Minnesota Appeals Court Ruling Serves as Cautionary Tale for Lenders Placing Bids at Sheriffs’ Sales

August 31, 2021

By Aaron J. Hurd

Deficiency judgments are common occurrences in mortgage foreclosures and typically arise when the amount bid at sale is less than the amount due on the mortgage debt. However, sometimes the amount bid at sale significantly exceeds the mortgage debt. When this happens, Minnesota law directs that the resulting “surplus” be paid to the borrower. The existence
of a deficiency or surplus is determined at the time of the sheriff’s sale, and not a later resale.

Another issue arises when the parties stipulate to an amount due under the mortgage. In a previous Minnesota Appeals Court decision, First Minnesota Bank v. Overby Development, Inc., the court found that a stipulated judgment amount can be used to calculate a deficiency judgment. Specifically, the courts have allowed this in cases in which the stipulated amount was much less than the total mortgage debt and the lender attempted to bid high and retain a bigger surplus for itself. A recent Minnesota Appeals Court decision, SW Partners, LLC v. Trade Center Property, LLC, grappled with this idea, clarifying the borrower’s right to a surplus and considering how a stipulation can affect the amount of that surplus.

In SW Partners, two affiliated companies borrowed $1.8 million, secured by mortgages on two different properties. After the borrowers defaulted, SW Partners (the creditor) brought three different actions to obtain a judgment for the outstanding amounts and foreclose on the properties. The reason that the creditor brought three different actions over the same underlying debt remained unclear throughout the case.

The parties then stipulated as to the amounts owed, and the District Court entered three separate judgments (again, all relating to the same underlying debt) in the amounts of $1,983,815.63, $1,990,012.67, and $2,005,371.35, respectively, with the amounts varying due to the interest accumulating over time. The properties were subsequently sold at a sheriff’s sale for $600,000 and $1.8 million, with the highest bids coming from SW Partners itself. Each party was then asked to submit a number as to what the surplus would be, and the District Court accepted SW Partner’s lower submission of $273,900.38 and awarded the surplus to the borrower.

On SW Partners’ subsequent appeal, the Appeals Court ruled that there was “obviously” a surplus, as the two bids totaling $2.4 million exceeded even the highest of the three stipulated amounts. The most important lesson, however, came from SW Partners’ attempt at using the precedence of Overby to its advantage. In Overby, the Court substituted the stipulated amount as the mortgage debt, which was less than the total outstanding mortgage debt. The lender appealed, arguing that it was entitled to any surplus found and that the surplus calculation should be based on the total outstanding mortgage debt, not the lesser stipulated amount. The Court rejected that argument, ruling that the “mortgage debt” should be reduced consistent with the portion of the property actually foreclosed upon. Since only part of the property had been foreclosed upon and the stipulation reflected that, the lesser amount of the stipulation was used for calculating a surplus.

When SW Partners attempted to use this precedence as evidence that the stipulated judgment should be substituted for the mortgage debt amount for the purposes of determining the surplus, the Appeals Court dismissed that argument, distinguishing this case from Overby by relying on the underlying policy driving both cases – preventing lenders from abusing the system by overbidding and preventing redemption, while at the same time eliminating any surplus that would otherwise belong to the borrower. The Court reasoned that, although the lenders in Overby and SW Partners were arguing for opposite results, their arguments would both open the door to this potential abuse. Instead, the Appeals Court affirmed the District Court’s ruling using SW Partners’ submission of $273,900.38 as the surplus amount, which was based on SW Partners’ winning bids at the sheriff’s sale and the mortgage debt.

SW Partners, although presenting a unique factual circumstance, serves as a reminder that the parties should exercise caution when stipulating as to amounts due on a mortgage, particularly when that stipulated amount differs materially from the underlying mortgage debt. Similarly, lenders should remember to carefully assess the impact of their bid at a sheriff’s sale so as not to inadvertently affect a later surplus calculation.