Many real estate investors have heard whispers of changes to the rules for redemption rights in Johnson County, Kansas over the past few weeks, but there is little public information out about the changes or what these changes will mean for investors who purchase redemption rights in Johnson County. This post will talk about these changes to the rules for redemption rights in Johnson County and some of the many questions that have arisen as a result of the changes.
Johnson County Local Rules
One of the biggest confusions related to these changes has been what exactly was changed. Some people have heard it was a decision in a case. Others have heard it was a change to the laws related to redemption rights. It actually was neither of these. It was a change to the procedural rules of the Johnson County Court. As a primer, the basic rules of court procedure are set either by statute or by rules created by the Kansas Supreme Court. With that being said, each district court is given the authority to create local rules. These local rules are not substantive law, but rather address issues such as what forms must be used, deadlines for responding to pleadings, how hearings are set, etc. For quite a while, Johnson County has had a local rule that specifically addresses the procedure for mortgage foreclosure actions. This rule is Civil Rule 34, and it can be viewed on the Court’s website. Traditionally, this rule has included items such as the form of notices for non-appearance hearings and the specific form to be used to itemize judgments. Within the past month, the Johnson County Court’s website has been updated with a new Civil Rule 34, which includes a paragraph dedicated entirely to redemption rights (in addition to other changes). This change to the rules for redemption rights in Johnson County was made without notice to or feedback from the attorneys who practice in this area and came as a surprise to many of us. Moreover, there are numerous questions that arise from this change that will be discussed in more detail in the sections below.
Prohibition on the Assignment of Rights Prior to the Sale
The biggest point concern for redemption right investors is the following sentence that is contained in the amended rule, “Statutory redemption rights may not be transferred or assigned until after the sheriff’s sale. Capitol Building & Loan Ass’n of Topeka v. Ross, 134 Kan. 441, 7 P.2d 88 (1932) (recognizing redemption rights cannot be assigned until after the sale and confirmation of the same); Anspacher & Assocs., Inc. v. Leslie, 5 Kan. App. 2d 348, 350, 616 P.2d 297 (1980) (redemption runs from date of sale).” Many redemption rights investors contact borrower prior to the sale of their home to negotiate the purchase of redemption rights. This language appears to prohibit these activities completely. One of the major questions being asked by redemption right investors is what about redemption rights that were purchased prior to the sale. The Court rule has not provided any guidance on this issue. The United States Constitution prohibits a state from passing a criminal law that is applied retroactively, but there is no such limitation on civil laws. Moreover, as noted above, the Johnson County Local Rules are procedural rules and not substantive law. Therefore, by placing this in the Local Rules and including the case references, the Johnson County Court is stating that it is the court’s interpretation of existing law that pre-sale assignments of redemption rights are prohibited. There are, however, potential arguments against this conclusion. For example, the first case cited in the modified rule is addressing when a borrower sells its redemption rights back to the lender. The Kansas Supreme Court found that this was essentially a waiver of redemption rights, which is prohibited by Kansas Statute. The purchase of redemption rights at the time a mortgage is issued is fundamentally different than when redemption rights are purchased by a third party after the initiation of foreclosure proceedings. As such, arguments could be made that this law should not apply to third-party purchasers of redemption rights. Despite arguments against the application of the cited opinion, by placing this reference and sentence into the local rules, the Johnson County Judges have shown how they are likely to rule on redemption rights issues. As such, although this change may not have effected substantive law, it does have significant implications for investors purchasing redemption rights in Johnson County. Challenging decisions on these issues would be time-consuming and expensive. Therefore, Johnson County investors should give serious consideration to modifying their business model not to run afoul of this newly stated restriction. Moreover, redemption rights investors should be aware that this change has opened the door to possible claims from borrowers to invalidate previous transfers of redemption rights that occurred prior to the sale. If the property has already been redeemed, such a challenge would be more difficult. If the property has not yet been redeemed, investors would be well advised to seek a new transfer of the rights subsequent to the sale. If borrowers do successfully challenge a pre-sale assignment, the borrower should be required to refund the amount he or she was paid. With that being said, to this point, the Court has not provided any guidance on how it is going to handle these situations.
Redemption Purchasers at the Foreclosure Sale
It is my opinion that the second change to the rules for redemption rights in Johnson County is likely the bigger catalyst for the recent changes. It states: Accordingly, no party or person attending an ordered sale, pursuant to K.S.A. 60-2410, shall represent that such party or person holds redemption rights and, in particular, to discourage others from bidding at the sale. See Knutson Mortgage Corp. v. Coleman, 24 Kan. App. 2d 650, 951 P.2d 548 (1997) (inherent power of court to address bad faith conduct from foreclosure sale). Before confirmation of any sale, pursuant to K.S.A. 60-2415, the sheriff shall inform the Court if any party or person may have impacted the sale proceedings from otherwise being regular and in conformity with the law. When a property is sold pursuant to a court order, the court has a duty to ensure that the property is sold for a reasonable price. The reason for this is that the difference between the purchase price and the amount owed by the borrower may remain as a deficiency judgment against the borrower. The lender would then have the ability to pursue this deficiency judgment through other means of collection, such as wage garnishment. On the other hand, if the bank waives the deficiency judgment, the amount collected from the sale is all that the bank will receive in return for the money it previously loaned to the borrower. Either way, the higher the purchase price, the less harm to the parties involved in the litigation. The redemption rights in Kansas place a significant burden on people purchasing properties at a foreclosure sale. The borrower generally has three or twelve months during which he or she can remain in the property or rent the property to third parties. At any point during this redemption period, the borrower may purchase the property back for the price paid at the auction, plus nominal interest. As such, there is a significant risk that a foreclosure purchaser may not make any return for tying up his or her money on the purchase of the property. When the redemption rights have been sold, the chances that the property will be redeemed increase significantly. As such, a potential purchaser at the foreclosure sale is less likely to bid on a property where the redemption rights have been sold. This results in a lower final sale price. It is my opinion that these changes to the rules for redemption rights in Johnson County were created to try to limit this interference with the sale so as to increase the amounts bid at the auctions. This is a legitimate public interest that should be promoted by the court. On the other hand, the court may have had more success reaching this goal if there was more public transparency on these rule changes and educational information available to those interested parties.
What Does this Mean for Redemption Rights Investors
The primary result of these changes to the rules for redemption rights in Johnson County is uncertainty, and this post, unfortunately, is unable to clear up much of the uncertainty as it will come over time as the judges begin applying these rules to their cases. With that being said, any investor who has was assigned redemption rights pre-sale for a property that has now been sold and the redemption rights have not been exercised should consider obtaining a new assignment of rights from the borrower. Furthermore, moving forward, investors should consider either purchasing rights post sale or make changes to the structure of their transaction to comply with the new restrictions. Moreover, regardless of when the rights were purchased, redemption rights investors should be very careful not to interfere with the sale of the property. Doing so not only runs the risk of invalidating the sale but will also cast the investor in a bad light before the judges, which is never advisable – especially when his or her investment strategy involves regular interaction with the court system. If you would like to schedule a time to discuss these changes to the rules for redemption rights in Johnson County in more detail and/or to discuss ways to structure your investment model to reduce the risk related to these changes, you can do so by visiting www.rickdavislegal.com/investors.
 Article 1, Section 10 of the United States Constitution, https://www.usconstitution.net/xconst_A1Sec10.html
K.S.A. 60-2414(a); Capitol Bldg. & Loan Ass’n of Topeka v. Ross, 134 Kan. 441, 7 P.2d 86, 88 (1932) (“Now, if plaintiff is relying upon that statute for rights flowing from an assignment, and its argument be sound, then, at the time the note and mortgage in question were given, the defendant owner, by the provisions of those instruments, assigned to the mortgagee his right of redemption. That would be tantamount to waiving the right of redemption—the very thing which R. S. 60—3438 prohibits.”). These changes to the rules for redemption rights in Johnson County address all transfers of redemption rights and not just transfers to the lender.