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
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
Statutory Redemption
• 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
Example of Statutory Redemption (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 Statutory 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, re‐
sell 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 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, 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)
• 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!
Statutory Redemption in Missouri
• RSMo. § 443.410: mortgagor must give notice of its
intent to redeem, at or prior to foreclosure sale
• RSMo. § 443.420: mortgagor or its assignee must
post a bond to cover all potential damages (e.g.,
waste, failure to pay taxes + failure to redeem)
• RSMo. § 443.410: borrower can’t redeem if
foreclosure sale buyer is a third party
•
RSMo. § 443.410: 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!
• 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
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 “anti‐
deficiency 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