The flowing hypothetical and questions are based on the encumbrances on Blackacre I have been diagraming on the blackboard. (See Diagram.)

Order of transactions:

1. O leases part of Blackacre to T-1.
2. O mortgages its interest in Blackacre to M-1 to secure a loan of $900,000.
3. O leases another part of Blackacre to T-2.
4. O mortgages its equity of redemption in Blackacre to M-2 to secure a loan of $300,000.
5. O leases a third portion of Blackacre to T-3.
6. J obtains a judgment for $25,000 against O in the county where Blackacre is located.
7. faults on M-1's mortgage by failing to pay two monthly payments of $10,801.51 each (total of $21,605.02).

M-1 institutes an action to foreclose the equity of redemption under its mortgage, naming as affected parties O, T-2, M-2, T-3, and J. At the time of the foreclosure action, the principal balance outstanding on the 1st mortgage (M-1) is $600,000; on the second mortgage (M-2), $250,000; the amount of J's judgment is $25,000; and, all parties agree, the fair market value of Blackacre is $1,000,000. Thus the value of O's equity of redemption form both mortgages and the judgment is $125,000 ($1,000,000 - ($600,000 + $250,000 + $25,000) = $125,000). Unfortunately for O, O is unable to pay any of the debts secured by Blackacre.

Questions:

1: If M-1 institutes a foreclose action for the unpaid installments ($21,605.02 + interest), what may O, T-2, M-2, T-3, or J do to prevent foreclosure? What should M-1 have done to protect against this action?

2(a): If M-1 is able to declare a default in the amount of the outstanding principal balance of $600,000, what should M-1's representative be prepared to bid to open the foreclosure sale?

2(b): If other persons bid at the foreclosure sale, how much should M-1's representative be prepared to bid? How much of its bid will be paid in cash by M-1 if M-1 is the successful bidder?

2(c): IF M-2's representative decides to bid, what is the minimum successful bid she or he should be prepared to make? What is the maximum M-2's representative should be prepared to bid. How much cash will M-2 have to pay if it is the successful bidder?

2(d): Should J's representative be prepared to bid at the foreclosure sale? If so, what should be J's minimum and maximum bids? How much cash will J have to pay if J is the successful bidder?

Remember that none of these creditors want to own Blackacre. M-1 and M-2 are in the money selling business, not the real estate business. J wants to have the judgment satisfied (paid).

3: Can M-1 (or M-2) successfully foreclose if O's default is the failure to maintain fire and extended coverage insurance on the improvements on Blackacre as required by the two mortgages?

4: What advice can you give M-1 before it institutes its foreclosure action if T-2 has a desirable (e.g., above-market rent) lease, but T-3 has an undesirable (e.g., below-market rent) lease?

5: If X purchases the property at a sale in foreclosure on the 1st mortgage after M-1 gave due notice to O, T-2, and J, what has X purchased?

6: If M-2 can do so and forecloses its mortgage after X's purchase in Q5, what rights does X have in Blackacre, if any?

7: If O is in default under M-2, but not under M-1, can M-2 foreclose? If so, whom should M-2 name as parties to its foreclosure action?

8: Suppose that the fair market value of Blackacre at the time of M-1's foreclosure sale is only $500,000. M-1, whose mortgage debt is then $600,000, purchases the property at that sale for $10,000. What can M-1 do next? Would your answer be the same if the fair market value of Blackacre at the time of the foreclosure sale were $700,000 and M-1 was the successful bidder at $10,000?