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Are Borrowers Prohibited from Waiving Redemption Periods In Minnesota?

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by Paul Weingarden and Brian Liebo
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

Minnesota is a redemption state, where the borrower’s redemption period following a foreclosure sale is most commonly six months and can be as long as twelve months. Given the “underwater” or disrepair status of many foreclosed properties, various mortgage companies and borrowers may want to shorten the lengthy foreclosure process. These parties may agree to “cash for redemptions” where the mortgage company pays the defaulting borrowers relocation funds to waive the redemption period by written agreement or providing a deed to the mortgage company shortly after the foreclosure sale occurs. However, a recent Court of Appeals decision appears to have removed that option in Minnesota. [U.S. Bank National Association v. RBP Realty, LLC, 2016 Minn. App. LEXIS 94 (Minn. Ct. App. Dec. 27, 2016).]

In RBP Realty, the court held that a borrower’s written waiver of the right of redemption following a nonjudicial foreclosure sale was unenforceable. Specifically, after the borrower defaulted on a $7.5 million (commercial) loan from the lender, the borrower and lender reached a written agreement where the borrower waived its statutory right to redeem the mortgaged property in the event of a foreclosure sale. The lender foreclosed the mortgage due to a continuing default, and at the nonjudicial foreclosure sale successfully bid a reduced amount of $4.25 million, despite the total debt balance approaching $9 million. The borrower subsequently contacted the sheriff and tendered sufficient funds to redeem from the foreclosure sale based on the lowered bid amount. The lender challenged the redemption in court, claiming that the borrower previously waived all redemption rights. The district court ruled as a matter of law that the borrower’s purported waiver was unenforceable. The Court of Appeals affirmed.

In its decision, the appellate court reviewed the language of the redemption statute at issue (Minn. Stat. § 580.23) and found no statutory language or case law permitting waiver of the borrower’s right to redemption. The Minnesota Foreclosure by Advertisement Statute (Chapter 580) is silent on the issue of waiving redemption rights. However, the court observed that the borrower’s statutory right to redeem a foreclosed property after a foreclosure sale is expressly permitted in Section 580.23. Also, the court identified that Chapter 580 contains a limited number of exceptions to the general rule that a borrower may redeem a foreclosed property within six months of a foreclosure sale (e.g., other redemption period lengths may apply, including twelve months and five weeks), but a private agreement between a lender and borrower is not among the listed exceptions to the general rule.

As a result of this recent judicial decision, mortgage servicers should consider immediately halting all cash for redemption-type programs that ask borrowers to waive redemption periods for Minnesota foreclosures, or that involve seeking post-sale deeds from borrowers for the purpose of avoiding redemption periods. It is possible that the courts involved with this case could have held differently if the foreclosure was conducted judicially instead of by advertisement (and the court approved the written waiver as a settlement agreement prior to enforcement), or if the borrower provided a deed with non-merger language to the lender instead of a waiver agreement. Nonetheless, either approach appears risky in light of the strong opinion by the court looking to fully preserve a borrower’s right to redeem a property following foreclosure. Until the Minnesota Supreme Court reverses course, redemption periods appear unwaivable in Minnesota.

It is important to note, however, that this development does not mean that borrowers and lenders are always stuck with lengthy redemption periods in Minnesota. Under Minnesota Statutes Section 582.032, a foreclosing party can reduce a redemption period for a qualifying property to just five weeks where the borrower abandons the property. The reduced redemption period can be obtained by the foreclosing party through an accelerated court process and judicial order.

There is an additional point to glean from the RBP Realty case. In Minnesota, competitive bidding at sheriff’s sales is relatively uncommon given the lengthy redemption periods that often apply (as well as low interest rates in the current environment). As a result, reduced or specified bids should be carefully considered in Minnesota and used with hesitation. If the lender in the case summarized here had bid full debt instead of a low, specified bid, the likelihood of any redemption by the borrower or resulting litigation would have been vastly reduced. Instead, it is far more likely that the lender would have kept the property with a full debt bid as ultimately intended or have been happy with receiving redemption funds in the amount of a full debt balance.

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