A company (that we’ll call “Borrower”) borrowed $7.5 million from a lender and offered a piece of commercial real property as collateral (commonly known as a mortgage). Borrower defaulted on its payments under the loan agreement.
At that point, Borrower and bank entered into a “written pre-negotiation agreement, in which [B]orrower agreed to, among other things, waive its statutory right to redeem the mortgaged property in the event of a foreclosure sale.”
Later, at the foreclosure sale, the bank bought the property for $4.25 million (effectively “buying the property from itself” — that is, as a result of the foreclosure sale, the bank took ownership of the property and, in the process, diminished the amount that Borrower owed the bank by $4.25 million, the foreclosure sale purchase price).
While we do not know the value of the property at issue, it seems like $4.25 million was a very good deal because, after the bank bid that amount and won the property at the foreclosure sale, Borrower asserted its statutory right to “redeem” the mortgaged property. That is, Borrower (whom you can also call “Mortgagor”) asserted a right to pay the bank, the foreclosure sale’s winning bidder, $4.25 million and thus re-take title to the property.
You might wonder how Borrower could agree to waive its right of redemption and then turn around and assert it?
This week the Minnesota Court of Appeals issued a published decision to the effect that mortgagors cannot waive their statutory right of redemption. The court held such agreements to be unenforceable as a matter of statutory construction.
This seems a little odd because the court concedes that the statute “does not answer the specific issue at the core of [the] appeal.” Nevertheless, the court says, the statute “does contain some provisions that inform our analysis.” Specifically, the statute provides that the mortgagor “may redeem…by paying the sum of money for which the [lands] were sold” at the foreclosure sale.
In this case, [the Court of Appeals decided], no ambiguity arises from the absence of a statement that a mortgagor may or may not waive the statutory right to redeem foreclosed property. No ambiguity arises on that particular issue because the statute expressly recognizes a mortgagor’s general right to redeem.
The court continued:
Chapter 580 contains a limited number of exceptions to that general rule, but a private agreement between a mortgagor and a mortgagee is not among them. Because the statute expressly makes certain exceptions, there is an implied exclusion of other exceptions.”
This canon of statutory interpretation is known as “expressio unius est exclusio alterius,” meaning “expression of one thing is the exclusion of others.” It is a notoriously “loose canon,” meaning that it can be used by courts when it helps them reach a particular outcome or ignored if it reaches another.
In any event, the Court of Appeals has now clarified a legal question that had previously been uncertain. And the banking industry is in a better position than the state’s diffuse and dispersed borrowers are more able to adjust their practices in light of the decision or, alternately, to lobby the legislature to change the statute.
Congratulations to the borrower’s counsel, Ted Sheu and Brad Williams, of Best & Flanagan, LLP.