Statutory Redemption. Redemption. Example: Minnesota Statute 4/1/2013

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1 Redemption Until a foreclosure sale occurs, mortgagor has right of equitable redemption, by paying off the entire balance of the debt (ALL states) In some states, even AFTER foreclosure sale takes place, mortgagor can exercise a right of statutory redemption Statutes vary, so generalization is difficult Some allow only the mortgagor to redeem; others also allow junior lienholders to redeem Time for redemption varies by state/type of land Some states only allow statutory redemption if the mortgagee was the foreclosure sale buyer Some states allow statutory redemption only after nonjudicial foreclosure 1/2 of states = no statutory redemption at all! Example: Minnesota Statute General statutory redemption period: 6 mos. Twelve month period if: (a) more than 1/3 of original principal amount has been repaid; or (b) parcel is > 40 acres in size, or (c) parcel is between 10 and 40 acres and is in agricultural use Most common feature: statutory redemption price = Foreclosure sale price paid by buyer, plus Interest accruing on that price from the date of sale, plus Sums paid by buyer for taxes/repairs 1

2 Example of (MN, p. 712) Foreclosure sale price = $70,000; Balance of debt = $100,000; 6 mo. redemption period; $1,000 in unpaid taxes, ultimately paid by Buyer Equitable Redemption Debt $100,000 Sale Price $70,000 Taxes 1,000 Taxes 1,000 Interest (10%) 3,500 Price $101,000 Price $74,500 Why allow post sale redemption period? Preference for certain types of mortgagors (homestead, agricultural mortgagors) Speed of foreclosure (esp. nonjudicial foreclosure) could result in quick loss of equity [thus, e.g., MN statute providing 12 mo. redemption period where more than 1/3 of loan has been repaid)] Why allow redemption price = foreclosure sale price (rather than balance of the debt)? Concern: if there s no active bidding at the sale, the mortgagee could bid low, acquire title, resell land at a profit, but still recover inflated deficiency judgment from borrower (and enforce it against borrower s other assets) If statutory redemption price = foreclosure sale price, then mortgagee has no incentive to make a low ball bid, but will bid at least the property s FMV Is Worth It? Foreclosure buyer doesn t have marketable title until redemption period has passed This may discourage 3rd party bidding (or depress bid amounts) Worse: in some states, the mortgagor still has the right of possession during the redemption period! Could encourage strategic default (foreclosure, wiping out of junior liens, followed by statutory redemption by borrower) 2

3 In some states, if borrower exercises its statutory redemption right, any previously extinguished junior liens are revived Similar rationale as in Currie case (removes borrower s incentive to strategic default; revival warranted in any event where junior could ve sued on debt and gotten judgment lien) Note 1, page 729: California law = no lien revival after statutory redemption by borrower! in Missouri RSMo : mortgagor must give notice of its intent to redeem, at or prior to foreclosure sale RSMo : mortgagor or its assignee must post a bond to cover all potential damages (e.g., waste, failure to pay taxes + failure to redeem) RSMo : borrower can t redeem if foreclosure sale buyer is a third party RSMo : redemption price = full balance of debt (not just foreclosure sale price!) Thus, statutory redemption in MO is extremely rare Creditor Remedies Traditional rule: a creditor s remedies are cumulative (foreclose, sue on the debt, or do both simultaneously) UCC Article 9 reflects this approach For real estate, some states have a one action rule: creditor must foreclose first In a one action state, lender can t get a judgment on the debt until after lender conducts a foreclosure sale One Action Rule: Rationale Protects borrower from multiplicity of actions and potential abuse by mortgagee Forces mortgagee to exhaust its security (land) first, before pursuing the borrower personally and the borrower s other assets If mortgagee files suit on the note, borrower can compel mortgagee to foreclose first (defensive) If mortgagee gets judgment on note w/out foreclosing first, it is deemed to have waived its mortgage lien! 3

4 Like most states, MO has NO one action rule Most full recourse mortgage loan documents don t require mortgage lender to foreclose first In Missouri, lender typically forecloses by power of sale first anyway, then sues for a deficiency judgment (if there s a deficiency) But, lender could sue on debt and foreclose simultaneously (foreclosure sale proceeds would then be applied to reduce judgment) Deficiency Judgment: Problem Bank holds mortgage on Uphoff s home, loan is in default (loan balance = $250K) Bank conducts a power of sale foreclosure Bank is high bidder (credit bid = $200,000) Bank sues Uphoff for $50,000 deficiency judgment Uphoff presents appraisal showing FMV = $230K Should deficiency be $50K or only $20K? Deficiency Judgment Traditional rule: if sale was properly conducted, deficiency is conclusively established by sale price Rationale: if land really was worth $230K, bidding should ve driven price to that level If sale was defective, Uphoff can recover $30K damages from Bank (and offset those damages vs. his liability to Bank for $50K deficiency) Restatement: Fair Value 8.4(c): if sued for deficiency, mortgagor may ask court to determine FMV of land as of sale date [note 6, p. 772] 8.4(d): If FMV >>> foreclosure price, mortgagor gets an offset vs. deficiency, to that extent Result: If Uphoff proves that land s FMV was = $230,000, Bank s deficiency is reduced to only $20,000 (not $50,000) Note: under fair value statute, fair value appraisal is done in all cases, regardless of whether sale complied with statute 4

5 Should Missouri Adopt Fair Value? First Bank v. Fischer & Frichtel: Missouri Supreme Court refused to adopt Restatement, suggesting such a change was up to the legislature Should legislature adopt fair value limit? Restatement Fair Value Rationale Foreclosures tend to produce lower sale prices (for reasons discussed in recent assignments) This creates an incentive for the foreclosing lender to strategically bid (e.g., bid as low as possible to increase potential deficiency judgment) Fair value procedure takes away incentive of lender to bid less than fair market value Over ½ of states now have a similar fair value limit (though most have done so by legislation) Anti Deficiency Rules? Some have argued that states should adopt antideficiency statutes akin to those in California Civil Code 580b: no deficiency judgment after foreclosure of purchase money mortgage Civil Code 580d: no deficiency judgment after any nonjudicial foreclosure Good idea, or bad idea? 5

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