Appeals court clarifies redemption rights when two mortgages, one foreclosed 

By Joe Forward, Legal Writer, State Bar of Wisconsin

Feb. 21, 2011 – A foreclosing party who waives the right to a deficiency judgment on one mortgage does not lose the right to a shortened redemption period by later seeking a money judgment for defaulting on a second mortgage against the same property, a Wisconsin appeals court recently held.

Under 846.101, a foreclosing party may waive a judgment for deficiency amounts due after sale of the mortgaged premises. If the plaintiff so elects, no judgment for deficiency may be ordered and the debtor’s statutory right to redeem the property is reduced from 12 months to six months. In other words, a lender trades deficiency rights for a shortened redemption period.

Harbor Credit Union (Harbor) held two mortgages on the same property owned by Christopher Samp (Samp). The first mortgage secured a loan of approximately $275,000. The second mortgage on the same property secured a loan of about $125,000.

In March 2009, Harbor filed a complaint for foreclosure under the first mortgage, and elected to shorten Samp’s redemption period from 12 months to six months under 846.101 by waiving the right to a deficiency judgment under section 846.04(1).

In June 2009, the Door County Circuit Court issued an order and judgment that Samp defaulted on the first mortgage and ordered the property sold within six months. The court also ordered that, pursuant to section 846.101(2), no deficiency judgment could be entered even if the proceeds were insufficient to pay the amount due on the first mortgage.

The circuit court’s order stated that Harbor’s $125,000 second mortgage interest was junior and subordinate to Harbor’s first mortgage, but said nothing more about it.

In December 2009, Harbor obtained separate action seeking a money judgment on the second defaulted mortgage for nearly $121,000.

Two weeks later, and just over six months after the circuit court issued the foreclosure judgment, Harbor submitted the only bid on the foreclosed property for $411,000, and moved for judicial confirmation of the sale.

Harbor’s attorney asserted there was no deficiency on the foreclosure of the first mortgage and the money judgment on the second mortgage “would also be satisfied from the proceeds of the sale.” The circuit court confirmed the sale, although Samp indicated his wish to redeem the property that same day by paying the sale amount.

The circuit court held open Samp’s redemption right until the end of the day, then confirmed the judgment for the amount of debt owed on the first mortgage, $272,125. Samp’s attorney argued that he tried to reach Harbor representatives immediately following the confirmation hearing to make a redemption payment on behalf of Samp, but was unsuccessful.

Three weeks later, Samp filed a motion to vacate the order confirming the sale, arguing that Harbor was not entitled to accelerate the redemption period to six months “because the money judgment on the second mortgage amounted to a deficiency judgment.” The circuit court denied Samp’s motion to reconsider the confirmation order.

The District III Wisconsin Court of Appeals in Harbor Credit Union v. Samp, 2010AP974 (Feb. 17, 2011), affirmed, concluding that “there is no reasonable way to read Wis. Stat. sections 846.04(1) and 846.101 to mean that the money judgment obtained on the second mortgage and note should count as a deficiency judgment for purposes of the foreclosure action.”

Judge Margaret Vergeront issued a dissenting opinion, arguing that Samp was not required to pay the amount due on both mortgages to redeem the property.

Waiver of deficiency judgment 

The appeals court – in an opinion written by Judge Brian Blanchard – explained that when a party waives a right to a deficiency judgment in a foreclosure action, it waives the deficiency right concerning the debts which are the subject of the foreclosure action only.

“In this case, the debt identified in the complaint and foreclosure judgment, and to which Harbor’s waiver of deficiency was directed, was the first mortgage and note, not the second mortgage and note,” Judge Blanchard wrote.

Judge Blanchard explained that case law does not support the argument that foreclosing on a senior lien and electing a shortened redemption period in the foreclosure on the senior lien extinguishes a party’s right to seek judgment in a separate action on the junior lien.

Thus, the court concluded that Harbor was entitled to seek a money judgment on the junior lien without disrupting its right to a shortened redemption period of foreclosure.

Last-minute redemption 

Samp also argued that it was improper for the circuit court to deny his motion to vacate the sale conformation order because preventing him from redeeming the property the day of sale confirmation, or shortly after, amounted to an injustice.

Wis. Stat. section 846.13 gives a mortgagor the right to redeem property “any time before the sale by paying to the clerk of the court in which the judgment was rendered.”

The appeals court explained that “before the sale” means payment is effective before the court confirms the sale, but the right expires upon confirmation. The court noted that a mortgagor takes certain risks in waiting until the day of confirmation to redeem.

“Samp’s perilous approach was apparently premised in part on the mistaken view that a mortgagor may redeem by handing a check to a judge, facilitating last-second redemption,” Judge Blanchard wrote. “[A] mortgagor is obligated … to plan at least sufficiently enough to conduct this transaction before entry of the confirmation order. …”

The appeals court ruled that no injustice occurred when the circuit court entered its confirmation of sale order on the same day as the confirmation hearing, despite Samp's assertion that he had the money to satisfy the debt.

The court also rejected, on grounds of harmless error, Samp’s argument that a new sheriff’s sale was required because Harbor failed to timely pay the clerk of court the mortgage balance after confirmation of the sale as required by 846.16.

Dissent 

Judge Vergeront noted that Harbor’s action did not seek a foreclosure on the second mortgage, only the first mortgage, so it was error for the circuit court to require that Samp pay the amounts due on both mortgages to redeem the property.

However, Judge Vergeront agreed that the money judgment on the second mortgage did not amount to a deficiency judgment, and that Harbor’s failure to comply with sections 846.16 and 846.17 was harmless error.