If You Buy A Foreclosed Property, Is It Yours?

35/ “BY A 4-3 COUNT, THE SUPREME COURT TAKES ‘A FAST SKATE ON THIN’ ICE’”:  Amos Graves defaulted on his mortgage for his house in St. Paul in 2007.  Wells Fargo bought the house at the first sheriff’s auction.  But Graves had a right to buy back the house within six months if he paid off the debt to the Sheriff.

Graves entered a scheme with Wayman and his two shell companies.  In return for either a return of his house, or a payment from Wayman if he kept the house, or a share of the profits if Wayman sold the house, Graves would sign a quitclaim deed to Wayman which would allow Wayman to stand in Groves’ shoes to reclaim the house from Wells Fargo.  Graves gave the quit-claim deed to Wayman.  Wayman sold the deed to his first shell firm C&M for $100.  C&M sold the deed to Wayman’s second shell firm REA for $100.  REA secured a mortgage from First Minnesota for the house for $145,000.  The Wayman entities paid the Sheriff $110,000 to settle the debt.  Wayman and his shell firms the defaulted on their mortgage and left with the $35,000 from the second mortgage.

Graves received nothing from the scheme of the $30,000 which the contract had promised him if Wayman bought the house through redemption.  Graves also received nothing of the $182,000 which the contract had promised him if Wayman kept the house under the quit-claim deed.  In addition, Graves had been paying Wayman $1,300 a month in rent under the terms of the contract.  The Supreme Court ultimately ordered the district court to award damages to Graves from Wayman and his shell companies.

But Graves also wanted his house back free and clear, even though he had allowed the first six-month period to expire after Wells Fargo had bought it at the first sheriff’s auction and he had let the second six-month period expire after First Minnesota had bought the house at the second sheriff’s auction.

Graves’ claim was based on the fact that he had cancelled the scheme with Wayman and therefore First Minnesota did not have the right to issue the second mortgage to Wayman which reversed the first auction sale to Wells Fargo and led to the second foreclosure and the second auction sale, this time a sale to First Minnesota.

 The district court ultimately held that Graves had lost his interests in the house to First Minnesota which had become a “bona fide purchaser” when it purchased the house at the second sheriff’s auction and Graves’ second six-month redemption period had expired.

The Court of Appeals reversed and held in favor of Graves based on two theories.  First, it decided that First Minnesota was not a “bona fide purchaser” at the second sheriff’s auction because documents in First Minnesota’s possession (and its duty to investigate Graves’ interests over Wayman) should have warned First Minnesota before it made the purchase.  Second, the Court of Appeals held that First Minnesota had no right to issue a mortgage to C&M because Graves’ cancellation left C&M with no interest in the house to secure the mortgage.  The Court of Appeals awarded the house to Graves, free and clear of any interests for any other party.

In a 4-3 decision, the Supreme Court ignored the statute which gave a good-faith “bona fide purchaser” of a property at a sheriff’s auction priority over the claims of a party with no recorded rights in the property who had let two six-month redemption periods to expire without redemption.  The majority directed the district court to consider whether the house should be given to Graves free and clear, or whether First Minnesota should be awarded any damages for its loss to the Graves/Wayman/C&M/REA scheme.

Chief Justice Gildea and Justice Wright joined the vociferous dissent by Justice Dietzen which opined that state law and a long string of Minnesota court decisions held that as a "bona fide purchaser," First Minnesota should have prevailed after Graves let the second six-month redemption period expire.

READ THE FULL CASE DECISION: 

Amos Graves, Respondent, vs. Michael Wayman et al., Respondents.

February 25, 2015          A11-1521,  2015-017

https://mn.gov/law-library-stat/archive/supct/2015/OPA111521-022515.pdf