Vol. 83, No. 8, August 2010
Attorneys who file state mortgage-foreclosure actions are probably well-acquainted with Wis. Stat. chapter 846, which sets forth the process for foreclosing property interests under state law. But if a foreclosure involves a federal interest – whether it is a mortgage held by the Small Business Administration (SBA) or the Farm Service Agency, an IRS tax lien, or even a restitution judgment in a criminal case – you also need to be familiar with the requirements of 28 U.S.C. § 2410. This federal statute sets out the jurisdictional prerequisites for foreclosing a federal interest, and its requirements preempt any conflicting state statutes. Following the requirements of section 2410 ensures that any lien or judgment interest of the United States is foreclosed at judicial sale. If section 2410 is not followed, the federal interest is not discharged, and clear title will not pass to the buyer of the property.
The U.S. Attorney’s Offices for the Eastern and Western Districts of Wisconsin regularly receive calls from attorneys new to federal practice who want to foreclose an agency interest but have questions about where to start. The offices also field calls from attorneys who have foreclosed a federal lien or mortgage in the past but want a reminder about all the requirements contained in section 2410. This article answers those questions and provides a basic overview of the process to help avoid the common mistakes and problems that can slow down or even derail a state foreclosure proceeding.
Name the Proper Federal Defendant
The United States is the only proper defendant in a foreclosure action in which any of its agencies has an interest.1 If the complaint names a federal agency as a defendant instead of naming the United States of America, amendment may be necessary.
Properly Identify the Federal Interest
The federal interest must be identified with particularity.2 Not only is the particularity requirement statutory, it also is practical. With adequate information, the assistant U.S. attorney who is assigned to represent the United States can identify the nature of the federal interest at an early stage, alert the plaintiff to any problems with the complaint, or notify the plaintiff promptly if the federal interest has been released or satisfied.
The information necessary to identify a federal tax lien is set forth in the statute and includes the date of filing, the taxpayer’s name and address, and the place where the lien was filed.3 For agency mortgages, include in the complaint the name of the mortgagor and the recording information. For judgments, include in the complaint the date of the judgment itself, the court that issued it, and the case caption.
Because it is possible for more than one federal agency to have an interest in a given property, it is important to comply with the particularity requirement of 28 U.S.C. § 2410(b) to ensure that all federal interests are properly foreclosed.
Include Correct Information on the Summons
The United States has 60 days to answer after service on the U.S. Attorney’s Office.4 Frequently, summonses incorrectly state that the United States has a shorter period of time to answer. It is important to recognize – and plan for – the longer answering period of the United States.
For instance, the 60-day answer period sometimes causes problems for plaintiffs who proceed under Wis. Stat. section 846.09. That provision allows a plaintiff to obtain a foreclosure judgment against the primary defendants, start their redemption period, and then add other defendants to the judgment shortly before sale. Occasionally, a plaintiff proceeding under this provision will schedule the sale but fail to serve the complaint on the U.S. Attorney’s Office more than 60 days before sale. This entails obvious risks for clients and prospective buyers, not to mention potential costs. These problems are easily avoided by ensuring that service on the U.S. Attorney’s Office is accomplished well in advance of sale.
Serve the Summons and Complaint Properly
28 U.S.C. § 2410 requires that the summons and complaint be served on the U.S. Attorney’s Office for the district where the complaint was filed, and on the U.S. Attorney General in Washington, D.C.5 The Attorney General must be served by registered or certified mail.6 The U.S. Attorney’s Office for the district may be served either by personal service or by registered or certified mail.7
There are two federal districts in Wisconsin, each of which covers specific counties. Complaints must be served on the proper U.S. Attorney’s Office for the county where the foreclosure action is pending. For instance, if you file a foreclosure complaint in Brown County, you need to serve it on the U.S. Attorney for the Eastern District of Wisconsin. Maps showing which counties are covered by each district can be accessed at www.wied.uscourts.gov/ (Eastern District) and www.wiwd.uscourts.gov/ (Western District). The U.S. Attorney’s Offices are not authorized to waive service on behalf of other offices or on behalf of the Attorney General.
What Happens Next
If the complaint identifies a junior federal interest, our offices will typically file a “Notice of Appearance and Claim for Surplus.” We may also send a letter stating that we do not intend to make further appearances unless necessary, but in any case, copies of all pleadings and orders should be forwarded to the U.S. Attorney’s Office in a timely manner.
The U.S. Attorney’s Offices do not routinely litigate in state courts, and federal law authorizes the United States to remove any foreclosure action to federal court.8 The Eastern and Western District offices have determined that allowing most foreclosures to proceed in state court is efficient for the parties and the courts. This general practice, however, is dependent on the cooperation of plaintiffs and their representatives. We will consider removing a case if it appears that significant litigation will be necessary or if we believe we cannot adequately protect the United States’ interest in state court. Attorneys’ cooperation affects our assessment of whether removal of the case to federal court is in the interest of the United States.
Megan McDermott, Berkeley 2000, is an assistant U.S. attorney in the Western District of Wisconsin, Madison. Reach her at Megan.McDermott@usdoj.gov.
Lennie Lehman, Marquette 1981, is an assistant U.S. attorney in the Eastern District of Wisconsin, Milwaukee. Reach her at Lennie.Lehman@usdoj.gov.
Even if the plaintiff’s lien is prior in time to the federal interest, it is important to be aware of the priority issues that commonly arise when a federal interest is involved. If the United States is a proper party based on a federal tax lien, be aware of the 45-day rule and the choateness principle.9 For most liens to be choate, the identity of the lienor, the amount of the lien, and the property to which the lien attaches must be established by the time the federal tax lien becomes effective.10 A federal tax lien becomes effective 45 days after it is filed with the county Register of Deeds.11 Thus, under federal law, the United States may claim priority with respect to certain funds advanced more than 45 days after the lien is filed, or in the case of a replevin action, with respect to any personal property acquired after the effective date of the federal tax lien. In cases in which the lien is fairly recent, this is usually not a significant issue. Occasionally, however, cases arise in which businesses have been operating for several years and taking advanced funds from a lender while a federal tax lien has been pending. This can significantly complicate matters, and it is sometimes more cost-effective to simply pay the tax lien before proceeding with the foreclosure.
If the United States is named because one of its agencies holds a mortgage, attorneys should determine if any priority issues are identified in subordination agreements or other intercreditor agreements. For example, federal law prohibits the SBA from subordinating to late fees or default charges.12
These are examples of the more common issues that occur, but other types of priority disputes also may arise. If the U.S. Attorney’s Office files an answer asserting these priority claims, it will try to work with plaintiff’s counsel to obtain a stipulation regarding the extent of priority.
Finally, we occasionally see foreclosures involving land contracts, in which one of the parties is subject to a federal tax lien. Once the United States is named as a party, a plaintiff must be prepared to conduct a sheriff’s sale of the property, because a judicial sale is required in foreclosure actions.13 Strict foreclosure is not an option.
The Postsale Right of Redemption
Of all the provisions of 28 U.S.C. § 2410, the United States’s postsale right of redemption creates the biggest headache for attorneys unfamiliar with this aspect of federal law. Under state law, a property owner facing foreclosure may redeem the property before sale by paying the plaintiff the amounts it is owed.14 This state right of redemption expires before the sheriff’s sale. However, under federal law, the United States retains a one-year right of redemption after the sale for most federal interests, with the primary exception of tax liens and certain housing loans.15 Tax liens have a 120-day postsale redemption period. The period does not begin to run until, at the earliest, confirmation of sale.
The existence of the postsale redemption period can be a shock for a buyer at a foreclosure auction who expects to take the property free and clear of all interests except real estate taxes. The United States therefore insists that the postsale right of redemption be included in the judgment so that prospective purchasers are aware of it.
The United States is frequently asked whether it is willing to waive its right of redemption. Waivers may be requested for a fee after the sale is confirmed. Each agency has specific procedures that must be followed, and the more information that a buyer can provide about the value of the property, the more quickly a waiver request can be processed. The turnaround time is typically 30 to 60 days for cases in which there is clearly no equity in the property. Because the IRS’s redemption period is only 120 days, many buyers prefer to spare the effort and wait out the IRS redemption period, but waivers are commonly negotiated for all agencies.
The right of redemption belongs to the United States, so agencies and their staff do not have authority to compromise or unilaterally waive this right. The U.S. Attorney, in consultation with the agency representative, must agree on any waiver decision.
There are pitfalls to foreclosing a federal interest that might cause problems for attorneys who are unfamiliar with 28 U.S.C. § 2410. All parties to a foreclosure action benefit by working cooperatively to avoid these pitfalls and to minimize litigation costs. Occasionally, however, attorneys believe that these issues are a matter of litigation strategy rather than federal law. A judgment that violates federal law may be voided under Wis. Stat. section 806.07 and will lead to unnecessary problems and expense. These potential problems can easily be avoided by ensuring compliance with federal law at every stage of a case.