@Chad Clinton
That is a great question. First off, let me disclose that I'm NOT an attorney or CPA and you should check with your own legal and tax professionals regarding this issue. Your issue is complicated enough that you would best be served by professional legal counsel. That being said, here's what my non-attorney thoughts are:
1. Every loan document I've ever seen always has some phrase that says something that the loan will "inure to the benefit of assignees, beneficiaries and or heirs". In layman's terms, it means that even if the original holder of the loan DOES go out of business, the debt may still be valid. Someone else may own it now.
2. If the holder of the note had creditors themselves, their creditors could have (or may still be able to, depending on your state), taken that loan over, so they now own the note and you owe the money to them now. However, usually when this happens, they notify you and record their interest against the property at the county courthouse. I'm assuming, based on your explanation of the circumstances, that you have NOT received notice from anyone else claiming they now own the loan.
3. Depending on the original hard money lender's legal structure, he may now personally own the loan, meaning that he still may claim his rights to be paid if the property sells.
4. If the lender has died and no one has claimed the assets of his business, the loan may be floating in "limbo", just waiting for someone to find it and claim its associated rights.
If you go to sell the property, the title company will do a title check and find out who is claiming the rights of the loan now, if anyone. Often, if they can't talk with the holder of the debt as listed in the official records, they will try to track down who the current holder of the rights may be, so they know where to send a check at closing for the amount owed to them.
All that being said, you being in foreclosure actually gives you a bit more leverage with the hard money lender. Being in second position, their options are limited. Is the value of the property less than amounts of the two loans? If so, then the HML is likely to receive little to nothing from the sale of the property. Perhaps you could negotiate with the HML for a reduced payoff so they will still get paid something and they'll let the sale of the property go through and collect something rather than nothing. Sometimes this forgiveness of debt can be counted as income by the IRS, so check with your CPA to see if this applies to you or if you can qualify for the IRS to waive any taxes due on the forgiveness of the debt.
Did you sign a personal guarantee with the HML? If so, even if the property is foreclosed on, and they lose their lien on the property, you'll still be responsible for the full balance of the loan.
So, all of that being said, I'd also call your local title company and ask them to run a preliminary title report on the property. Then, I'd recommend you visit with your attorney and CPA and lay out the situation to them. See what they suggest.
Best of luck!
