. . . And if a man sell a dwellinghouse in a walled city, then he may redeem it within a whole year after it is sold; . . .

. . . But the houses of the villages which have no wall round about them shall be counted as the fields of the country: they may be redeemed, and they shall go out in the jubilee. . .

-Leviticus

In a foreclosure, can one lienholder destroy a junior lienor's right to redeem by satisfying the junior lien? Although the law has wrestled with redemption issues for thousands of years, Colorado law does not precisely address this question. The ambiguity creates mischief for public trustees, court clerks, and trial courts. The question also raises another question: Why should the law help junior lien creditors resist a payoff to obtain a windfall through redemption of their liens?

As discussed below, this question was answered in the 1955 book, Colorado Security Law. That answer to this second question and Colorado case law provide guidance in answering the first question.

ROOTS OF REDEMPTION

Statutory redemption provides the foreclosed-upon debtor, and holders of liens junior to the lien being foreclosed on, an opportunity to redeem the subject property after foreclosure sale. These redemption rights pressure bidders, including the foreclosing lender, to submit bids approaching the fair market value of the property. This tends to prevent the foreclosing lender from acquiring the property for a trifling amount, while enhancing the likelihood that proceeds from the foreclosure sale will satisfy debts secured by the property.

Generally, American redemption statutes divide into two classes: "scramble" systems and "order" systems. In scramble systems, any junior lienholder can redeem property at any time after the debtor's failure to exercise its right to redeem. The redeeming lienholder generally pays off all claims attached to the property junior to the lien being foreclosed, regardless of whether those claims are junior or senior to those of the redeeming lienholder. The first lienholder to pay all claims, or not be "out-redeemed" by an unpaid lienholder, takes title to the property. Unpaid liens of lienholders who do not redeem are extinguished.

Colorado fits into the larger category of order systems. Order systems establish specific time periods in which junior lienholders must redeem the property or lose their redemptive rights. A redeeming lienholder redeems the property from the holder of the certificate of purchase or from senior positions that have properly exercised their right to redeem the property during the allotted time period. Redemption by a junior lienholder extinguishes and satisfies all senior interests junior to the foreclosed lien, as well as the foreclosed lien itself.

Both scramble and order systems are creatures of statute. Post-sale redemption can be only effected by strict compliance with statutory procedures.

CRS § 38-38-302 provides for a post-sale period in which the property owner and "any other person liable after the foreclosure sale for the deficiency" exclusively may redeem the property from the holder of the certificate of purchase. If the owner fails to redeem within this time, the lienor holding the lien junior to the foreclosed lien may redeem within the next ten day period by tendering the foreclosure sale amount, plus proper charges, to the sheriff or public trustee. In successive five day periods, each junior lienor, in order of seniority, also may redeem, or "out-redeem," each prior senior redemptioner's interest by tendering the redemption amount plus all amounts and charges owing to each prior redemptioner. Doing so satisfies the liens held by the senior lienors and extinguishes their interest in the property.

No lienor may redeem unless, within the owner-debtor's statutory redemption period, the lienor files notice of intent to redeem and the lien appears of record prior to the expiration of that period. Failure to redeem results in nullification of the lien. Colorado's statute does not otherwise provide for nullification of the redemption rights of lienholders.

The authors believe that the Colorado Supreme Court in Bailey v. Erny and the Colorado Court of Appeals in Davis Manufacturing v. Coonskin (both discussed below) have, by implication, answered the question raised at the beginning of this article in the negative. However, at least three district courts have disagreed, and public trustees and trial courts struggle with the uncertainty.

In Poladsky v. Castro, the Arapahoe County Public Trustee conducted a foreclosure sale. The plaintiff, the assignee of a judgment lien, held the junior-most lien encumbering the subject property, making him the last person who could redeem. During his redemption period, the plaintiff tendered proper redemption funds to the Public Trustee. The Public Trustee rejected Poladsky's tender because, two days earlier, Tawara, assignee of a more senior mechanic's lien, had not only redeemed the property, but also tendered funds in satisfaction of the judgment held by the plaintiff. In spite of the decision in Davis Manufacturing, discussed below, the district court, ruling as an appellate court, held that Tawara, a stranger to the Poladsky judgment, had the right to satisfy the judgment and extinguish Poladsky's redemption rights.

Poladsky is not the only recent case encountering this situation. In Murer v. Colorado Mortgage Acquisition Ass'n., the Court of Appeals avoided the issue by resolving the case on other grounds. In Hoff v. Blum and Company Retirement Plan, the plaintiff was the assignee of a judgment lien. Without citing authority, the Arapahoe District Court, acting in its appellate capacity, concluded that the plaintiff's redemption rights were cut off when the judgment it purchased by assignment was satisfied by the holder of a second deed of trust against the property.

In no area of law are certainty and predictability more important than in the law of real property. Numerous and important commercial transactions occur every day based on the predictability of legal consequences of documents and relationships. The authors have not attempted to find all unpublished cases in which public trustees and trial courts have addressed the question raised by this article. However, it is the experience of the authors that the issue arises frequently, causing confusion for public trustees, trial courts, and real estate investors.

ANALYSIS OF EXISTING CASE LAW

In Bailey, the beneficiary of a deed of trust was the successful bidder at its own foreclosure sale and received the certificate of purchase. After expiration of the owner's redemption period, the holder of a judgment lien junior to the foreclosed position attempted redemption. The sheriff refused redemption because the holder of the certificate of purchase had deposited sufficient sums to satisfy the judgment.

The holder of the certificate of purchase argued to the Colorado Supreme Court that the holder of the judgment lien was entitled to "nothing more than his judgment, and that when the holder of the certificate of purchase tendered to him an amount sufficient to pay his judgment and costs, the right of redemption was thereby extinguished." Rejecting this argument, the Court stated that "the holder of a certificate of purchase has, in our opinion, no right to prevent a judgment creditor from exercising his right of redemption if exercised within the statutory period." The Court further determined that the judgment lienholder "was entitled to determine for himself whether he would accept payment of his judgment, or redeem the property."

In Davis Manufacturing, the Colorado Court of Appeals recognized that only the debtor and certain persons with an ownership interest in the property have a right to pay off a judgment creditor and thereby cancel existing redemption rights. In Davis Manufacturing, the holder of a certificate of purchase attempted to thwart the redemption rights of a junior judgment lienor by satisfying the judgment lien. The holder of the judgment lien argued that the holder of the certificate of purchase had no right to prevent him from redeeming by paying the amount of the lien.

The Court of Appeals agreed, because "the holder of a certificate of purchase on an execution sale acquires only the alternative rights to receive the redemption money, in case of a redemption, or a deed for the land after the time for redemption has expired." Relying on Bailey, the court concluded that the holder of the junior judgment lien was entitled to determine for himself whether he would accept payment of his judgment, or redeem the property.

Colorado case law recognizes two exceptions to the general rule that the holder of a certificate of purchase has no ability to extinguish the redemption rights of junior lienholders. In Plute v. Schick, the holder of the certificate of purchase, who was already the fee owner of the foreclosed property, was allowed, prior to expiration of the owner's redemption period, to satisfy a judgment lien encumbering the property and thereby extinguish that lienholder's redemption rights. As discussed below, the Plute decision is severely criticized.

In Osborn Hardware Co. v. Colorado Corp., the Court of Appeals allowed a holder of a certificate of purchase, who was "acting on behalf of" the debtor, to extinguish the redemption rights of a junior lienholder. The holding in Osborn Hardware is based, in part, on what some consider to be a tortured reading of the 1973 version of Colorado Rules of Civil Procedure, ("C.R.C.P.") Rule 58(b). (For present purposes, the 1973 version of the rule differs only insignificantly from the present rule.) The Osborn Hardware court quoted the relevant portion of the rule as follows:

Whenever a judgment shall be so satisfied in fact otherwise than upon execution, it shall be the duty of the party or attorney to give such acknowledgment, and upon motion the court may compel it or may order the entry of such satisfaction to be made without it.

The Court of Appeals concluded that the trial court had the authority to order satisfaction: (1) without acknowledgment from the judgment creditor; and (2) without a motion. The latter conclusion is based upon the premise that the last "it" in Rule 58(b) refers to a motion.

In the authors' opinion, Rule 58(b) has more internal consistency if the last "it" in the quotation refers to the judgment creditor's acknowledgment of satisfaction, and not the motion. A plain reading of the rule suggests that the final two its in the quotation refer to the same thing. The penultimate "its" must refer to the judgment creditor's acknowledgment of satisfaction. With this interpretation, the Rule should be construed to read as follows:

Whenever a judgment shall be so satisfied in fact otherwise than upon execution, it shall be the duty of the party or attorney to give such acknowledgment, and upon motion the court may compel [such acknowledgment] or may order the entry of such satisfaction to be made without [such acknowledgment].

While a court may compel satisfaction of a judgment without the cooperation of the judgment creditor or the judgment creditor's assignee (often an unwilling foreclosure investor), a motion is still a prerequisite to the court's ability to order satisfaction.

This interpretation is the only one consistent with Bailey and Davis. Both cases establish that not all persons have the right to satisfy a judgment. The motion requirement not only guarantees due process for the judgment holder, it also ensures that an improper person will not satisfy the judgment. The procedural question of how someone may satisfy a judgment without the judgment holder's cooperation creates frequent practical problems for court clerks and public trustees. It is the experience of these authors that court clerks are unaware of the limitations in Bailey and Davis and will allow anyone tendering sufficient funds to satisfy a judgment.

Craft v. Storey is a 1997 Colorado Court of Appeals decision resting on Plute and Osborn Hardware. Craft holds that an owner (or his or her agent) may satisfy liens encumbering the property to eliminate the redemption rights of junior lienholders. Craft also addresses the additional question of when the owner's ability to satisfy junior liens terminates, concluding that owners may defeat the redemption rights of lienholders by satisfying liens even after the lienor has tendered redemption funds, as long as the lien is satisfied before expiration of that lienor's redemption period. While the resolution of this additional timing issue is not directly germane to the question posed by this article, Craft is a decision that contradicts the policies discussed under "Public Policy", below.

Bailey and Davis Manufacturing establish that the holder of a certificate of purchase has no right to satisfy junior liens. Plute, Osborn Hardware and Craft establish that an owner (or his or her agents) may extinguish redemption rights of junior lienholders by satisfying junior liens. While the rationale that applies in Bailey and Davis would seem to preclude one lienor from extinguishing the redemption rights of junior lienors, the gap between Poladsky and Davis Manufacturing on the one hand, and Plute, Osborn Hardware and Craft on the other, leaves open the possibility for decisions in cases like Poladsky, Murer and Hoff holding otherwise.

The question raised by this article and cases like Poladsky, Murer and Hoff can be annoying to courts, court clerks, and public trustees, who ask: Why should the law reward junior lienholders who seek a windfall by resisting satisfaction of their liens? The answer lies not in protecting foreclosure investors, but in the law's desire to: (1) benefit debtors through bidding pressure at foreclosure sales; and (2) encourage foreclosure investors to seek out and satisfy junior lienholders.

In the aforementioned Colorado Security Law, these policies are discussed in a criticism of the decision in Plute:

It is notorious that hard cases make bad law. . . . In Plute v. Schick [the Colorado Supreme Court] faced the problem of determining which of two undeserving parties should get a windfall. . . . [The Plute court] solved it by taking the property away from the party who would otherwise get the biggest windfall, and whose conduct seemed to the court to be most reprehensible. [The junior-most lien creditor] had borrowed the abstract from [the foreclosing lender] as a prospective purchaser, discovered the outstanding judgment and bought it up in order to get the land for a song.

Why should the law have preferred the junior-most lien creditor in Plute over the foreclosing lender? Because the foreclosing lender:

. . . had violated [a principle] which the statute is designed to promote. He had bid in the property cheaply at the sale and should have been penalized for underbidding. . . . The court purported to apply the spirit of the statute as against its letter, but completely failed to comprehend its underlying purpose.

Colorado foreclosure law attempts to strike a balance between: (1) the foreclosing lender's right to take its collateral; (2) protecting the debtor's equity, or, if there is no equity, maximizing the property's value in satisfaction of debt obligations secured by it; and (3) protecting junior lienholders.

If Colorado courts allow lienholders to extinguish each other's redemptive rights in a chaotic and disorderly fashion, foreclosure investors will have little incentive to seek out junior judgment creditors, homeowner's associations, mechanic's lien claimants, or other junior lien creditors. (The also could inadvertently convert Colorado to a scramble system, rather than the order system prescribed by law.) On learning of each other's redemption rights, foreclosure investors will race to satisfy the liens of their competitors and extinguish each other's redemptive rights. (It is not far-fetched to envision a situation in which, unbeknownst to each other, two investors holding liens junior to the foreclosure position extinguish each other's redemption rights, leaving the windfall for the foreclosing lender, who may be less deserving of this windfall than foreclosure investors.)

Profit-seeking as a foreclosure investor is like "looking for a needle in a haystack." The opportunity to make large sums of money on one particular foreclosure (the "needle") is what motivates foreclosure investors to search among the vast number of foreclosures in which the property being foreclosed upon has no equity (the "haystack").

If foreclosure investors have no incentive to seek out junior lienholders, then foreclosed-on owners and their secured creditors will be harmed. Foreclosing lenders and other bidders at foreclosure sales will have less incentive to submit bids approaching fair market value. Foreclosing lenders will be more likely to reap windfalls from low bids at foreclosure sales. Unsophisticated junior lien creditors, or junior lien creditors without funds to redeem, will be less likely to have their debts satisfied through foreclosure. Public policy dictates that the law should reward foreclosure investors who compete and pay for opportunities to redeem from junior liens.

The status of redemption rights remains very much in purgatory. The resulting amibiguity creates mischief for public trustees, courts, and foreclosure participants, and deserves to be resolved through a published opinion or clarifying legislation.

Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.   His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance.   He can be reached at contact Jonathan Goodman.

Richard Byron Peddie is no longer with  Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.

This article was originally published in The Colorado Lawyer, Vol.27, No.6, June 1998.

Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.