Mortgage Foreclosures - FARM LEGAL SERIES
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Agricultural Business Management
FARM LEGAL SERIES June 2015
Mortgage Foreclosures
Phillip L. Kunkel, Jeffrey A. Peterson, Jason Thibodeaux
Attorneys, Gray Plant Mooty
Acceleration
INTRODUCTION
If default occurs, most mortgage documents
If a farm debtor is unable to perform under contain acceleration clauses. These clauses
the terms of his real estate mortgage, the allow the mortgagee to require the mortgagor
rights of the parties are determined by state to pay all payments due. For a more detailed
law. If the farmer defaults under his discussion on these clauses see fact sheets
mortgage, it is possible that the creditor will Contracts, Notes and Guaranties and
foreclose on the mortgage. Minnesota law is Mortgages and Contracts for Deed.
very specific with respect to the foreclosure
of real estate mortgages. Specific time Notice and Cure
periods are provided by the statutes and Even after default, the terms of the mortgage
must be followed to the letter by the creditor may give the mortgagor the right to notice
attempting to foreclose its security interest. and the opportunity to cure the default. If
Failure to follow each step of the foreclosure this type of provision is included in the
process properly may result in an invalid mortgage, the mortgagee must notify the
foreclosure. mortgagor if there is a default, the nature of
the default (e.g., nonpayment) and allow a
DEFAULT reasonable amount of the time to cure that
default.
Acts of Default
A typical real estate mortgage includes MORTGAGEE’S OPTIONS UPON DEFAULT
several terms that require the farmer (or the
Once a default has occurred, the creditor, or
“mortgagor”) to do more than merely make
the mortgagee, has several available options
the necessary periodic payments. For
in addition to foreclosing on the mortgage.
example, the mortgagor is required to
maintain insurance on the premises, pay all
Deed in Lieu of Foreclosure
real estate taxes and maintain the premises
The mortgagee can negotiate an arrangement
for the benefit of both the mortgagor and the
with the mortgagor whereby the mortgagor
creditor (or the “mortgagee”). In addition,
gives the property back to the mortgagee in
mortgages may include a provision
satisfaction of the underlying debt. Such a
prohibiting the sale of all or any portion of
procedure is known as the mortgagor giving
the premises without the prior written
the creditor a “deed in lieu of foreclosure.”
consent of the mortgagee. Such provisions
When a mortgagor undertakes such action,
are known as “due on sale clauses.” If the
he is voluntarily surrendering his redemption
mortgagor fails to abide by any of the terms
or reinstatement rights (discussed below).
in the mortgage, he is in default.
Because such an action results in the transferof ownership and the right to possession, costly and time consuming for the lender and
Minnesota courts have long held that such is rarely used.
transactions are subject to close scrutiny to
Where a mortgage encumbers agricultural
protect the mortgagor from oppression by
real estate, Minnesota’s farmer-lender
the mortgagee. For such an agreement to be
mediation statute generally requires the
upheld by a court, it must not be the result
lender to offer mediation of the debt to the
of any oppressive means or overreaching on
borrower prior to beginning foreclosure
the part of the mortgagee, and adequate
proceedings. The farmer-lender mediation
consideration must be given.
statute began requiring mediation in 1986,
with the statute’s expiration date being
Legal Action
extended in the years following original
A second course of action for the mortgagee
passage. Generally, the statute requires,
is to bring a lawsuit on the underlying debt
among other things, that a mortgagee
based on the promises of the mortgagor
seeking to enforce a mortgage on agricultural
contained in the promissory note. A
real estate, either by advertisement or action,
mortgage generally will be granted by a
first send notice to the mortgagor and offer
mortgagor to secure the performance of the
the mortgagor the opportunity to mediate a
promises of payment contained in a
resolution to the debt prior to beginning
promissory note. If the value of the real
such action. If the mortgagor elects to
property is less than the amount due under
mediate the debt, the mortgagee’s
the mortgage, the mortgagee may elect to
enforcement of the mortgage can be
bring an action seeking the payment of the
suspended for a period of up to 90 days
amount due under the promissory note. Such
pending completion of the mediation. Where
a course of action, however, may not be
the debt involved has been scheduled by the
attractive to a mortgagee unless the
mortgagor in a bankruptcy or involved in a
mortgagor has other nonexempt assets that
previous farmer-lender mediation, the debt is
can be reached to satisfy the underlying debt.
not subject to the farmer-lender mediation
statute and the mortgagee can enforce its
Mediation
mortgage without first offering mediation.
Under the Farmer-Lender Mediation Act,
when dealing with a mortgage on farm land, Where a mortgage encumbers the home of
the mortgagee may be required to serve the the borrower (or a rental home owned by the
farmer with notice of the option of borrower), Minnesota’s law requires that the
mediation. This is discussed in more detail creditor provide certain additional notices to
below. the borrower (and any tenant).
METHODS OF MORTGAGE FORECLOSURE FORECLOSURE BY ADVERTISEMENT
Under Minnesota law, there are two methods Foreclosure by advertisement is by far the
of foreclosing a real estate mortgage, preferred method of foreclosure, as it is
foreclosure by advertisement and foreclosure faster, simpler and less expensive than a
by action. Foreclosure by advertisement is foreclosure by action. Foreclosure by
the most common. Foreclosure by action advertisement is only available for mortgages
requires the creditor to bring an action in that include a power of sale clause. A power
court to determine its right to foreclose prior of sale clause simply grants the lender the
to any foreclosure sale. It is therefore more right to sell the property upon default, and is
included in most mortgages. A foreclosure byadvertisement is also only available where Foreclosure Sale
there has been no action or proceeding to Following publication and service of the
recover the underlying debt secured by the required notice of mortgage foreclosure sale,
mortgage, or if the action has been the sheriff of the county in which the
discontinued. mortgaged property is located conducts the
foreclosure sale. The sheriff’s sale is
Notice
conducted as an auction. The mortgage
To initiate a foreclosure by advertisement, holder is the seller; the sheriff acts as the
the creditor must prepare a notice of auctioneer. If a party other than the
mortgage foreclosure sale. The notice must mortgagee bids at the foreclosure sale, he
specify (1) the name of the mortgagor and of must pay cash. The sale is made to the
the mortgagee, (2) the original principal highest bidder. In most cases, the highest
amount secured by the mortgage, (3) the date bidder at the foreclosure sale will be the
of the mortgage and when and where mortgagee, and in many cases, the mortgagee
recorded, (4) the amount claimed to be due will bid the amount due the mortgagee.
under the mortgage including taxes paid by Following the sale, the mortgagee's costs of
the mortgagee, (5) a description of the sale are reimbursed and the debt owed to
mortgaged premises (e.g., legal description mortgagee is paid to the extent covered by
and commonly used street address), (6) the the sale price. Any bid in excess of the
time and place of sale, and (7) the time amount owed the mortgagee is a surplus and
allowed by law for redemption by the may be reached by junior lien holders. If no
mortgagor. Once the notice has been such holders exist, the surplus must be
prepared by the creditor, it must be returned to the mortgagor. Any shortage
published in a qualified newspaper in the between the sale price and amount due is a
county where the mortgaged property is called a “deficiency.” Where, as in most cases
located for six weeks prior to the sale. involving agricultural property, the
The notice must be personally served upon redemption period is twelve months, the
the person in possession of the mortgaged mortgagee can obtain a deficiency judgment
premises at least four weeks before the sale. in the amount of the difference between the
It must be served in a manner similar to that fair market value of the property and the
required for service of a summons initiating amount remaining unpaid on the mortgage
a civil action. by initiating a lawsuit within 90 days
following the foreclosure sale.
Designation
Certificate of Sale
Where the property is homestead property, a
homestead designation notice must be Upon completion of the sale, the sheriff
served, and if the property is agricultural, an prepares a certificate of sale, which operates
agricultural designation notice must be as a conditional conveyance of the mortgaged
served. Designation notices disclose the premises subject to the debtor's rights of
rights of the mortgagor to designated for redemption. The certificate must contain a
separate sale and redemption the homestead description of the mortgage and the
area, or the home and some of the property, the price paid, the time and place
surrounding land, and to similarly designate of the sale, the name of the purchaser, the
one or more separate tracts of agricultural interest rate in effect on the date of the sale,
property within the total property. and the duration of the redemption period.This certificate must be recorded within 20 served upon the debtor. After serving the
days of the sale. notice of sale on the debtor, the sheriff must
post the notice of sale for six weeks.
FORECLOSURE BY ACTION
Sale
Even though foreclosure by advertisement is
At the sale, the sheriff may sell the property
the preferred method of foreclosure because
to cash bidders only, except for the
it does not require legal action and is less
mortgagee, which can bid its total debt.
time consuming, foreclosure by action may
Following the sale, the sheriff reports the
be required in some instances. For example,
sale to the court, which will then confirm the
if a power of sale clause is not included in
sale. Once the court has confirmed the sale,
the mortgage, a foreclosure by action is the
the statutory period of redemption for the
only option. A foreclosure by action may also
debtor begins. The time periods for redemp-
be elected by the mortgagee for any variety
tion are the same as for foreclosure by
of technical reasons such as erroneous
advertisement as discussed below.
descriptions, a mistaken release of the
mortgage or if an issue of priority with
another lien holder must be resolved. REINSTATEMENT
After the foreclosure notice has been
Initiation prepared and publication has begun, the
To initiate a foreclosure by action, a debtor may reinstate the mortgage. This
summons and complaint must be served applies to both foreclosures by
according to the Minnesota Rules of Civil advertisement and foreclosures by action.
Procedure. The complaint will name as This right to reinstate is guaranteed by
defendants all of the present owners of the Minnesota law even though the creditor may
property, other lien holders and those with a have accelerated the balance due under the
right to possession of all or a portion of the mortgage prior to the initiation of
premises. If no party defends the action, the foreclosure proceedings. To reinstate the
mortgagee may obtain a default judgment or mortgage, the debtor must pay to the
a determination from the court that it has a mortgagee the amount constituting the
valid mortgage. If, however, any of the default at the time the mortgage foreclosure
defendants objects (e.g., interposes an proceedings were initiated, including
Answer), a trial may be necessary to establish insurance, delinquent taxes, if any, together
the right of the mortgagee to foreclose. with all costs of foreclosure that have been
incurred to the date of reinstatement,
Notice including half of any attorneys’ fees allowed
Once the court has made its decision by law or $150, whichever is greater. If the
regarding the right to foreclose, the sheriff debtor reinstates the mortgage, the
will publish a notice of a foreclosure sale for foreclosure proceeding is annulled. To
a six-week period. The notice must include a reinstate the mortgage, however, the required
description of the property and the date, payment must be made prior to the sheriff’s
time, and place of the sheriff’s sale. In sale, which is provided for by the foreclosure
addition, if the debtor is a resident of the proceedings.
county in which the mortgaged premises are
Within seven days of a written request by the
located, a copy of the judgment of the court
sheriff, the mortgagee must provide the
and the sheriff’s notice of sale must be
sheriff: (1) the current payoff amount,showing outstanding principal, interest, and 6. The mortgage was executed on or
a daily interest accrual amount, (2) an after August 1, 1994, and the
itemized schedule of the current amounts mortgaged property, as of the date of
necessary to reinstate the mortgage, and (3) the execution of the mortgage,
the identity of the person or entity with exceeded ten acres but did not exceed
authority to act on behalf of the mortgagee. 40 acres in size and was in
If the mortgagee does not respond to the agricultural use, as defined by
request in the time required, the sheriff must Minnesota statute.
postpone the sale.
To redeem from the sale, the mortgagor must
pay to either the person who purchased the
RIGHT OF REDEMPTION property at the sale or the sheriff the sum of
Following the foreclosure sale, the mortgagor money for which the mortgaged premises
has a right under Minnesota law to redeem were sold, with interest from the sale date at
from the sale. Such a redemption annuls the the rate provided in the mortgage, plus other
sale. If there are any junior liens, however, costs recoverable by statute. These costs
they are revived by the redemption by the include (1) any taxes or assessments upon
mortgagor. which penalties would be incurred; (2), any
costs of a hazard insurance policy; (3) costs
The mortgagor must redeem within six
incurred to reduce a mortgagor's redemption
months of the date of the sale unless one or
period; (4) any fees paid to the county
more of the following applies, in which case
recorder, registrar of titles, or sheriff; (5) any
the redemption period is twelve months:
reasonable fees paid to licensed real estate
1. The mortgage was executed prior to brokers or appraisers; (6) any deed taxes; (7)
July 1, 1967. reasonable attorney fees incurred after the
2. The amount claimed due and owing as foreclosure sale, not exceeding one-half of
of the date of the notice of foreclosure the limits imposed by statute; (8) any costs
sale is less than two-thirds of the incurred in maintaining the property; and (9)
original principal amount secured by any interest or installment of principal upon
the mortgage. any other mortgage, lien, or contract for deed
due during the redemption period.
3. The mortgage was executed prior to
July 1, 1987, and the mortgaged The sheriff may accept a less than the full
property, as of the date of the amount required for redemption provided
execution of the mortgage, exceeded that the holder of the sheriff’s certificate
ten acres in size. gives written confirmation that he or she
agreed to accept a sum less than the full
4. The mortgage was executed prior to amount required for redemption.
August 1, 1994, and the mortgaged
property, as of the date of the The mortgagor must also provide a copy of
execution of the mortgage, exceeded the document giving him the right of
ten acres but did not exceed 40 acres redemption and an affidavit containing the
in size and was in agricultural use as amount owed. The mortgagor must record
defined by Minnesota statute. these items with the county recorder within
24 hours of redemption. In addition, the
5. The mortgaged property, as of the mortgagor will receive a certificate of
date of the execution of the mortgage, redemption including the mortgagor’s name,
exceeded 40 acres in size. the amount paid, a description of theforeclosure sale and the property, and a mortgagee. The mortgagee cannot offer the
statement of the source of redemption. The property for sale or lease until it has
certificate must be recorded within four days provided written notice to the mortgagor at
after the end of the redemption period. least 14 days in advance. When a third party
buyer or lessee is found, the mortgagee must
Possession of the Property During the Redemption then offer to sell or lease the property to the
Period mortgagor upon the same terms as the offer
During this redemption period, the made by such third party. The mortgagor has
mortgagor is entitled to remain in possession a defined period of time within which to
of the property. He is therefore entitled to exercise his right of first refusal to either buy
the rents, income and profits from the or lease the property on such terms. For
property unless he has made an assignment leases, it is within 15 days of the mortgagee’s
of an interest in them. No assignment of written offer to the mortgagor, and for sales,
rents and profits contained in a mortgage is it is within 65 days of the mortgagee’s
enforceable under Minnesota law unless it written offer to the mortgagor. If the
was (1) executed after August 1, 1977; (2) mortgagor exercises his right of first refusal,
secured an original loan in excess of he must fully perform the terms of the sale
$100,000; and (3) not a lien on property that or lease within ten days of such exercise.
was entirely homesteaded as agricultural
The mortgagor can elect to purchase or lease
property.
a portion of the total property involved, but
Waiver only where the portion is of a size,
configuration and location which does not
It is possible for a mortgagor to waive his
unreasonably reduce access to or the value of
right to redemption. In order for a waiver to
the remaining property. The mortgagor is not
be valid, it must be contained in a document
allowed to resell the property if the sale was
separate from the mortgage or be executed
arranged prior to his exercise of the right of
separately. It must also be recorded by the
first refusal. Where the property is resold by
lender.
him within 270 days of exercising the right of
first refusal, there is a presumption, subject
RIGHTS OF FIRST REFUSAL to proof to the contrary, that the sale was
Following the expiration of the redemption arranged ahead of the exercise of the right of
period, the mortgagor’s ownership rights in first refusal. Where the mortgagor violates
the property are terminated. However, with this prohibition, he will be liable for damages
respect to certain foreclosures of agricultural and attorneys’ fees.
property, the mortgagor continues to have
In addition to Minnesota law creating rights
certain rights of first refusal upon resale of
of first refusal, applicable federal law creates
the property by the mortgagee, as discussed
similar rights of first refusal in certain
above with respect to foreclosure by
circumstances. The mortgagee must be a
advertisement.
lender which is a part of the Farm Credit
Where the real estate which has been Services system. Changes in this federal law
foreclosed is agricultural and the mortgagee in 1996 have significantly limited the
is a government agency, limited partnership applicability of the federal law rights of first
or corporation, Minnesota law provides the refusal.
mortgagor with certain rights of first refusal
upon the resale of the property by theJUNIOR LIEN HOLDERS judgment can be sought against any
guarantors of the promissory note.
Under either method of foreclosure, junior
lien holders may redeem from the
foreclosure sale if the mortgagor fails to do
SEPARATE TRACTS OF LAND
so. Such junior lien holders may redeem if In the case of farming operations, it is
they have filed for record a notice of common for a single real estate mortgage to
intention to redeem. Junior lien holder give cover several separate tracts of land. If the
notice of their intent to redeem at least one mortgaged premises consist of separate and
week prior to the expiration of the distinct farms or tracts, the sheriff must sell
borrower’s redemption period. Redemption such tracts separately. If the mortgaged
by creditors is subject to a six percent premises include the homestead, upon
interest rate from the time of sale, unless the demand by the mortgagor, the sheriff must
certificate of sale specifies a different rate. first sell the non-homestead premises.
DEFICIENCY JUDGMENTS CONCLUSION
If the foreclosure sale does not bring in Procedures under Minnesota law for the
enough money to pay off the debt, the foreclosure and termination of real estate
creditor may be able to obtain a deficiency security agreements are complex and
judgment against the mortgagor. If the detailed. They prescribe specific time periods
statutory redemption period is six months, within which both parties must take certain
however, such a deficiency judgment can be actions. Such time periods are critical for
obtained against the mortgagor only if the both parties. Any person involved in such
foreclosure was by action. No deficiency procedures should carefully examine the
specific provisions of state law that apply to
judgment can be obtained against the
his case.
mortgagor if the redemption period is six
months and foreclosure was by For more information:
advertisement. If the redemption period is extension.umn.edu/agriculture/business
twelve months, however, a deficiency
judgment can be sought. Finally, even if the
redemption period is six months, a deficiency
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