Minnesota Foreclosures by AdvertisementBy Alissa N. Mitchell

Alissa N. Mitchell is an attorney in Foley & Mansfield’s Minneapolis office, where she focuses her practice in commercial litigation. Her clients include banks, private lending institutions and insurance companies. She can be reached at (612) 338-8788 or via email at amitchell@foleymansfield.com.

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F oreclosures in Minnesota are big business for the banks and businesses, and for all the other businesses involved in the foreclosure process. The decision on how to foreclose – via litigation or advertisement without judicial intervention – is a big decision. To

save costs and in an effort to avoid judicial involvement in most foreclosures, lenders will often decide to foreclosure by advertisement.

Unfortunately, a lender foreclosing by advertisement on Torrens property will be unable to avoid all judicial involvement and will find themselves in front of a judicial officer reviewing the foreclosure process. If you’re not in the real estate business or not an experienced lender in Minnesota, you may be wondering what is Torrens property and if the foreclosure was by advertisement, why do they have to go to court? Although the law governing Torrens property can be highly technical, being aware of the basic framework of a common Torren’s procedure can help lenders and attorneys alike to avoid unnecessary litigation from a foreclosure by advertisement procedure.

In Minnesota, land can be either registered land, known as Torrens property, governed by a system for registering the title to land pursuant to an order of registration issued by the District Court, or land which has not been registered, known as abstract property.

The abstract records control the history of the property and provide a way of determining property ownership. To determine ownership of a particular abstract property, an owner must get copies of pertinent documents of the property and read through abstracts to find which inter-ests are established for a piece of property.

With Torrens property, an owner of a prop-erty is issued a certificate of title, which forgoes the need to get copies of document to determine the chain of title. Each time an owner voluntari-ly transfers property, a new certificate of title is created and carries over the relevant documents affecting the title on the new certificate of title. In order for any conveyance, lien, instrument

or proceeding to affect the title to the registered Torrens property, it must be filed and registered with the county’s registrar of titles.

After a certificate of title has been issued, the court must correct the certificate on occasion when there is an involuntary conveyance, such as a mortgage foreclosure. If this occurs, the court must review the foreclosure process to confirm it was done properly and new owner has, in fact, gained title. After the redemption period expires on Torrens property, the foreclosing party will need to commence a separate court action re-questing an order from the court directing the issuance of a new certificate of title in the name of the new owner. This proceeding requires the lender to serve the borrowers with notice of a hearing date to provide them with an opportu-nity to bring forward any objections they have relating to the foreclosure before the court will enter an order directing the issuance of the new certificate of title in the new owner’s name.

Brief Overview of Torrens Property

A Proceedings Subsequent Doesn’t Give A Borrower a Second Opportunity to Object to the Foreclosure.

Over the past six years, as foreclosures have occurred in record-breaking numbers, the number of lawsuits filed by the borrowers relating to the validity of the foreclosure proceeding has also increased. In recent years, borrowers have even tried to use a proceeding subsequent actions to re-litigate foreclosure objections or defenses that were already the subject of (or could have been the subjection of) prior court proceeding initiated by the borrowers against the lenders.

Despite a good effort by some borrowers to use this proceeding as a second swing at litigation against the lenders, the Minnesota appellate courts have consis-tently affirmed that borrowers who commence lawsuits against lenders in connection with the foreclosure in prior state and/or federal proceedings will be barred from trying to use a proceedings subsequent as a second attempt to re-litigate these same claims. The courts have applied the doctrine of res judicata to avoid litigating issues in proceedings subsequent. As a result, if parties (the borrowers or junior creditors) to a foreclosure want to litigate an issue, the litigation must be commenced prior to the proceedings subsequent action or the right to have a court intervene will be lost.

So How Does This Play Out in a Typical Foreclosure by Advertisement?

In foreclosures by advertisement, after sending all required pre-foreclosure notices to the occupant and borrower, a sheriff ’s sale is scheduled and the prop-erty is scheduled to be sold. The highest bidder at the sheriff ’s sale (generally, the foreclosing party) becomes holder of the sheriff ’s certificate for the foreclosed property. After that, there is a period of time (six or 12 months) that the borrower can try and redeem the property before the holder of sheriff ’s certificate gains title and becomes owner of the property.

If the foreclosure involves abstract property and all parties entitled to redeem fail to redeem during the redemption period, this is the end of the foreclosure process for the foreclosing lender. No further judicial involvement is needed. Record title to the abstract property is automatically in the name of the new own-er (holder of the sheriff ’s certificate).

If this foreclosure involves Torrens property and re-demption does not occur, title does not automatically transfer to the holder of the sheriff ’s certificate. In or-der for the certificate of title to transfer into the lender or subsequent new owner’s name, the lender will have to commence a proceeding subsequent action request-ing the issuance of a new certificate of title, thus requir-ing litigation in a process designed not to be litigated.

April 2015 Attorney at Law Magazine® Twin Cities | 9