Recent Foreclosure Ruling Considers Whether Foreclosure Sale Must Be Cancelled Pending Offer for Purchase of Property

The Court of Special Appeals of Maryland recently examined a foreclosure trustee’s duties with respect to considering offers to purchase the foreclosure property.   Although the Court reached the correct result under the facts of the case, its discussion of trustee duties came dangerously close to imposing unreasonable duties on lenders and their foreclosure trustees.

In Johnson v. Nadel, 217 Md. App. 455 (2014), the foreclosure trustees sold a residential property on behalf of the foreclosing noteholder holding a security interest in the property that was junior only to a federal tax lien, which had priority over all other encumbrances.  There also existed a third lien that was junior to both the IRS and the foreclosing noteholder.  The purchase price at auction was $617,605, and the trustees filed a report of sale with the Circuit Court for Montgomery County, Maryland, approximately six weeks after the auction.

The borrower filed exceptions to the sale, indicating for the first time that prior to the auction he had secured a sale contract in the amount of $650,000 for a short sale of the property.  The offer was not made known to the trustees until after the foreclosure sale.

The trial court refused to set aside the foreclosure sale, and noted that the “eleventh-hour offer” required that the property be free and clear of liens; gave the offeror the right to withdraw the contract; did not provide for the payment of the IRS lien or any other encumbrances; and included absolutely no information regarding the offeror’s ability to fund the down payment.  In short, the offer was extremely vague and imposed conditions that could not be met.  The trial court found that because the offer was not brought to the attention of the substitute trustees until after the sale, the sale should not be overturned.

Although it was not surprising that the Court of Special Appeals upheld the lower court’s ratification of the sale in light of the specific facts of the case, the opinion is notable in that it carefully examined the foreclosure trustee’s duties, which were held to include a duty to “exercise the same degree of prudence, care, diligence, and judgment, that a man of ordinary business judgment and experience would exercise, in selling his own property.”  The Court cited Fagnani v. Fisher, 418 Md. 371, 384-85 (2011) for this proposition.  The Court noted that a trustee’s failure to recognize a putative better offer for the purchase of a foreclosure property may constitute the type of procedural irregularity that falls within the ambit of Maryland Rule 14-305(d), which allows a party to take exceptions to a foreclosure sale by claiming an alleged irregularity in the sale.

This is significant, because historically the trustee’s duty to accept higher and better offers for the purchase of a property has been limited to bids submitted in connection with the foreclosure sale auction, and not the type of third party short sale that was at issue in the Johnson case.  For example, chilling the bidding or preventing a party from bidding are two commonly accepted “irregularities” that would fall within Rule 14-305(d) as grounds for setting aside a sale. In this regard, the Johnson case is troubling in that, if not read carefully, it may be used by borrowers to impose what seems to be an impossible standard on foreclosure trustees by requiring them to continue or cancel foreclosure sales if presented with offers for the purchase of the property, without consideration of the validity of the offer or the financial ability of the offeror to close the sale.  Lenders are commonly presented with “offers” which are hastily written by friends or relatives of the borrower, for the sole purpose of buying the borrower more time to avoid an inevitable foreclosure sale.

However, a careful reading of the Johnson case reveals that there is no requirement that the trustees in a foreclosure sale must continue or cancel a sale if presented with any bid or offer, without regard to whether the offer is viable.  In fact, for nearly 150 years, Maryland foreclosure trustees have been “…clothed with a prudent and sound discretion, and the court will always sustain [them] in refusing bids which would manifestly defeat and frustrate the very object and purpose of a sale.”  Gray v. Veirs, 33 Md. 18, 22 (1870).  Particularly in light of the general presumption in Maryland in favor of the validity of the sale, lenders and foreclosure trustees should feel confident in ignoring last-minute offers lobbed at them for the purpose of delaying the foreclosure – but they should proceed with caution if presented with a viable offer that does not impose impossible or unreasonable conditions on the purchase of the property.

For more information on this ruling or foreclosures, contact Alan Grochal via email.

This alert has been prepared by Tydings for informational purposes only and does not constitute legal advice.