In the recent real estate collapse, many homeowners entered into contracts with companies, called “equity purchasers,” who told them they could save their home from foreclosure. In these types of transactions, the foreclosed homeowner would deed their home to the equity purchaser, who would redeem the foreclosed property, and then enter into some sort of rental agreement with the homeowner and an option to buy the home back. However, it is important for homeowners to remember that if done in time, they can cancel such contracts with an equity purchaser pursuant to the many protections under the law for foreclosed homeowners. One such cancellation scenario recently played out in front of the Minnesota Supreme Court.
In a Decision Filed February 25, 2015, the Minnesota Supreme Court Held:
- When a homeowner timely cancels a foreclosure reconveyance under Minnesota Statute section 325N.13 (2014), any deed executed by the homeowner before the cancellation is rendered void, and
- Because a deed that has been rendered void by timely cancellation notice under Minnesota Statute section 325N.13 does not transfer title, a mortgagee does not take any interest based on such a deed, even if the mortgage can establish that it was a bona fide purchaser.
Summary of Minnesota Supreme Court Decision: Graves v. Wayman, et. al.
This case was the result of the tumultuous real estate market over the last few years. Graves was in danger of losing his home when Wells Fargo foreclosed on it in 2007. Pursuant to Minnesota Statute section 580.23, Graves had 6 months to redeem the home. During that time he was convinced by Wayman to quitclaim deed his house to a corporation that Wayman controlled, REA Group. Graves was paid $182,000. Graves also entered into a “residential lease” and “rent-back agreement” where Graves was to pay $1,302 to another one of Wayman’s companies, C&M Real Estate. Graves also had the option to buy the home back in 6 months for $170,000.00.
Then, the next day, Graves changed his mind and decided to cancel the quitclaim deed (which he had a right to do). Wayman refused to honor the cancellation, claiming that Graves had not properly cancelled the transaction. Wayman eventually redeemed the property and granted a mortgage to First Minnesota Bank. Wayman eventually stopped making payments on the mortgagee, so First Minnesota Bank commenced foreclosure proceedings. A foreclosure sale was held and First Minnesota bought the home for $145,000. Graves brought an action in 2009 against Wayman, his companies, and First Minnesota. The district court held that First Minnesota was a bona fide purchaser and awarded the home to it. The Minnesota Court of Appeals reversed and gave the property to Graves without reserving First Minnesota’s interest.
The Minnesota Supreme Court found that the case turned on whether Graves properly cancelled the conveyance to Wayman, therefore leaving Wayman without any interest to convey with First Minnesota. The Minnesota Home Ownership and Equity Protection Act (“MHOEPA”) states that a foreclosed homeowner, “has the right to cancel any contract with a foreclosure purchaser” until the earlier of (1) midnight of the fifth business day after signing a contract that complies with MHOEPA, or (2) the end of the foreclosed homeowner’s redemption period.” Minn. Stat. § 325N.13(a). Cancellation is “effective upon mailing” and “occurs when the foreclosed homeowner delivers, by any means, written notice of cancellation.” Minn. Stat. § 325N.13(b). The Court found that the cancellation was proper. Specifically, the Court held,
In this case, although Graves physically transferred a quitclaim deed to Wayman, delivery did not occur because Graves never put the deed beyond his power to revoke or reclaim it. Instead, Graves retained the power to revoke or reclaim the deed during the statutory cancellation period…which made deliver impossible during the cancellation period. Nor did Graves have the intent to convey title at the conclusion of the cancellation period, because he had already cancelled the transaction. Accordingly, without deliver of the deed to Wayman, the common law treats the quitclaim deed as void.
(Internal citations omitted).
Next, the Court disagreed with First Minnesota that its interest is still valid as a bona fide purchaser since it relied on the recorded quitclaim deed and lacked notice of the cancellation. The Court reasoned that under Minnesota law, “when a grantor has ‘no power’ to convey land due to a void deed, the purchaser does not acquire title, and ‘it is immaterial whether [the purchaser] was a bona fide purchaser or not.’” (Internal citations omitted). However, the Court noted that although it has held that First Minnesota does not have a valid interest, the Court of Appeals should not have awarded the house back to Graves, since Graves never properly redeemed the property after it was foreclosed on by Wells Fargo. Therefore, the Court of Appeals decision in that regard was reversed and remanded to decide whether under laws of equity, First Minnesota has a right to the property since it was First Minnesota’s funds that redeemed the property after the Wells Fargo sale.
Key takeaways from Graves v. Wayman:
The MHOEPA exists to protect distressed homeowners who have fallen behind on their mortgages from predatory companies who attempt to scam those homeowners into equity loans or mortgage refinancing strategies to help them save their homes.
MHOEPA, and its federal counterpart, is an amendment to the Truth In Lending Act (codified at 15 U.S.C. § 1639 and Reg. Z §§ 226.31-32) and compels the “creditors” in closed-end loans made with high interest rates or high costs and fees to make additional disclosures.
If MHOEPA is violated, the homeowners have various available remedies, including rescission of the contract within a specific time period.