Chapter 8 - § 8.2 • INITIATING JUDICIAL FORECLOSURE

• Jurisdiction: Colorado

§ 8.2 • INITIATING JUDICIAL FORECLOSURE

As noted above, judicial foreclosures are distinguished from public trustee foreclosures in part because they are not limited to security interests in a public trustee deed of trust, and may be initiated to foreclose on any lien on the subject property. Such liens include deeds of trust to a private trustee, mortgages, vendor's liens under an installment contract, equitable liens, condominium and homeowner association liens, mechanics' liens,¹ and a variety of other liens provided for under statute.² Judicial foreclosures are initiated like any other civil action and may be pled in a complaint along with any related claims, such as additional property claims arising under statute or provided by the Colorado Rules of Civil Procedure.³ These additional claims may include quiet title claims, judgment on a promissory note being foreclosed, eviction, and the appointment of a receiver to manage the property during foreclosure.

In Burnett v. Mortgage Electronic Registration Systems,⁴ MERS had standing to foreclose a note after securitization and sale on the secondary market. In McDonald v. OneWest Bank,⁵ the court held that the holder of the original note was entitled to foreclose and need not be a "holder in due course."

§ 8.2.1—Pre-filing Conditions

The original evidence of debt is not necessary to commence a judicial foreclosure, but the original note or other evidence of debt will be required at trial.⁶ Counsel should try to secure evidence of debt as early as possible because clients do not always keep it handy, and locating it may take some time. If the original is not available, counsel should request a copy before commencing the foreclosure. Counsel should also confirm that the client is indeed the holder of the note and beneficiary of the lien being foreclosed. Counsel should also obtain a certificate of taxes due and further confirm that payments under the note or other instrument have been properly accelerated under the terms provided in the note or other instrument. If notice is required to accelerate the debt, then the foreclosing attorney should consider giving notice, even if the client represents that notice has already been given. The attorney will need to examine the notification documents to determine that notice was indeed given properly.⁷ Similarly, the client's calculations should be checked for accuracy and verified before the complaint is filed. Finally, counsel should review the security instrument to determine whether the homestead exemption was properly waived. If not, then the homestead exemption requirements must be satisfied.⁸

The attorney should also confirm that lenders who service 5,000 or more loans per year have provided a single point of contact and are not dual tracking (i.e., negotiating loss mitigation with the borrower and pursuing foreclosure of the borrower's property simultaneously). HB 14-1295 requires servicers of 5,000 or more mortgages to establish a single point of contact for borrowers that are in arrears on their mortgages and prohibits dual tracking.⁹ If the client services 5,000 or more mortgages, the attorney should review HB 14-1295 carefully.

The foreclosing attorney should then consider the identification of the potential parties to the suit. Foreclosure extinguishes the ownership interests of the borrower as well as all interests subordinate to the lien foreclosed if those interest holders are made parties to the action and served with process.¹⁰ This includes subordinate recorded interests such as liens, but also possessory interests of parties "actually in possession" such as lessees.¹¹ Post-foreclosure, the foreclosing party or the successful bidder takes the property subject to all liens senior to the lien foreclosed.¹² Accordingly, all junior lien holders must be named in the suit and provided with notice of the foreclosure or their interests will be unaffected by the foreclosure.¹³ Senior lien holders are not necessary parties to the suit, but the foreclosing attorney should contact them nonetheless to discuss potential payments on any senior liens during and after foreclosure and to ensure that those lien holders with superior positions do not foreclose on the property and undermine the foreclosure now in process.

To determine these interests, the foreclosing attorney should contact a title insurance company early in the process and order a foreclosure certificate or litigation guarantee, which is sometimes offered in lieu of a foreclosure certificate. A foreclosure certificate lists all interests recorded against the property after the recording of the lien being foreclosed, while a litigation guarantee focuses on all currently effective interests recorded against the property regardless of when they were recorded. Since a foreclosure action only requires those with subordinate interest to be named as defendants, a foreclosure certificate is often adequate, especially if the lien being foreclosed has first priority. However, there may be instances where the foreclosing attorney wishes to consider a litigation guarantee. For example, a guarantee may be useful for a junior lien holder who wishes to determine and contact all senior lien holders, or a foreclosing party may be interested in a guarantee when it knows that the foreclosure action will likely be joined with several other claims related to the property, such as the resolution of an easement. In these situations, a litigation guarantee may prove useful. In any event, the foreclosing attorney should request copies of all documents listed in the litigation guarantee or foreclosure certificate and should review these documents carefully to determine the names and addresses of all parties that could claim an interest in the property.

Finally, in those instances where the foreclosing attorney believes that a receiver may be necessary, counsel should contact a receivership company beforehand and acquire a general estimate of the cost of a receiver and whether this amount can be covered by rents or other revenue generated by the property. For a more complete discussion of receivers, see Chapter 9.

§ 8.2.2—Judicial Foreclosure Proceedings And Judgment

Proceedings are initiated by filing a complaint in the district court for the county in which the property, or a substantial part of it, is located.¹⁴ The complaint should name as defendants all parties with a recorded subordinate interest and all parties in "actual possession."¹⁵ If the instrument foreclosed is a public trustee deed of trust, counsel should name the public trustee, who will typically renounce any interest in the property. Identifying parties with a recorded interest is accomplished rather simply by ordering a foreclosure certificate or litigation guarantee and examining the documents affecting title, as discussed above. However, identifying parties in actual possession is somewhat more difficult, usually requiring an on-site inspection. Careful thought should be given to whether the foreclosing client wishes to extinguish the rights of existing leases or tenants. Often the foreclosing party will want the tenants to continue their tenancy. This can be accomplished by omitting the tenants as parties in the complaint and filing a document with the sheriff affirming the omitted parties' interest, subject to the terms and conditions of the lease.¹⁶ On the other hand, if a party purchasing property subject to a lease is neither party to the lease nor aware of its existence, a lessee's interest may be extinguished even if the foreclosing party does not name the lessee.¹⁷ The foreclosing attorney should confirm and double-confirm that the names of all parties are correctly spelled to avoid a post-foreclosure omitted party action due to misspellings.¹⁸ When the United States is a defendant, the foreclosing attorney should consult 28 U.S.C. § 2410 for guidance. Prior to recent amendments, special steps had to be taken before a party could foreclose on a lien held by the State of Colorado. Now, however, the state is treated like any other party, except for those instances where the lien is for withholding.¹⁹

After the complaint is filed, but ideally before any of the parties are served, the foreclosing party must record a notice of lis pendens in the real estate records with the office of the clerk and recorder for the county in which the property is located (or in each county in which parts of it are located) with a complete — unabbreviated — case caption with the name of the court and the names of all parties to the action and the legal description of the property.²⁰ The title evidence (foreclosure certificate or litigation guaranty) should then be updated and the complaint amended to add any parties who obtained an interest in the property between the time the first title evidence was acquired and the time the lis pendens was recorded.

Service in a judicial foreclosure action is accomplished in the same way as service in a quiet title action.²¹ Each defendant to the action must be served in accordance with C.R.C.P. 4. Where personal service is not possible or frustrated, service by publication is authorized so long as no deficiency judgment or other form of personal relief is sought against an individual defendant.²²

Default by all defendants is not an uncommon occurrence in a judicial foreclosure. If all defendants default, the court will typically accept the plaintiff's affidavit regarding the propriety of venue, the accrual of interest, and other damages accrued since default.²³ However, if the complaint is contested, the foreclosing party must be prepared to establish at trial all damages through traditional means of witness testimony and exhibits.

If the foreclosing party prevails at trial, or by default, the court will issue a Judgment and Decree of Foreclosure, which the foreclosing attorney typically prepares in advance. Exhibit 8D is included as an example. In the Judgment and Decree of...