On December 23, 2013, the Minnesota Court of Appeals held that if two separate tracts of land secure one mortgage loan, each tract must be sold separately at a foreclosure sale conducted under Minnesota's foreclosure by advertisement statute. Failure to strictly comply with this requirement voids a non-compliant foreclosure sale. Unless and until this case is overturned on appeal, lenders should assume that when foreclosing by advertisement, property comprised of multiple separate and distinct tracts must always be sold as separate tracts at the foreclosure sale, and that questions about title resulting from a sale in gross may persist for a period of time following any such sale

The Case: Hunter v. Anchor Bank

In Hunter v. Anchor Bank, __ N.W.2d __, A13-0515 (Minn. Ct. App. Dec. 23, 2013), a borrower's loan was secured by a mortgage on the borrower's home in Dakota County and a second home in Washington County that the borrower had purchased for her son. When the borrower defaulted, the lender conducted a foreclosure by advertisement. The two homes encumbered by the mortgage were sold together to a single purchaser at the foreclosure sale.

After the sale, the borrower sued to set aside the sale because the two separate homes were sold together in alleged violation of Minn. Stat. § 580.08, which provides that mortgaged premises made up of separate and distinct tracts be sold separately.

The Court of Appeals noted that there was no dispute that the foreclosure sale did not comply with the statute. The two homes were clearly separate and distinct "tracts," yet they were sold together at the foreclosure sale. Only the consequence of the sale was in dispute. The borrower argued that the non-compliant sale was void. The lender argued (and the lower court had held) that the sale was merely voidable and should be upheld absent evidence of prejudice or good cause to void the sale.

Relying on recent Minnesota Supreme Court decisions Ruiz v. 1st Fed. Loan Servicing, LLC, 829 N.W.2d 53 (Minn. 2013) and Jackson v. Mortgage Electronic Registration System, Inc., 770 N.W.2d 487 (Minn. 2009), the Court of Appeals concluded that a failure to strictly comply with any provision in Chapter 580 renders a foreclosure void. In so concluding, the Court of Appeals rejected a series of older Minnesota Supreme Court cases holding that sales in gross of multiple parcels were voidable only when fraud, prejudice or other good cause for vacating them was shown. See, e.g., Willard v. Finnegan, 42 Minn. 476, 44 N.W. 985 (1890).

One judge in the three-judge panel concurred in the conclusion that the foreclosure sale did not comply with the requirements of section 580.08, but wrote separately that the sale should be voidable rather than void. The concurring judge wrote that to apply a remedy declaring all such non-compliant sales void would render titles impossible to determine as title examiners could no longer rely on title records to provide necessary information. And because additional records might not be accessible, title examiners may have difficulty certifying that particular titles were free of void transactions.

The Impact of Hunter

While arising in a residential setting, the decision in Hunter will likely have a much greater impact on commercial as opposed to residential foreclosure sales as commercial mortgages routinely encumber property that could potentially be characterized as comprising multiple separate and distinct parcels.

Some commercial mortgages contain provisions that purport to waive any requirement to hold separate sales on separate tracts. Prior to Hunter, this type of waiver had been enforced. In John W. Swenson & Sons, Inc. v. Aetna Life Ins. Co., 571 F.Supp. 895 (D. Minn. 1983), the Minnesota District Court reviewed a waiver provision stating that the mortgagor "waives and relinquishes any and all rights which he may have to have the premises marshalled or sold in separate parcels at any foreclosure sale." The court held that the mortgagor had knowingly and voluntarily waived its rights, and since such a waiver was neither illegal nor contrary to public policy, the waiver was valid and enforceable. Id. at 902. But the court explicitly relied, at least in part, on its finding that the Minnesota Supreme Court had held that section 580.08 was "directory" only, stating that under the case law as it then existed noncompliance with the statute did not make a sale void, but only voidable for good cause shown. The Minnesota District Court concluded that since section 580.08 was not mandatory, the mortgagor had the power to consent to its waiver.

Hunter clearly undercuts this portion of the Minnesota District Court's reasoning. It makes section 580.08 mandatory (to use John W. Swenson's terminology) and so may well affect any conclusion that a mortgagor can waive its provisions.

One saving grace is the Curative Act. Section 582.25 of the Minnesota Statutes provides that every foreclosure sale by advertisement is, after the expiration of the period specified in section 582.27, legalized and made valid and effective as against any number of objections, including any objection "that distinct and separate parcels of land were sold together as one parcel and to one bidder for one bid for the whole as one parcel." Minn. Stat. § 582.25, subd.4. The period specified in section 582.27 is one year after the last day of the redemption period of the mortgagor." Minn. Stat. § 582.27, subd.1(a).

Going Forward: Handling Foreclosure Sales by Advertisement

Hunter is a published decision of the Minnesota Court of Appeals. While a petition for further review by the Minnesota Supreme Court is possible, there's no assurance that a petition will be filed or, if filed, granted.

Absent further direction from the Minnesota Supreme Court, any pending foreclosure sale being conducted by a foreclosure by advertisement should be reviewed for the possibility that the property to be sold is comprised of separate and distinct tracts. Unfortunately, despite a number of cases from the late 1800s addressing the issue, there is no accepted definition of what constitutes a separate and distinct "tract." Under this case law, multiple lots or separately described parcels may still constitute a single "tract," but reasonable minds might differ, and litigation over what constitutes a separate and distinct "tract" is now more likely.

And for any foreclosure by advertisement that has already been conducted, until one year has passed from the last day of the redemption period, there is at least a possibility that a borrower might argue that the sale was void for failure to sell separate and distinct tracts separately. A lender might argue that this perceived change in the law should be applied only prospectively, but there is no assurance that a court would accept such an argument (and it's at least implicitly rejected by Hunter).

To preserve a future waiver argument, adding a section 580.08 waiver provision to any new mortgage should be considered. Without further direction from the courts, it is impossible to say with certainty that such waivers will be deemed valid and enforceable by future case law, but because contractual waivers are generally valid and enforceable, a lender will want to have included one in any mortgage that is arguably comprised of separate tracts or parcels.

Finally, section 580.08 and Hunter apply only to foreclosures by advertisement. If a lender is keen on selling multiple parcels in gross, a lender would be wise to consider foreclosing by action as sales in gross are expressly permitted under section 581.04.