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. 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 mortgagee 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. In return, another Wayman company, C&M Real Estate Services Group, agreed to pay Graves $182,000, which Graves never received. Graves also entered into a “residential lease” and “rent-back agreement” under which he was to pay C&M $1,302 per month. 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. C&M redeemed the property with a loan from First Minnesota Bank and purportedly granted the bank a mortgage. Wayman and C&M later defaulted on the loan, 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 an owner “has the right to cancel any contract with an equity purchaser until midnight of the fifth business day following the day on which the owner signs a contract that complies with sections 325N.10 to 325N.15 or until 8:00 a.m. on the last day of the period during which the owner has a right of redemption, whichever occurs first.” Minn. Stat. § 325N.13(a). Cancellation is “effective upon mailing” and “occurs when the owner 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 delivery 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 delivery 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). 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 equity purchasers who offer to save their homes through transactions that transfer title, such as the one in this case.

Minnesota’s law is codified at Minn. Stat. §§ 325N.10 to 325N.18. The Minnesota Supreme Court noted that it does not appear to have a formal name and that the parties called it MHOEPA, likely after the similar federal Home Ownership and Equity Protection Act of 1994, which is part of the Truth in Lending Act.

If MHOEPA is violated, the homeowners have various available remedies, including rescission of the contract within a specific time period.