Redemption. Statutory Redemption 3/18/2014

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1 Albice: recital of compliance in trustee s deed doesn t give rise to presumption of finality unless deed recites specific facts demonstrating the trustee s compliance with nonjudicial foreclosure statute What benefit would the additional factual recitals provide? Redemption Until a foreclosure sale occurs, mortgagor can exercise the right of equitable redemption, by paying off entire 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 (e.g., MO) Some states allow statutory redemption only after nonjudicial foreclosure Some states allow mortgagor to retain possession of the land during the redemption period! 1/2 of states = no statutory redemption at all! Statutory Redemption Under the most common approach, the statutory redemption price is calculated as follows: Foreclosure sale price paid by buyer, PLUS Any interest accruing on that amount from the date of foreclosure sale, PLUS Any sums paid by buyer for taxes/repairs to the property (where buyer took possession) 1

2 Example of Statutory Redemption (MN, p. 712) Foreclosure sale price = $70,000; Balance of debt = $100,000; 6 mo. redemption period Equitable Redemption Statutory Redemption Debt $100,000 Sale Price $70,000 Interest (10%) 3,500 Price $100,000 Price $73,500 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 sale doesn t produce active bidding, mortgagee could bid low, acquire title, re sell the land at a profit, recover an inflated deficiency judgment from borrower, and enforce it against borrower s other assets If borrower can redeem at the foreclosure sale price, then mortgagee has no incentive to make a low ball bid, but will instead bid the property s FMV Is Statutory Redemption 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, mortgagor still has the right of possession during the redemption period! Could encourage strategic default (borrower defaults, gets foreclosed by senior, thus wiping out junior liens, then borrower redeems the freshly laundered title) 2

3 In many states, if the borrower statutorily redeems, any previously extinguished junior liens are revived [MacFarland, p. 721] Similar rationale as in Currie case (p. 707) This removes borrower s incentive to strategic default Revival is warranted, esp. if junior creditor could ve sued on debt, and gotten a judgment lien Note 1, page 729: California law = no lien revival after statutory redemption by borrower! Statutory Redemption 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 (creditor can foreclose on its security, sue for a judgment on the debt, or do both simultaneously) UCC Article 9 reflects this approach For real estate, some states (not MO) have a oneaction rule: creditor must foreclose first In a one action state, lender either (a) can t get a judgment on the debt until after lender conducts a foreclosure sale, or (b) can t foreclose at all if it gets a judgment on the debt first 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 majority of 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; Uphoff is in default (loan balance = $300K) Bank conducts a nonjudicial foreclosure Bank is high bidder (credit bid = $200K) Bank sues Uphoff for $100,000 deficiency judgment Uphoff presents appraisal showing FMV = $250K Should deficiency be $100K? Or only $50K? Deficiency Judgment Traditional rule: if sale was properly conducted, deficiency is conclusively established by sale price Rationale: if land really was worth $250K, bidding would ve/should ve driven price to that level If sale was procedurally defective, Uphoff can recover $50K 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 establish FMV of land on 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 = $250,000, Bank s deficiency is reduced to only $50,000 (not $100,000) 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 the Restatement, suggesting such a change was up to the legislature Should the Missouri legislature adopt a fair value limit? Anti Deficiency Rules? Some have argued that states should go further and adopt anti deficiency statutes akin to those in California Civil Code 580b: no deficiency judgment after foreclosure of a purchase money mortgage Civil Code 580d: no deficiency judgment after any nonjudicial foreclosure Good idea, or bad idea? 5