The Great Recession of the past five years shed harsh light on the limitations of marital liens when certain liens became worthless as home equity vanished. Learning from that experience can help practitioners draft, perfect, and enforce marital liens, helping ensure that the equitable intent of the liens is realized.
For years, the marital lien has served family lawyers well as an efficient and low-cost method of securing property settlements, spousal maintenance payments, and child support obligations after divorce. However, seemingly overnight, the foreclosure crisis and the Great Recession shifted the landscape of how we draft and enforce marital liens. In a matter of months, many preexisting liens became worthless as home equity vanished, and tens of thousands of Minnesotan’s lost their homes to foreclosure.1 Although jarring, this sudden loss of home equity shed light on the uses and abuses of marital liens, as well as their limitations. Now, as home prices rebound and the marital home resurfaces as a source of wealth rather than a marriage’s biggest liability, practitioners can begin to incorporate the lessons of the past six years into how they draft, perfect, and enforce liens in their family law cases.
Drafting the Marital Lien
Marital liens, also called homestead liens, equitable liens, or spousal liens, serve as a method of dividing property, or securing obligations, in divorce cases.2 Rather than awarding an asset to one party alone, the lien provides judges or practitioners the ability to award title to the property to one spouse while giving the other a lien interest that will be payable at a later date.3 Liens intended to serve as an award of property upon divorce may be stated as a specific dollar amount (with or without interest) or a percentage of a future sale price.4 Alternatively, liens may be used to secure future payments of child support or spousal maintenance (particularly where the payor spouse has been less than timely in his or her payments), and subject to reduction as these obligations are satisfied.5 The purpose of the lien can be significant insofar as a lien awarded as property will not be subject to later modification by the court,6 while liens intended to secure child support or maintenance obligations may be amended so long as the court has jurisdiction to modify the underlying obligation.
Chief Judge Toussaint’s decision in the case of Bakken v. Helgeson provides the most definitive guidance from the Minnesota Court of Appeals in the creation and drafting of marital liens since the Great Recession.7 After holding that a former wife’s marital lien was subject to the statute of limitations on the foreclosure of mortgages (15 years from the maturity of the debt), rather than the general ten-year judgment period, the chief judge went on to suggest how judges and lawyers might help “decrease the likelihood of such disputes.”8 Every lien, the chief judge suggested, should include five specific items:
- the value of the debt to be secured by the lien, in terms of either an absolute dollar amount or a percentage of the equity or ultimate sale price of the property;
- the applicable interest rate, if any, which should be justified in account of the court’s division of the marital assets;
- an ascertainable date of maturity;
- a specific mechanism for enforcement; and
- an explanation whether the lien is in the nature of child support or purely a division of property.”9
In the wake of the Great Recession, the importance of at least two elements of Chief Judge Toussaint’s admonition have become increasingly important to drafting marital liens: interest rates and enforcement.
Interest Rates. The shifts in the housing market and record low mortgage interest rates make the question of what interest rate should apply to a lien all the more important. Though parties may stipulate to an interest rate, the dangers of remaining silent on this issue or leaving it to a judicial officer are substantial. At a time when many 30-year mortgages are still hovering at or below 4 percent, should a lien holder be able to command interest rates about 10 percent? This may be precisely the trap laid for the unwary.
In the unpublished case of Soeffker v. Soeffker, the Minnesota Court of Appeals applied the statutory judgment rate of interest to a property settlement the wife was to pay by refinancing real property awarded to her in the divorce.10 After the husband refused to cooperate with the refinancing, the district court declined to award him interest on the unpaid portion of the property settlement. Citing the recent case of Redleaf v. Redleaf,11 the court of appeals reversed the district court, holding that statutory judgment interest rates apply to all “obligations due in a dissolution judgment” and thus the district court was legally bound to apply the statute’s 10 percent rate.12
The potential implications of the Soeffker case to marital liens are disconcerting. If statutory rates of interest apply to any “obligation due in a dissolution judgment” then marital liens, as one such obligation, could arguably be expected to command the same 10 percent interest rates as those applied in Soeffker and Redleaf for obligations over $50,000. Nor would a later court, interpreting Soeffker, be without precedent for applying judgment interest rates to marital liens. As early as 1985, the court of appeals in Fernandez v. Fernandez reversed the interest rate imposed by a court on a marital lien to conform with the statutory rates of interest imposed by Minn. Stat. §549.09.13 Thus, while many properties can now be refinanced for under 4 percent, the same obligation if subjected to a marital lien might incur interest at 10 percent—an unpalatable possibility for the spouse burdened with that
While the impact of the Soeffker decision on marital liens is still unclear, attorneys must carefully consider the implications that statutory interest rates may have for such liens, and work to mitigate this uncertainty with careful drafting.
Enforcement Remedies. Attorneys drafting liens must also consider what enforcement remedies are being granted to the lien holder.14 The court of appeals in Bakken permitted the enforcement of marital liens by foreclosure under Minn. Stat. §§518.01-.12, where no other means for enforcement were specified.15 But what, if any, recourse is left to a lien holder where the secured property has been lost to foreclosure?
The court of appeals has addressed this scenario twice in the past two years, while reaching seemingly opposite results. In the 2011 case of Nelson v. Nelson, the district court granted the husband’s motion to reduce the unpaid balance of his marital lien to judgment after the wife lost the home to foreclosure.16 On appeal, the wife argued that in the absence of specific language in the parties’ decree, the husband’s enforcement remedies were limited to foreclosure of the lien.17 The wife also suggested that the lien awarded by the court was intended to grant the husband a priority share of the equity in the home, not a recourse obligation against her if the home lost equity or, as ultimately occurred, was foreclosed upon. The husband responded that the lien was not intended to award him a priority share of the home equity, but a fixed sum which would be available at a date certain. He argued that the court, in entering judgment, did nothing to alter the property division or the wife’s obligations.
In the absence of any express language in the decree regarding the nature of the lien (an interest in equity or a fixed property award) or the appropriate enforcement mechanism, the court of appeals held that the use of the word “lien” was ambiguous, and that the district court acted reasonably interpreting the ambiguity and entering judgment against the wife. The appellate court also rejected the wife’s argument that liens could only be enforced through foreclosure, leaving open the possibility of judicial enforcement mechanisms beyond those available to other types of lien holders.
By contrast, the court of appeals just two years later affirmed precisely the opposite result in the unpublished opinion Goodyear v. PeKarna.18 In Goodyear, the parties’ dissolution decree awarded the husband the home and the wife a marital lien payable in two installments, one due within months of the entry of the decree, the other upon one of several future events. Partially as a result of the wife’s failure to pay child support, the husband lost the home to foreclosure and the wife moved to have the unpaid balance reduced to judgment as in Nelson. The district court denied the wife’s motion and she appealed. In affirming the district court, the court of appeals again found the marital lien described in the decree ambiguous. Noting that the “decree does not indicate whether [the wife’s] lien on the property was subordinate to the mortgage encumbering the property,” the court of appeals determined that the wife’s lien could reasonably be read as awarding her a nonrecourse award in the equity in the property—equity that could be lost if the home was foreclosed or if the real estate market soured. Given the ambiguity in the decree, the district court was entitled to make this interpretation.
Though Nelson and Goodyear can be read as inconsistent—or the court’s attempt to prevent inequitable outcomes—they are best read as a reminder of Chief Judge Touissant’s dicta in Bakken. The disparate results in Nelson and Goodyear were possible because of the ambiguous language contained in their respective decrees—language that did not clearly reflect what was being secured (a fixed dollar amount or a potentially fluctuating interest in equity), and what enforcement remedies were available to the lien holder (recourse to a judgment against the debtor spouse or not).
Accordingly, when drafting liens, practitioners must consider at the outset what remedies a lien holder should have in the event of foreclosure or transfer of the property. Similarly, what, if any, additional remedies should the lien holder have if the equity in a property is diminished (either through additional borrowing or market forces) to such an extent that foreclosure will net little or nothing to the lien holder?
Whether the issue is interest rates, enforcement remedies, or the purpose of the underlying lien, the lesson of the Great Recession undoubtedly centers on clarity. As the Goodyear court remarked, “…the district court was faced with an ambiguous provision in the dissolution decree and the responsibility of sorting out a situation six years after the dissolution decree was entered, all while dealing with a dramatically changed real estate market.”19 Where marital liens are intended to create long-term security, practitioners and judicial officers must be deliberate and specific to ensure that the intent of the lien is achieved at the time of enforcement, when memories and market conditions may be substantially different.
Perfecting Marital Liens
Now that you have a marital lien, what does that mean? The marital lien does not differ from a standard judgment lien in the sense that it is strictly personal property and never an interest in real property.20 As with any other judgment lien, you must take action to notify all third parties of your interest in the real property by giving public notice of the lien, called “perfecting” your lien. The steps for perfecting the lien depend on the language in the dissolution decree and the type of lien that is granted. By way of illustration, if the dissolution judgment and decree provides that one spouse is entitled to a personal monetary judgment against the other spouse, the spouse entitled to the monetary judgment should take the steps provided in Minn. Stat. §548.09 to docket and perfect a personal monetary judgment lien. On the other hand, if the dissolution decree provides a spouse with a marital lien as a method of distributing property, the lien-holding spouse should take the following steps to perfect the marital lien:
- File the dissolution judgment and decree (or the Summary Real Estate Disposition Judgment) in the county recorder’s office in the county where the property is situated.21
- If the property is torrens or registered property, file with the registrar a certified copy of the dissolution judgment and decree, together with a written statement containing a description of each parcel of land in which the spouse with title to the property has a registered interest and upon which the lien is claimed, and a proper reference to the certificate or certificates of title to such property.22
From the time of recording (or memorialization on the certificate of title for torrens property), the dissolution judgment and decree serves as a lien in the amount unpaid, upon all real property in the county where the dissolution judgment and decree or Summary Real Estate Disposition Judgment was recorded.23 The process of recording and docketing the judgment (or memorializing the judgment on torrens property) provides the legal basis for the lien-holding spouse to enforce the lien against the spouse holding title to the property. In other words, in order to establish the priority of the lien, the lien-holding spouse needs to give public notice of the lien by perfecting the lien.
Priority of Marital Liens
The general rule for lien priority is that in disputes between creditors concerning a lien on the debtor’s property, the first creditor to perfect the lien will prevail.24 This “first to file” rule is exemplified in Minn. Stat. §507.34 regarding bona fide purchasers. The statute provides that under the Recording Act, a party obtaining an interest in property is protected against prior unrecorded interests so long as the party is a “subsequent purchaser in good faith and for a valuable consideration.” In order to be a bona fide purchaser, the purchaser must give consideration “without notice of inconsistent outstanding rights of others.”25
This rule is highlighted in Oldewurtel v. Redding where the Minnesota Supreme Court held that the wife’s judicial lien against her husband’s property did not have priority over the bank’s mortgage on the same property where the bank had recorded its security interest first.26 On appeal, the wife argued that because the bank had knowledge of the dissolution action and property division, it had “actual notice”, and therefore, was not protected under the Recording Act. Rejecting the wife’s argument, the supreme court reasoned that although the bank had actual notice of the divorce proceedings when it transacted with the husband, “[n]otice of the dissolution and notice of the money judgment did not create notice of inconsistent, outstanding rights of others in the subject property.”27 Further, the supreme court explained that “at the time the security interests arose, all Wife had was an unsecured right to payment” and “[n]o amount of notice of this would remove [the Bank] from the protection of the recording act.”28 Stated differently, the notice was inadequate absent the docketing process required by Minn. Stat. §548.09.29
In contrast, the court of appeals in Simons v. Shiltz, held that a dissolution decree creating a marital lien takes priority over the bank’s interest where the bank had actual and record notice of the judgment before the bank recorded its mortgage.30 The court stated that “a court order that expressly secures a monetary award with an interest in real property establishes a lien on the property that is superior to security interests later obtained and recorded by creditors who have notice of the judicial order that created the security interest…[the wife] gave the bank actual notice of her lien. She also provided record notice of her lien before the bank recorded its mortgages.”31 Based on the reasoning of the Redding and Shiltz cases, a prudent practitioner should adhere to the “perfection” and “docketing” processes to ensure the client’s priority status.
Enforcement of Marital Liens
As discussed above, the method of enforcing the marital lien depends on the language of the dissolution decree. The significance of identifying the precise method for enforcement arises when applying the appropriate statute of limitations. The statute of limitations for enforcement of a personal judgment by execution is ten years from the date of entry.32 However, marital liens that may be enforced by other means may have a different statute of limitations. For example, martial liens that may be enforced by foreclosure have a 15-year statute of limitations.33
Depending on the enforcement language provided in the dissolution decree, a family law practitioner should be cognizant of the varying enforcement remedies, each with its own procedure and regulated by separate statutes. By way of example, Chapter 550 of the Minnesota Statutes provides the processes and procedures for enforcing a personal judgment by execution, while, Chapter 581 provides the rules governing mortgage foreclosure.
With the resurrecting housing market, the marital home is likely to once again become a marriage’s main asset for purposes of property distribution. As such, prudent family law practitioners must be deliberate in drafting unambiguous marital liens, specifying applicable interest rates and enforcement remedies, to ensure that the intent of the lien is realized as a just and equitable division of property in the dissolution proceeding.
Christopher D. Pham practices with Lindquist & Vennum in Minneapolis in the areas of general business and commercial litigation, including contract disputes, real estate, and construction matters. A 2009 cum laude graduate of William Mitchell College of Law, he has been honored for his pro bono service and his work on behalf of diversity in the legal profession.
Michael P. Boulette focuses his practice with Lindquist & Vennum on marital dissolution, custody, and post-decree and appellate work in cases with complex financial and custodial issues. A 2010 magna cum laude graduate of the University of St. Thomas Law School, he served as Articles Editor for the University of St. Thomas Law Journal.
The authors acknowledge with thanks the research assistance of Jennifer M. Warfield, a summer associate at Lindquist & Vennum.
1 See generally Minnesota Homeownership Center, Annual Reports, available at http://www.hocmn.org/reports-resources/annual-reports/ (last visited 07/09/2013).
2 Bakken v. Helgeson, 786 N.W.2d 791, 794-795 (Minn. App. 2010).
3 Id., see also Martin L. Swaden & Linda A. Olup, Minnesota Practice Series: Family Law (3d ed.) §9:43.
4 Bakken, 786 N.W.2d at 795.
5 See Minn. Stat. §§518.71 and 518A.39, subd. 2(f), permitting the court to “impose a lien or charge on the divided property [provided by §518.58] at any time while the property, or subsequently acquired property, is owned by the parties or either of them, for the payment of maintenance or support money.”
6 Redmond v. Redmond, 594 N.W.2d 272, 275 (Minn. App 1999); Holmberg v. Holmberg, 578 N.W.2d 817, 825 (Minn. App. 1998).
7 Bakken, 786 N.W.2d 791.
8 Id. at 795.
10 Soeffker v. Soeffker, 2012 WL 5834454 *1 (Minn. App., 11/19/2012),
11 Redleaf v. Redleaf, 807 N.W.2d 731 (Minn. App. 2011). Notably, Redleaf applied a judgment interest rate to spousal maintenance arrearages, not to any payment ordered by a dissolution judgment. Insofar as Soeffker’s expansion of Redleaf is, as yet, only an unpublished observation, the exact ramifications for other marital obligations (including marital liens) is unknown.
12 Soeffker 2012 WL 5834454 at *3.
13 Fernandez v. Fernandez, 373 N.W.2d 636, 638 (Minn. App. 1985). Notably, the court in Fernandez reversed to lower the interest rate rather than raise it; this decision predates the amendment to §549.09 imposing a higher interest rate for judgments over $50,000.
14 The authors wish to express their gratitude to Alan Eidsness and Jaime Driggs, who made a similar point in their article “Proper Drafting Avoids Lien Confusion” which was released while the authors were researching this article. Minnesota Lawyer, 05/10/2013.
15 Bakken, 785 N.W.2d at 795.
16 Nelson v. Nelson, 806 N.W.2d 870 (Minn. App. 2011).
17 Id. at 872.
18 Goodyear v. PeKarna, 2013 WL 1285482 (Minn. App. 04/01/2013).
19 Id. at *5.
20 Bakken, 785 N.W.2d at 795.
21 Dolly v. Nichols, 386 N.W.2d 261, 262-63 (Minn. App. 1986); see also Minn. Stat. §548.09.
22 Minn. Stat. §508.63.
23 Minn. Stat. §548.09.
24 See Oldewurtel v. Redding, 421 N.W.2d 722, 726 (Minn. 1988).
25 Id. at 727.
30 Simons v. Shiltz, 741 N.W.2d 907, 910 (Minn. App. 2007) (emphasis added).
31 Id. (Emphasis added.)
32 Minn. Stat. §550.01 (providing that judgment must be enforced within ten years of its entry, unless said judgment is renewed pursuant to Minn. Stat. §541.04).
33 Minn. Stat. §581.01; see also Bakken, 785 N.W. 2d at 795, and Erickson v. Erickson, 452 N.W.2d 253 (Minn. App. 1990), (providing that assigning a fixed dollar amount to a marital lien and characterizing it as a mortgage entitled to foreclosure is within a trial court’s discretion).