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Once again, North Dakota has placed another burden on lenders attempting to foreclose there interest in collateral. The North Dakota Supreme Court decision in Principal Residential Mortgage v. Nash, (filed February 22, 2000) requires the notices of sheriff's sales to be served on parties participating in foreclosure actions.

In Principal Residential Mortgage, the lender [hereafter "PRM"] received a foreclosure judgment on March 11, 1997. Shortly thereafter, the debtor [hereafter "Nash"] filed a petition for bankruptcy. For a period of time, Nash made payments to the lender under the plan. However the plan was dismissed when Nash discontinued making payments. In compliance with North Dakota Century Code § 28-23-04, PRM caused the notice of sale to be published in a local paper once a week for three consecutive weeks.

The sheriff's sale was held on August 18, 1998. The only bid submitted was on behalf of PRM. The amount of this bid included principal, interest and costs. There was also some dispute as to whether PRM's bid included attorney's fees. As PRM was the sole bidder, it was awarded the property, the sheriff signed the report and the judge issued an order confirming the sale. The following January, Nash became aware that the sale had taken place.
On appeal, Nash asserted that PRM was required to provide her with notice of the sheriff's sale. Nash's primary argument was based on North Dakota Rules of Civil Procedure 5(a). Rule 5(a) requires that "every written notice ... must be served on each of the parties." PRM contended that North Dakota Rules of Civil Procedure 81 precludes the service requirement of Rule 5(a) because a sheriff's sale is a special statutory proceeding and, therefore, exempt from the Rule of procedure.

As stated above, the North Dakota Supreme Court ruled in favor of the debtor by holding that PRM was required to give serve the notice of sale on parties participating in the foreclosure action. In making this ruling, the North Dakota Supreme Court relied upon Ohio law and declined to follow Montana law supporting PRM's position. The Court stated that the purpose behind publication of the notice of sale is to attract potential bidders and protect the rights of the parties by securing competitive bids. The Court also noted that service upon the parties, especially the landowner, serves a different purpose. Specifically, service upon the landowner would give them the opportunity to "ascertain the sale was being properly conducted according to the statutory requirements" and allow the landowner to "attend the sale and bid on the property."

It should be noted that this decision was only supported by three of the five Justices. In dissenting, Justice Kapsner wrote:

since personal notice is not constitutionally required under these circumstances, I believe compliance with the statutory notice provisions is sufficient.

Justice Kapsner further opined that Rule 5(a)'s language should not be interpreted so expansively to "include service of notices which are prepared outside the litigation by non-parties to the litigation." Rather, a "real estate mortgage foreclosure, is a special statutory proceeding under Rule 81 and it is not silent on the procedures for giving notice." Justice Maring joined Justice Kapsner in this dissent. Still, the law today is that a notice of sale must be served on all of the participants involved in a foreclosure action.
This decision does leave one major hole. It fails to address what happens when the lender fails to serve the notice of sale but the landowner has knowledge of the sale prior to it occurring. As most readers are aware, landowners typically have actual knowledge of when the sale will take place. In fact, it is not uncommon for the landowner to attend the sale or at least discuss the upcoming sale with the lender or its counsel. Although it is always difficult to predict a future ruling, a sensible approach would be to dismiss this failure as a harmless error because the purposes behind providing notice are met with the landowner's actual knowledge. This may not be the case in the event the landowner does not have knowledge sufficiently in advance.

As a side issue in the Principal Residential Mortgage decision, the Court stated that there was a surplus owing to the debtor to the extent PRM's bid included attorney's fees. This holding is based on North Dakota Century Code § 32-19-06, which allows for "costs of the action," and the Court's interpretation that attorney's fees are not costs of the action.

In general, North Dakota law does not require banks to retain documents for more than six (6) years (NDCC 6-08-23). However, many loan obligations continue for a longer period of time. It is a good idea to retain any documents relating to a loan for the life of that loan for several reasons.

First, they provide a picture of the history of the file and the relationship between the bank and the borrowers. This helps those unfamiliar with the file's status to become quickly up-to-date with the nuances of the loan record. This history may also be necessary as evidence of the past course of dealings, the business relationship, and previous understandings of the parties if a future misunderstanding or a law suit occurs.

The most important reason to keep all loan documents is as a protection of the bank's security interest. If later documents are void or uncollectible (missing a signature, not perfected...) there are "fall-back" documents in the file to maintain some type of secured position.