In states like Michigan, where non-judicial foreclosures are allowed by state law, it has been widely accepted that state law also governs the rights of the United States when a senior lien is foreclosed upon non-judicially. This practice was largely based on the precedent set by the U.S. Supreme Court in United States v. Brosnan (1960)1, which held that a non-judicial foreclosure of a senior lien could extinguish a junior Federal lien. The decision created a standard practice in which non-judicial foreclosure was understood to terminate the rights of the United States, provided that the foreclosure followed the state law procedures.
However, subsequent to the Brosnan decision, amendments were made to Federal law2, introducing two changes that have been determined to affect the rights of the United States in foreclosure proceedings. First, the statute provides in pertinent part, “an action to foreclose a mortgage or other lien, naming the United States as a party under this section, must seek judicial sale3,” as opposed to a non-judicial foreclosure. Second, the statute grants the United States a right of redemption for one year following the judicial sale of the property, allowing it to redeem the property under specific conditions4.
These changes have sparked some recent legal debate, particularly in states permitting non-judicial foreclosures. A recent Federal court of appeals5 found in Show Me State v. McDonnell (2023), that based on this provision of Federal law, non-judicial foreclosures do not extinguish junior Federal liens held by agencies of the United States. (e.g. mortgages in favor of the Department of HUD or VA).
Federal tax liens (e.g., IRS liens) are exempted because those liens can be eliminated through non-judicial foreclosures authorized by a separate Federal statute6.
The implications of this decision are significant for the underwriting of title insurance even in states that are not located within the jurisdiction of the Show Me State court. As a result of the Show Me State ruling, major title underwriters have concluded that, to ensure post-foreclosure title is insurable, the foreclosure of a senior lien must be conducted through a judicial sale to extinguish a junior Federal lien. Even with a judicial sale, the government still retains a right of redemption for one year, adding an additional layer of complexity to the process.
When a junior Federal lien (not including Federal Tax Liens) held by an agency or instrumentality of the U.S. government is involved, in a state where non-judicial foreclosures are typically permitted by state law, mortgage servicers now encounter the added expense and time required to carry out the foreclosure through a judicial sale in those states, and wait for the extended redemption period to expire. These steps are essential to ensure that clear and marketable title can be transferred to the successful bidder following the foreclosure sale.
The legal landscape surrounding the foreclosure of senior liens and the extinguishment of junior Federal liens has evolved considerably since the Show Me State decision. Servicers should work closely with counsel to ensure all requirements for a judicial sale and the government's redemption rights are carefully navigated to avoid potential post sale legal complications.
[1] United States v. Brosnan (1960) 363 U.S. 237
[2] 28 U.S.C. § 2410
[3] 28 U.S.C. § 2410(c)
[4] 28 U.S.C. § 2410(c)
[5] Show Me State v. McDonnell (2023) 8th Cir. 74 F.4th 911
Our team is constantly monitoring this topic. If you have additional questions or would like to learn more about our real estate default solutions, connect with shareholder Ben Hoen at any time.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
However, subsequent to the Brosnan decision, amendments were made to Federal law2, introducing two changes that have been determined to affect the rights of the United States in foreclosure proceedings. First, the statute provides in pertinent part, “an action to foreclose a mortgage or other lien, naming the United States as a party under this section, must seek judicial sale3,” as opposed to a non-judicial foreclosure. Second, the statute grants the United States a right of redemption for one year following the judicial sale of the property, allowing it to redeem the property under specific conditions4.
These changes have sparked some recent legal debate, particularly in states permitting non-judicial foreclosures. A recent Federal court of appeals5 found in Show Me State v. McDonnell (2023), that based on this provision of Federal law, non-judicial foreclosures do not extinguish junior Federal liens held by agencies of the United States. (e.g. mortgages in favor of the Department of HUD or VA).
Federal tax liens (e.g., IRS liens) are exempted because those liens can be eliminated through non-judicial foreclosures authorized by a separate Federal statute6.
The implications of this decision are significant for the underwriting of title insurance even in states that are not located within the jurisdiction of the Show Me State court. As a result of the Show Me State ruling, major title underwriters have concluded that, to ensure post-foreclosure title is insurable, the foreclosure of a senior lien must be conducted through a judicial sale to extinguish a junior Federal lien. Even with a judicial sale, the government still retains a right of redemption for one year, adding an additional layer of complexity to the process.
When a junior Federal lien (not including Federal Tax Liens) held by an agency or instrumentality of the U.S. government is involved, in a state where non-judicial foreclosures are typically permitted by state law, mortgage servicers now encounter the added expense and time required to carry out the foreclosure through a judicial sale in those states, and wait for the extended redemption period to expire. These steps are essential to ensure that clear and marketable title can be transferred to the successful bidder following the foreclosure sale.
The legal landscape surrounding the foreclosure of senior liens and the extinguishment of junior Federal liens has evolved considerably since the Show Me State decision. Servicers should work closely with counsel to ensure all requirements for a judicial sale and the government's redemption rights are carefully navigated to avoid potential post sale legal complications.
[1] United States v. Brosnan (1960) 363 U.S. 237
[2] 28 U.S.C. § 2410
[3] 28 U.S.C. § 2410(c)
[4] 28 U.S.C. § 2410(c)
[5] Show Me State v. McDonnell (2023) 8th Cir. 74 F.4th 911
[6] 26 U.S.C. § 7425
Our team is constantly monitoring this topic. If you have additional questions or would like to learn more about our real estate default solutions, connect with shareholder Ben Hoen at any time.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
