You are foreclosing on a mortgage and you've entered into a contract to sell the property to a third party. The proposed buyer obtains a title search, and it shows an exception for a junior mortgage or a right of redemption in favor of the United States (or one of its agencies, such as the Small Business Administration). What rights does that give to the United States?

If the government's mortgage is junior to the lien of the mortgage that is being foreclosed, pursuant to 28 U.S.C. §2410, the United States may have a right of redemption-a right to purchase the property for an amount determined by a formula set forth in the statute-that lasts for one year from the date of the foreclosure sale.

What is the scope of this right of redemption? What happens in states where judicial foreclosure is not the norm? In large part, the answer turns on the interpretation of whether the federal statute requires the joinder of junior lienholders in the foreclosure action, or merely allows the United States to be joined as a party.

Some states' laws require all junior lienholders to be joined in a foreclosure action in order to terminate junior liens. The Federal statute that creates the right of redemption specifically allows the United States to be named a party in any civil action to foreclose a mortgage or other lien upon real property on which the United State has a mortgage or other lien. In cases where the government is so joined, the Federal statute requires the sale of the property to be a judicial sale, and for a period of one year from the foreclosure sale, the right of redemption will exist. In such cases, the United States has an interest in the property that has the potential to be a cloud on title, preventing the further sale of the property unless the U.S. agrees to extinguish its lien before the one year period expires so the property can be sold free and clear.

When the applicable state's laws do not require judicial foreclosure or the joinder of junior lienholders, the rules are less clear. The U.S. Supreme Court has stated that the Federal statute serves as a waiver of the government's sovereign immunity; the United States, as sovereign, cannot be sued without its consent, and this statute serves as its waiver of immunity from suit. That being the case, however, the Supreme Court has determined that the statute merely allows suit to be brought against the U.S., but is not necessarily intended to exclude state procedures.

Some courts have interpreted this determination to allow applicable state laws be followed, and not as a mandate that the United States be joined as a party. Thus, in those states, if state law does not require junior lenders to be joined and only requires notice of the foreclosure by publication-even if a judicial sale is held-it is possible that the senior lender's foreclosure sale may terminate the Federal mortgage lien and no right of redemption will exist.

Other courts have been more restrictive in their interpretations, however, making blanket statements that the Federal statute provides for a one year right of redemption, and not specifying any limitations on the right of redemption. The possibility also exists that the government will attempt to enforce the right of redemption, even if the senior lender believes that there is no right of redemption in its case. In either event, litigation regarding the existence of the right could result in costly and time-consuming litigation that prevents or significantly delays the sale of a property.

Consequently, in contemplating any foreclosure action, lenders should always consider whether obtaining a release of the right of redemption will be needed in a particular transaction, and whether it is appropriate to commence discussions with the government to attempt to obtain a release. For more information on the federal right of redemption, contact Amy at abrownstein@starfieldsmith.com or 215-542-7070.