Friday, August 12, 2011

The difference between clogged arteries and clogged rights of redemption

Poor circulation or shooting pains in your arms might suggest a trip to your doctor for lack of proper circulation in your arteries, but how do you know if your redemption rights have been clogged?  And why should you care? And is it fatal?

If you have even heard the phrase "clogging the equity of redemption" before, congratulations!   If you harbor an interest to know more, then you are very special, indeed.  I had not given this legal concept much thought, until a recent exchange between several very bright colleagues on the Maryland State Bar Listserves.  And if the cool kids are talking about it, well, then count me in, too!

What is the equity of redemption? Imagine you had but one remaining payment to make to your bank, but because your payment was made one day late the bank took ownership of the property....the whole thing...lock, stock and barrel. That is the harshest of harsh results. Since the reign of Charles I, the common law has recognized that a mortgagor remains at high risk to lose title to his land right through the last payment, and has fashioned a doctrine that permits some leniency for the temporarily defaulting debtor. (follow this link to a first person account of the execution of Charles I in 1649)

The common law evolved to recognize that a mortgagor has the right to reacquire clear title to the property pledged as security upon repayment of that debt, plus interest. This is your "equity of redemption." You can find a more "lawyerly" description in a motion for summary judgment I filed, several years ago.( I have redacted information about the parties' identities and the property location.) 

Maryland takes a strong public policy position against documents that preemptively strip a borrower's right to exercise this redemption in the future.  But some private, or "hard money" lenders continue to require a borrower to execute a deed in lieu of foreclosure, when the loan is made, as added protection to the lender in case of default.  The deed in lieu is then filed away until the borrower misses a payment....and then it is pulled from the file, dusted off, and recorded in the land records.  And just like that, the borrower's title is lost to the lender, without a foreclosure action ever being filed.

This morning, I stumbled on an exchange of questions/answers on the Maryland State Bar Listserve that questioned application of the rule against clogging the equity of redemption in foreclosure cases, where a deed in lieu is negotiated AFTER the foreclosure is filed, but BEFORE the sale.

One very able foreclosure lawyer, Jeff Fisher, posited that:

The purpose of foreclosure is to put the property to a public sale so that a price for it can be obtained and, if the price is sufficient to satisfy the debt, the excess proceeds are available for the benefit of the mortgagor or those who claim under the mortgagor. It is a fundamental right. All deeds in lieu of foreclosure are subject to equitable scrutiny, even when the deed in lieu is negotiated after default occurs. If the mortgagor is just giving his equity away to his mortgagee, how is that not a clog on the equity of redemption.
Another very bright and capable lawyer, Byron Huffman, posted this rejoinder:

I respectfully disagree with Jeffrey as to the “clog on redemption” where a deed in lieu is executed post-default.  At that point, the DIL is a negotiated instrument for valuable consideration.  The clog on redemption occurs where there is no present intent of conveyance whether in connection with the original loan transaction or in connection with, say, a loan modification or forbearance.  That in my view always results in a deed in the nature of a mortgage.  Title insurance counsel may disagree with me, but where there is a negotiated DIL and a present intent of conveyance, a sale thereafter to a bona fide purchaser would be unassailable
This exchange caused me to go back through my old research. I found that in 1892, a published treatise on Maryland property law said "[t]he right to redeem, even in a mortgage context, can be itself divested by a valid mortgage foreclosure sale, or by a waiver made subsequent to, and outside the mortgage instrument itself." (you can buy the book, on Amazon, if you are a legal history buff, for about twenty bucks).

The Venable treatise continues to be quoted by the Maryland appellate courts. It was most recently quoted authoritatively in late 2010. This leads me to agree with Mr. Huffman. A deed in lieu that is negotiated later, after the initial loan transaction, should not be deemed to clog the equity of redemption. To borrow Venable's words, the waivers made in the deed in lieu are subsequent to the loan transaction, and are "outside the mortgage instrument itself."

So, my title friends, here's what I conclude: A deed in lieu that is given in the course of a foreclosure proceeding is not an impermissible clog of the equity of redemption. It is a subsequent waiver of the right of redemption.

Time for recess! Meet you all at the jungle gym.