Lenders often secure repayment of loans by taking a mortgage on real estate owned by the borrower. If the borrower becomes unable to repay the loan, the lender may foreclose the mortgage and take back the property. In Minnesota, there are two ways to foreclose on real estate: by action and by advertisement. (Wisconsin only allows foreclosure by action.) Foreclosure by action involves filing a lawsuit in court and typically takes longer and costs more, but also allows the lender to pursue additional remedies besides foreclosure. In contrast, foreclosure by advertisement does not involve a lawsuit, is generally quicker and less expensive and, accordingly, has been utilized by lenders as much or more than foreclosure by action. However, recent decisions by Minnesota courts may discourage lenders from foreclosing by advertisement by requiring “strict compliance” with foreclosure-by-advertisement statutes. Under these decisions, a foreclosure by advertisement may be void, and the lender must start all over, if the lender errs in any way in conducting the foreclosure, no matter how insignificant the error. Accordingly, lenders should be acutely aware of the strict requirements for foreclosing a mortgage by advertisement in Minnesota.
This article discusses the requirements of foreclosure by advertisement under current Minnesota law, briefly reviews the recent Minnesota court decisions requiring “strict compliance,” and suggests how lenders can avoid having a foreclosure invalidated.
Foreclosure by Advertisement Requirements
Foreclosing by advertisement does not require a lawsuit. Indeed, a foreclosure by advertisement should not involve a court at all. Rather, the process begins with the lender recording in the county real estate records a “notice of pendency and power of attorney.” This document informs potential buyers or other lienholders that the mortgaged property may be foreclosed and that the lender’s attorney is authorized to conduct the foreclosure on the lender’s behalf. It must also contain certain “foreclosure data,” including the property address and lender’s name.
After recording the notice of pendency and power of attorney, the lender must publish notice of the foreclosure sale. The notice of sale must contain specific information regarding the borrower, the property, the time, date, and location of the sale, and the redemption period following the sale, as well as the same foreclosure data in the notice of pendency and power of attorney. The notice of sale must be published for six consecutive weeks in a legal newspaper in the county where the property to be foreclosed is located. The lender must also legally serve the notice on the property occupant, even if the borrower is not an occupant. If the property contains one to four family dwelling units, the lender must also serve special “foreclosure advice” notices.
After service and publication of the notice of sale, the county sheriff will sell the property at a public sale held at the sheriff’s office. The lender may make a “credit bid” at the sale by bidding the amount due and owing on the loan. If the lender bids more than the amount due, it must pay the difference by cash or check. Any other bidders must pay only by cash or check. If the property sells for more than the amount due on the loan, the “surplus” must be paid to the borrower. The highest/winning bidder at the sale (we will assume here it is the lender) receives a sheriff’s certificate of sale, which must contain certain information regarding the property, mortgage, and the sale, and must be recorded in the county real estate records within 20 days after the sale.
After the foreclosure sale, the lender does not yet own the property. Rather, the borrower and any creditor with a lien on the property that is subordinate to the lender’s mortgage may “redeem” the property by paying the lender the amount bid at the sale plus costs and interest. The time in which the borrower may redeem generally depends on the type of property foreclosed: a six-month redemption period applies to most non-agricultural properties; a 12-month redemption period commonly applies to agricultural properties and when the loan securing the mortgage has been paid down by more than 33%; and a five-week redemption period can apply to certain abandoned properties with court approval. If the borrower does not redeem, subordinate lienholders that have filed a notice of intent to redeem receive successive seven-day redemption periods, in order of their priority, with the first such period beginning when the borrower’s redemption period expires. If no redemption occurs, the recorded sheriff’s certificate of sale operates as a legal conveyance of ownership to the lender at the end of the redemption period.
Judicial Shift to Strict Compliance?
A line of cases decided by the Minnesota Supreme Court more than 100 years ago held that a foreclosure by advertisement was not invalid if the foreclosing lender made a mistake, unless the mistake deprived the borrower of legal rights. The cases held that if the lender erred in some way, the foreclosure sale was not automatically void, but was “voidable” if the borrower showed some infringement of its rights.
Not long after, however, the Court issued two decisions in which it concluded that “exact,” “literal,” and “strict” compliance with statutory requirements is necessary, or a foreclosure by advertisement is “void.”
These two lines of seemingly conflicting cases existed alongside one another for nearly a century until a 2009 case in which the Court indicated agreement with its old “strict compliance” decisions. But, the 2009 case actually decided a different question: whether a lender’s assignment of a promissory note secured by a mortgage must be recorded in the county real estate records before the mortgage could be foreclosed by advertisement (the Court concluded that no recording is required). Notably, the Court did not discuss its earlier decisions that did not require strict compliance.
Then, in April 2013, the Court appeared to recognize the conflict between the two lines of cases in a case involving whether a lender’s assignment of a mortgage must be recorded before the mortgage may be foreclosed by advertisement. The Court concluded that because Minnesota Statutes section 580.02 states that recording “all assignments” of a mortgage “is requisite” before the mortgage may be foreclosed by advertisement, strict compliance with that section of the foreclosure-by-advertisement statute is required. The Court did not, however, address the larger question of whether a failure of strict compliance with any other section of the foreclosure-by-advertisement statute renders a foreclosure void.
Finally, in December 2013, the Minnesota Court of Appeals faced the question of whether a single foreclosure-by-advertisement sale of two properties covered by the same mortgage was void for failure to follow Minnesota Statutes section 580.08, which requires a separate sale for each property covered by a mortgage. The Court of Appeals concluded the sale was void, interpreting the Supreme Court’s 2009 and April 2013 decisions as requiring strict compliance with all sections of the foreclosure-by-advertisement statute.
Although the Minnesota Supreme Court has not revisited the question of strict compliance more recently, the Court of Appeals has reiterated its view that strict compliance is required. Interestingly, however, recent Minnesota Federal District Court and Eighth Circuit Court of Appeals decisions applying Minnesota law have sided with the line of cases holding that a failure of strict compliance does not void a foreclosure by advertisement unless the lender’s error deprived the borrower of legal rights.
Given the seeming conflict in court decisions, whether a failure of strict compliance with all sections of Minnesota’s foreclosure-by-advertisement statute renders a foreclosure void or merely voidable appears to be an open question. It will take a Minnesota Supreme Court decision to finally decide it. But, until that happens, foreclosing lenders should strive for strict compliance with all statutory requirements to minimize the possibility of both a legal challenge to a foreclosure sale and, ultimately, a court decision voiding the sale. Accordingly, lenders should familiarize themselves with the developing Minnesota law on foreclosure by advertisement and should utilize legal counsel with the depth of knowledge and experience necessary to successfully guide them through the foreclosure process.
Eric Johnson is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Business Litigation, Appeals, and Banking/Lending Services. This article is not intended to provide legal advice. You should always consult an attorney regarding your specific circumstances.