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Connecticut: Defaulted Lender May Have Rights to Surplus Funds After COA Foreclosure Sale

Posted By USFN, Thursday, August 01, 2013
Updated: Monday, November 30, 2015

August 1, 2013

 

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

A Connecticut superior court has held that the entry against a lender of a default in an action to foreclose a condominium lien does not preclude the lender from later participating in the proceeding to obtain satisfaction of its obligation from the proceeds of a foreclosure sale. Saddle Ridge Farm Association, Inc., v. Blessing-Palmer, No. 55 Conn. L. Rptr. No.17, 631 (2013). In Saddle Ridge, the plaintiff commenced a foreclosure action seeking to foreclose on unpaid condominium common charges. In addition to naming the unit owner as a defendant, the plaintiff named a lender by virtue of having a recorded mortgage. The lender was subsequently defaulted and the court entered a judgment of foreclosure by sale. The property was sold to a third-party bidder and the sale was subsequently approved by the court.

After the foreclosure sale, and without challenging the underlying foreclosure judgment, the lender filed a motion for supplemental judgment. At a hearing, the unit owner and lender claimed competing priority rights to the surplus funds from the foreclosure sale. The defendant unit owner objected to the disbursement of the surplus funds to the lender on equitable grounds and claimed that because a default judgment entered against the lender, it was precluded from participating in the supplemental judgment proceedings. Therefore, the common law doctrine of “first in time, first in right” did not apply. The defendant lender argued that a default judgment simply precludes a defendant from raising defenses to the underlying foreclosure action and does not preclude participation in the supplemental proceedings.

The court held that the lender was not prevented from participating in the supplemental judgment proceeding because of the default judgment. The court reasoned that the purpose of the judicial sale in a foreclosure action is to convert the property into money and, following the sale, a determination of the rights of the parties in the funds is made, and the money received from the sale takes the place of the property. A foreclosure by sale furnishes conflicting claimants an ideal forum for litigating their differences. Clearly, a resolution of such issues provides the very raison d’être of supplemental proceedings.

Naturally, lenders recognize the importance of promptly notifying their counsel of any pending lawsuits or default notices. However, all may not be lost if a default judgment does enter. A lender may still be able to participate in the supplemental proceedings to obtain surplus funds.

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