few exceptions (taxes, mechanic’s liens).  All liens held and properly recorded against a property prior to the filing of a foreclosure case are necessary parties to a foreclosure.  When foreclosing from a priority lien position, the interest(s) of properly named junior lienholders are extinguished at confirmation of sale, subject to the limited exceptions.  Answering junior lienholders often assert their interest and are transferred to the proceeds of sale, if any, in priority of their recorded instrument(s).  The exceptions to the general rule, though, are as follows:

Taxes - Unpaid property taxes become a lien against the property and that lien in favor of the County has priority over a previously recorded mortgage or other property interest. (R.C. 5721.10)

Mechanic’s Liens - The Ohio mechanic’s lien statute and related case law states that regardless of when work was performed, a lien against the property takes effect for priority purposes as of the first date of visible work on the project.  (R.C. 1311.13)

Foreclosure From a Junior Lien / Inferior Priority Position

In 2018 Governor Kasich signed an amendment to Ohio’s Residential Mortgage Lending Act revising the rights and notice procedures related to foreclosing from a junior lien position.  The rights of the senior lienholder, however, have not changed.  From a priority lien position, Ohio creditors hold the right to foreclose their interest and marshal all liens held against the property via foreclosure sale as discussed, above.  Junior lien initiated foreclosures must name senior and all other lienholders and interest holders.  In a foreclosure action, Ohio law provides that a priority creditor may require any foreclosure sale of the property be made ‘subject to a prior lien’ and that the priority lien is ‘unaffected’ by the sale.  (R.C. 2329.20)  This  right must be asserted in a responsive pleading, together with subsequent notice requirements throughout the foreclosure process.  

For mortgage lienholders in a junior priority position without a priority dispute in a foreclosure initiated by the priority creditor, it is important to timely assert the junior interest, proceed with seeking judgment as applicable, and be transferred to the proceeds of sale in proper priority position.  

For mortgage lienholders in a senior priority position without a priority dispute in a foreclosure initiated by a junior lien, it is important to timely assert the senior interest, proceed with seeking judgment as applicable, or, assert the right of a senior priority lienholder to have the junior interest foreclosure proceed subject to the senior priority lien, leaving it unaffected by the sale.  

In Sum

Again, in all cases it is vitally important to review with counsel the implications of all liens and/or exceptions indicated on a title report, the rights of the lienholders involved and the implications on the foreclosure process.  Best practices will always involve properly naming necessary parties and understanding the rights held by each.