Redemption in Purgatory: Who Can Thwart Lienholder Redemption Rights?

Publication year1998
Pages139
CitationVol. 27 No. 6 Pg. 139
27 Colo.Law. 139
Colorado Lawyer
1998.

1998, June, Pg. 139. Redemption in Purgatory: Who Can Thwart Lienholder Redemption Rights?




139


Vol. 27, No. 6, Pg. 139

The Colorado Lawyer
June 1998
Vol. 27, No. 6 [Page 139]

Specialty Law Columns
Real Estate Law Newsletter
Redemption in Purgatory: Who Can Thwart Lienholder Redemption Rights?
by Jonathan A. Goodman, Richard Byron Peddie

. . . 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. . .

-Leviticus1

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,2 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.3 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-on debtor, and holders of liens junior to the lien being foreclosed on, an opportunity to redeem the subject property after foreclosure sale.4 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.5

Generally, American redemption statutes divide into two classes: "scramble" systems and "order" systems.6 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.7 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 effected only by strict compliance with statutory procedures.8

Colorado's Statute

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.9 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.10 In successive five-day periods, each junior lienor, in order of seniority,11 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.12 Failure to redeem results in nullification of the lien. Colorado's statute does not otherwise provide for nullification of the redemption rights of lienholders.

Recent Confusion

The authors believe that the Colorado Supreme Court in Bailey v. Erny13 and the Colorado Court of Appeals in Davis Manufacturing v. Coonskin14 (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,15 the Arapahoe County Public Trustee conducted a foreclosure sale. The plaintiff, the assignee of a judgment lien, held the...

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