Error In Sheriff’s Notice of Sale Did Not Invalidate Redemption Right
When a mechanic’s lien is foreclosed upon and the real estate is sold, the owner of the property and lienholders have certain statutory rights of redemption. Normally, notice of redemption rights is specified in the notice of the foreclosure sale and also the deed of foreclosure. But, are redemption rights extinguished if such notice is not made and another party buys the property under a belief that no redemption rights existed? That was the question involved in this case.
The property owners were in the process of building a residence at the time it became subject to three liens – one in favor of the lumber company for purchased materials and supplies, one for a lender’s mortgage interest, and a third lien for work performed by a landscaping company. The lumber company filed to foreclose its mechanic’s lien (it had priority position among the lienholders), and gave notice to all interested parties – including the property owners. The district court entered a decree of foreclosure of the mechanic’s lien and ordered the property sold, and ordered that the buyer would obtain a sheriff’s deed to the property.
Unfortunately, the decree of foreclosure didn’t say anything about redemption rights, and the notice of sale that the sheriff’s office issued (based on advice of the lumber company’s counsel) explicitly stated that the foreclosure sale was not subject to redemption even though, under Iowa law, a mechanic’s lien foreclosure is not possible without redemption rights. A third party learned of the sale and contacted a bank about financing. The bank agreed to provide financing, but only if the property was not subject to redemption. The third party confirmed with the sheriff’s office that the sale was not subject to redemption. The sale occurred and the third party ended up buying the property (financed by the bank), and getting a sheriff’s deed to the property. The mortgage holder did not attend the sale because its lawyers told it that its interests would be protected by the one-year redemption right. The sale proceeds were sufficient to satisfy the lumber company’s lien, and the remaining surplus went to the prior owner’s mortgage holder (but, it was insufficient to satisfy the lien in full).
The sale proceeds were sufficient to satisfy the lumber company’s lien. Approximately, two months after the sale, the court held a hearing to determine who would get the excess sale proceeds. The court determined that the remaining surplus should go to the prior owner’s mortgage holder, but the amount of the surplus was not enough to satisfy their lien in full. Also, at the hearing the original lender claimed for the first time that they should have a right to redeem. The court declared the sheriff’s deed void and found that a one-year right of redemption was in effect beginning with the date of sale. The buyer then filed a motion to set aside the court’s ruling. Ultimately, the court determined that the buyer was a good faith purchaser, and vacated its earlier ruling to the extent that the earlier ruling had vacated the sheriff’s deed and granted a one-year redemption period. The initial mortgage holder appealed, claiming that it should not be stripped of redemption rights.
On appeal the court reversed (opinion by Vogel), on the basis that the buyer was not a good faith purchaser because the buyer had constructive notice of the initial mortgage holder’s right of redemption. The court opined that the buyer should have checked the public records concerning the property which would have disclosed the actual status of the title to the property. Simply relying on the incorrect sheriff’s notice and public announcements concerning the property were not enough. Justice Vogel even went so far as to refer to the buyer as an “ill-informed” buyer.
Justice Vogel’s opinion and name-calling didn’t sit well with Justice Mahan, who authored a stinging dissent. The dissent noted that the case involved fundamental concepts of contract law, that the law of equity (fairness) applied to the dispute, and that the equities were in the buyer’s favor. The dissent pointed out that neither the prior property owner nor the prior owner’s financier filed an answer or appearance when the petition was filed to foreclose the lumber company’s lien, even though they had notice. In addition, the buyer inquired repeatedly about whether the property was subject to redemption rights, and had been informed by a realtor (who later bid at the foreclosure sale) that the realtor’s attorney had advised the realtor that no redemption rights existed. After purchasing the property, the buyers took possession and began completing work on the residence. They also purchased an adjoining acreage shortly after acquiring the residence. The dissent noted that the initial mortgage holder sat on the sidelines and watched the buyer acquire the property, expend substantial sums in improving the property and acquire additional adjacent land. Only after the buyer had expended all of this time, money and effort, did the initial lender come forward and assert its redemption rights and claim that the sheriff’s deed should be set aside. The dissent properly noted that the initial lender could have avoided the entire situation by asserting its rights at the beginning of the process. The problems created were not the result of the buyer’s conduct.
Vogel’s opinion is highly questionable. In her majority opinion (joined by Miller), Vogel admonished the buyers for not checking the public record concerning the property. However, had a title search been done concerning the property, it would have disclosed the decree of foreclosure containing language that is only utilized when there are no rights of redemption concerning the subject property. Also, a title search would have revealed that the original owner’s lender defaulted – the time to set aside the default and appeal had already expired. Also, a search of the record would have revealed that the buyers were going to get a sheriff’s deed. Under Iowa law, a sheriff’s deed is as good as gold – it’s presumptive evidence of the regularity of all prior proceedings concerning the property (Iowa Code §626.100). That point was briefed, but the court ignored it. So, Vogel’s point about the buyers not searching the record is meaningless under the facts of this case. Vogel also opined that the buyers had constructive notice of the redemption right. Really? The facts of the case don’t support that assertion. What the facts clearly illustrate, however, is that the original lender had actual notice that a huge problem was looming (pursuant to the sheriff’s deed) and chose to sit on the sidelines.
Looks like the Iowa Supreme Court will have another mess to clean up. In the meantime, buying real estate and receiving a sheriff’s deed in return may not be a good idea. Spahn & Rose Lumber Co. v. Jones, et al., No. 8-565/07-1742, 2009 Iowa App. LEXIS 174 (Iowa Ct. App. Mar. 11, 2009).