During the “great recession” in the past decade, it was common for our bank and lender clients holding a second or third position mortgage securing a defaulted debt to face little or no equity available in the mortgaged property. In most instances, the client exercised the option under Minnesota law not to foreclose on the mortgage as the first step toward collection, but instead to simply obtain a money judgment based on the underlying debt instrument. While the mortgage remained as a lien on the property, the ease of obtaining a money judgment that usually was quickly obtained by default far outweighed the time and expense of a foreclosure on the mortgage.
However, often facing limited results in collecting upon money judgments obtained, and as property values have gradually recovered in recent years, we have assisted our clients with significant success by revisiting the existing mortgage lien rights as part of post-judgment collection efforts. By reassessing the current value of the secured real estate, sufficient equity has been to have reappeared to make it worthwhile to seek to foreclose the existing mortgage in order to collect on the previously-docketed money judgment.
To put this strategy into perspective, under Minnesota law, the holder of a mortgage lien on real property has three options:
(i) To bring an action for foreclosure in district court, often referred to as foreclosure by action, whereby the creditor has the right to have a “deficiency money judgment” entered to the extent the sheriff’s sale is insufficient to satisfy the underlying debt;
(ii) Foreclose upon the mortgage by advertisement, a statutory procedure that avoids the need for a court action, but which serves as an election in that the creditor is deemed by statute as foregoing the right to seek a money judgment; or
(iii) Proceed first with obtaining a money judgment, leaving the mortgage alone on the property as a lien of record for a possible recovery due to a voluntary sale of the property by the owner, or a foreclosure action be advertisement to be exercised at a later date.
Essentially, Minnesota does not obligate a creditor to always first seek foreclosure on a mortgage lien, and permits a mortgage holder to exercise the remedies of a money judgment and/or foreclosure either together or separately and in any order. The only “election of remedies” occurs in the event a foreclosure by advertisement is first attempted. By Minnesota statutory law, the foreclosure by advertisement eliminates the option to seek a money judgment, regardless whether the foreclosed property was not sufficient in value to satisfy all of the underlying debt.
Once a mortgage holder elects to proceed first with obtaining a docketed money judgment alone without commencing a foreclosure by action, the Minnesota Court of Appeals has confirmed that the lender creditor’s right of foreclosure remains as a further collection remedy as long as there is no double recovery on the debt:
“In choosing between mortgage foreclosure and an action on the note, the mortgagee may pursue either or both remedies, as long as there is no double recovery on the debt. First Nat’l Bank of Osakis v. Flynn, 190 Minn. 102, 106, 250 N.W. 806, 808 (1933). This is in accord with the general rule of law that a mortgagee is permitted to assert any claim against a debtor that is not inconsistent with the remedy of foreclosure. See Kooda Bros. Constr. v. United Fed. Sav. & Loan, 400 N.W.2d 407, 409 (Minn.App.1987) (citing Bond v. Charlson, 374 N.W.2d 423, 431 (Minn.1985)).”
City of St. Paul by Housing and Redevelopment Authority of City of St. Paul v. St. Anthony Flats Ltd. Partnership, 517 N.W.2d 58, at 62 (Minn. App., 1994).
The take-away: a creditor is not obligated to foreclose on a mortgage securing a debt, but can instead first choose to seek only a money judgment. No election of remedy is triggered by doing so. As the economy continues to recover, holders of mortgage liens with money judgments in hand can revisit the merits of whether the value of the mortgaged property has risen to a level making a foreclosure action now worthwhile.
By Steve Hetland
Leighton Hetland PLLP