Case Law Summaries

Norwest Bank Minnesota, N.A. v. Edgar

• Opinion Date: December 5, 2001
• Real Property Law
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MORTGAGES; FORECLOSURE; SURPLUS FUNDS—One who purchases a property from its owner, for value, during the pendency of foreclosure proceedings is entitled to any surplus sale proceeds even if the buyer, itself, is the successful bidder.

A bank foreclosed on a house. Between the time final judgment was entered and the date of the sheriff’s sale, a third purchased the property from its owner-mortgagor and agreed to assume mortgage. The buyer also agreed to pay the taxes and certain other costs. The buyer was the successful bidder at the foreclosure sale and paid considerably more than the amount owed to the mortgagee. The original owner then claimed that it, not the buyer, was entitled to the surplus funds. He had four arguments. First, he argued “that a successful bidder at a sheriff’s sale is not entitled to surplus funds he created, the surplus belonging to the owner of the property.” His argument was based on the assertion that it was a conflict of interest for a buyer to be both the owner of the property and the successful bidder. The mortgagor also noted that its deed to the buyer was never recorded and that the other bidders did not know that the buyer was the owner of the property for which he was bidding. The mortgagor’s second argument was that by operation of law, “the new Sheriff’s Deed to a successful bidder cuts off all prior Deeds and Interests. Therefore, the unrecorded Deed” was void and of no effect. The third argument referred to the lis pendens filed in connection with the foreclosure action. Under that theory, the buyer’s interest in the property would have been bound by the foreclosure judgment and the resulting Sheriff’s Deed would have cut off the buyer’s equitable interest in the property. This would mean that the buyer acquired title by the Sheriff’s Deed “as a successful bidder and not as the prior owner of the property.” Lastly, the mortgagor argued that “[s]urplus monies belong to the parties who held interest in lands which were ‘cut off’ by Foreclosure Sale and not to holders of superior interests, since the purchaser at such a sale will take subject to all superior interests.” In response, the buyer argued the mortgagor waived its right of redemption when it conveyed its legal title to the property to him. The buyer further argued that he became the rightful owner of the property and the equity of redemption when he purchased the property from the mortgagor and that the mortgagor was, therefore, estopped from making any further claims to the property. The Court rejected the mortgagor’s reasoning and awarded the surplus funds to the buyer. It held that the buyer’s failure to record a deed did not undermine its validity. While an unrecorded deed may be void against subsequent buyers, encumbrancers, and judgment creditors without notice of the transfer, “[i]t is perfectly efficacious in passing title from grantor to grantee… .” As to the mortgagor’s argument that it was improper for the buyer to bid at the sheriff’s sale without disclosing to the other bidders that he was the owner of the property, the Court could not find any legal authority to support such an argument. Further, it pointed out that a person who “accepts a deed ... for the payment of money, conveying property subject to a first mortgage which he assumes, certainly is not a trustee for the grantor in a sense which forbids him from attending the sheriff’s sale in a suit to foreclose the first mortgage and buying in the property for his own benefit.” Only one who “occupies a position trust or confidence toward the mortgagor, ..., is precluded from bidding.” Lastly, the mortgagor lost all interest in the premises and had no right to any surplus existing after payment of the mortgage. “That right belongs to the person who acquired title to the premises for valid consideration prior to the sale.”

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