Alabama Supreme Court Decision: Former Mortgagees Are Necessary And Indispensable Parties In Ejectment Action With Wrongful Foreclosure Counterclaims

In April 2024, the Alabama Supreme Court issued an opinion in Alavest, LLC v. Harris that significantly expands the application of Rule 19 of the Alabama Rules of Civil Procedure...
United States Finance and Banking
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In April 2024, the Alabama Supreme Court issued an opinion in Alavest, LLC v. Harris that significantly expands the application of Rule 19 of the Alabama Rules of Civil Procedure to post-foreclosure proceedings when it held that former mortgagees are necessary and indispensable parties in wrongful foreclosure actions.

Case Background

In the case, the current mortgagee initiated non-judicial foreclosure proceedings after the borrower defaulted on their payment obligations. Alavest, an unaffiliated third party, purchased the home at the foreclosure and subsequently filed an ejectment action against the borrower for possession of the property. The borrower answered Alavest's ejectment complaint and asserted a wrongful foreclosure affirmative defense along with a counterclaim against Alavest, requesting a judgment declaring that the foreclosure sale was void. Alavest filed a motion for the circuit court to dismiss the borrower's counterclaim, arguing that the claims were more properly asserted against the former mortgageeā€“ not Alavest. The circuit court denied Alavest's motion to dismiss and ultimately entered summary judgment in favor of the borrower. Alavest appealed.

Appeal and Alabama Supreme Court's Interpretation

On appeal, Alavest argued that the trial court did not have jurisdiction over the case because the former loan servicer, as mortgagee, was a necessary and indispensable party who had not been joined in the case. The Alabama Supreme Court ultimately rejected Alavest's argument but nonetheless found (on its own independent grounds) that a former mortgagee was a necessary and indispensable party. The case was then remanded back to the trial court with specific instructions to join the former mortgagee as a party.

Judicial Efficiency and Rule 19

The Alabama Supreme Court reached this decision by expanding its interpretation of Rule 19 of the Alabama Rules of Civil Procedure. According to the court, one of the purposes of Rule 19 is "the promotion of judicial efficiency and final determination of litigation by including all parties directly interested in the controversy." The court's analysis determined that the former mortgagee was a necessary and indispensable party because, if the borrower succeeded in their wrongful foreclosure claim, the property interest would be involuntarily transferred from Alavest back to the former mortgagee.

Furthermore, the Alabama Supreme Court also recognized that Alavest would be "subject to a substantial risk of incurring doubly, multiple, or other inconsistent obligations by reason on the claimed interest." Thus, the Alabama Supreme Court's opinion in Alavest, LLC v. Harris has expanded the reach of Rule 19 by mandating that the party who conducted a foreclosure sale be added to a post-foreclosure judicial action if any question as to the validity of the underlying foreclosure sale is raised therein.

Impact of the Ruling on Future Foreclosure Litigations

This opinion continues the recent trend by the Alabama Supreme Court to attempt to provide clarity for parties in post-foreclosure civil actions. Courts are already taking notice of the Alavest decision and are asking litigants to brief the impact of the case on currently pending litigation, making one thing clear: investors and servicers will need to be prepared to be named as parties in more wrongful foreclosure claims following non-judicial foreclosure sales despite no longer having an interest in the subject property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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