Md. App. Ct. holds that evidentiary hearing under Rule 14-211 not required where valid defense to foreclosure is not stated with particularity

In Buckingham v. Fisher, the Court of Special Appeals of Maryland affirmed the trial court’s denial of a motion to stay or dismiss a foreclosure proceeding pursuant to Maryland Rule 14-211 without an evidentiary hearing, where the challengers failed to state with particularity the basis for their claims of forgery or that the notice of sale was deficient. 

In doing so, the Court elaborated that “bare assertions of a broad defense to the validity of a lien instrument will not be sufficient,” because “the pleading standard is more exacting than the pleading standard for an initial complaint.[,]” and that “under Rule 14-211, a party must plead all elements of a valid defense with particularity.”  Op. at 9.

A copy of the opinion is available at: http://www.mdcourts.gov/opinions/cosa/2015/2416s13.pdf

In Buckingham, the personal representatives of the estate of the borrower (“Buckingham”) filed a motion to stay or dismiss the foreclosure sale on two grounds.  First, Buckingham claimed that one of the signatures of a deceased co-borrower was not authentic, according to the opinion of a handwriting expert, whose affidavit opined that “there is a strong possibility that the co-borrower did not sign” the deed of trust.   Second, Buckingham claimed the notice of foreclosure sale was insufficient to inform the interested parties of the details of the foreclosure sale because (i) in identifying the lien instrument, it referenced a 1997 modification to the original deed of trust, rather than the 2006 modification that was attached to the initial filings; (ii) the notice incorrectly indicated that the lien instrument was signed by the borrower with reference to his legal guardian, although such guardianship was not established until after the document had been executed; and (iii) the notice was not served on counsel of record.

On the day Buckingham filed the motion, the trial court held an initial hearing, and following argument, denied the motion without scheduling an evidentiary hearing on the merits of the defenses.  However, the trial court ordered that the foreclosure sale be rescheduled, to accommodate service on Buckingham’s counsel.  Thereafter, the property was sold, and Buckingham appealed, asserting an entitlement to an evidentiary hearing before the motion could be denied.

On appeal, the Court affirmed that the trial court was not required to hold an evidentiary hearing, holding that Rule 14-211 required “that the factual and legal basis of a defense must be stated ‘with particularity’ and that any available supporting documents must be provided.”  Op. 7.  

Maryland Rule 14-211 provides the mechanism for an interested party to challenge a foreclosure pre-sale by filing a motion to stay or dismiss the foreclosure proceeding.  Under Rule 14-211(a)(3) such motion must “(A) be under oath or supported by an affidavit; (B) state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action; [and] (C) be accompanied by any supporting documents or other documents or other material in the possession or control of the moving party[.]”  Op. at 6 (emphasis in opinion).

Further, Maryland Rule 14-211(b)(1) provides the trial court with the discretion to deny such motion before holding a hearing on the merits, where the motion does not substantially comply with the requirements of the Rule, or does not state on its face a valid defense to the validity of the lien, lien instrument, or the right to foreclose.  See Op. at 8 (citing Rule 14-211(b)(1)).  In contrast, under Rule 14-211(b)(2), “[i]f the [trial] court finds that the motion was timely, complies with the requirements of the Rule, and states a valid defense, then an evidentiary hearing on the merits is required before the [trial] court makes a final determination on whether to grant or deny the motion.”  Op. at 8.

In addressing the particularity requirement of Rule 14-211(a)(3), the Court held that “particularity means that each element of a defense must be accompanied by some level of factual and legal support.  General allegations will not be sufficient to raise a valid defense requiring an evidentiary hearing on the merits.”  Op. at 10.

Applying that standard, Court determined that Buckingham’s forgery allegations were insufficient.  Notably, the definition of forgery is “[1] false making or material alteration, [2] with intend to defraud, [3] of any writing which, if genuine, might be of legal efficacy or the foundation of legal liability.”  Op. at 12 (quotations omitted).  According to the Court, Buckingham’s allegations met the first and third elements, but failed to assert “with particularity or without” that there was an intent to defraud.  Id.  “In the absence of any allegation and some evidentiary support for the existence of an intent to defraud, they have failed to sufficiently allege the grounds for their motion, and as a result, it was property denied without an evidentiary hearing.”  Id.

As to the notice of sale, the Court determined that, although Buckingham identified inconsistencies in the notice regarding identification of the lien instrument, Buckingham failed to allege with particularity the legal grounds pursuant to which the trial courts could determine that the notice would prohibit the foreclosure trustees from proceeding with the sale.  The Court explained that Rule 14-210(a) requires a foreclosing party to publish prior notice of the time, place and terms of sale, and that “the notice must contain a description or the property that is sufficient to enable an ordinary person to identify the property and seek further information.”  Op. at 13.  Observing that the notice at issue was, in fact, sufficient to enable the Buckingham to protect their interest in the property by filing the Rule 14-211 motion, the Court further noted that “[t]he rule does not require that the notice perfectly identify the lien instrument upon which the sale is proceeding.”  Op. at 14 n.5.  Finally, as to Buckingham’s claim that  counsel was not notified of the sale, the Court determined that no error was manifest, as the original sale date was delayed to enable copies of all filings to be furnished to Buckingham’s counsel.

Accordingly, the appellate court affirmed the trial court’s denial of Buckingham’s motion to stay and dismiss, determining that no evidentiary hearing on the merits was required prior to denial under Rule 14-211.

Md. App. Ct. Rejects Forfeiture of Deposit of Defaulting Foreclosure Purchaser, Where Resale is at the “Risk and Expense” of the Defaulting Purchaser

In Greentree Series V, Inc. v. C. Larry Hofmeister, Jr., et al., a case of first impression involving a defaulting foreclosure purchaser, the Maryland intermediate appellate court recently determined that, where a foreclosure purchaser fails to close on the sale, the trial court erred by ordering that the deposit be forfeited, if the property is to be resold at the cost and expense of such defaulting purchaser.

Pursuant to Maryland Rule 14-305(g), where a purchaser fails to close on a foreclosure sale, a circuit court may order a resale “at the risk and expense of the purchaser or may take any other appropriate action.”  (Emphasis added).   According the Court, either the deposit could be forfeited, or the property could be resold at the risk of the defaulting purchaser, but not both.  A copy of the opinion is available at http://www.mdcourts.gov/opinions/cosa/2015/1246s13.pdf

Background

Greentree Series V, Inc. (“Greentree”) was the high bidder at a foreclosure action for $172,000, having paid a $33,197 deposit at the time of the auction.   In addition to requiring the deposit, the advertisement of sale had provided that the “[b]alance of the purchase price is to be paid in cash within ten (10) days of the final ratification of sale[.] . . . If payment of the balance does not take place within ten days of ratification, the deposit will be forfeited and property will be resold at the risk and expense of the defaulting purchaser.”

After failing to settle on the balance of the purchase price, the trial court entered an order that the property “shall be resold at the risk and expense of” Greentree, and also provided that the “the deposit monies in the amount of $33,197.00 be and are hereby forfeited.”  Op. at 3.

At the second foreclosure sale, Greentree was again the high bidder, at $244,000.00, and ultimately followed through with the settlement.  Thereafter, the court Auditor proposed that the original deposit should be returned to Greentree.  The trial court disagreed, noting that Greentree’s failure to go to settlement on the first sale caused the Trustees to incur additional expenses of $33,379.61, inclusive of interest on the indebtedness, even though the higher sale price still allowed the Trustees to realize $38,620.39 more than they would have if Greentree had closed on the first sale.

Consequently, viewing the failure to settle as indicative of unclean hands, the trial court ordered that, in addition to having the property resold at the risk and expense of the defaulting purchaser, forfeiting the deposit constituted an “appropriate action” under Rule 14-305(g).  Greentree appealed, and the Court of Special Appeals of Maryland reversed, narrowing the trial court’s interpretation of Rule 14-305(g).

Discussion

Before addressing Rule 14-305(g), the Court initially determined that the forfeiture provisions in the advertisement, which also provided for a resale at the risk and expense of the defaulting purchaser, amounted to a penalty, and was not a valid liquidated damages clause that could be enforced.

In Maryland, there are three elements of an enforceable liquidated damages clause:  “First, such a clause must provide ‘in clear and unambiguous terms’ for ‘a certain sum’.  Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach.  Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.”  Op. at 12 (quoting Board of Education of Talbot County v. Heister, 392 Md. 140, 156 (2006) (internal citations and alternations omitted)).

Here, the Court determined that the advertisement of sale did not meet any of these requirements, and the forfeiture provisions therefore amounted to a penalty that was not enforceable.  Notably, no “certain sum” could be ascertained at the time of default, because Greentree might be forced to pay more if the resale price was lower than the original, or insufficient to cover the additional interest and cost of resale.  See Op. at p. 13.

The Court also rejected the trial court’s determination that Greentree had unclean hands barring recovery of the deposit, explaining that “failure to go to settlement was simply a breach of contract and, for purposes of applying the unclean hands doctrine, a party does not act ‘wrongfully’ simply by breaching a contract.”  Op. at 14.  Moreover, the Trustees ultimately received interest for the delay, and after expenses, “recover[ed] over $38,000 dollars more than they would have received if there had been no default.”  Id.

Regarding Maryland Rule 14-305(g), the Court rejected the trial court’s interpretation that it had discretion to order both that the initial deposit be forfeited and the property be resold at the risk and expense of Greentree.  Under that Rule, “[i]f the purchaser defaults, the court, on application and after notice to the purchaser, may order a resale at the risk and expense of the purchaser or may take any other appropriate action.”  Md. Rule 14-305(g) (emphasis added).

According to the Court, the Rule is disjunctive in nature in permitting resale at the risk and expense of the purchaser “or” other appropriate action.  Thus, the Court held that the trial court “has the power to act only in the alternative.”  Op. at 20.  “[O]nce the court selects one of two alternative remedies, it is not appropriate to award the second alternative remedy.”  Id.

Consequently, the Court determined that, in accordance with the Auditor’s report, the deposit should be returned to Greentree.  However, the Court acknowledged that “[n]othing in this opinion should be interpreted as preventing the Trustee or mortgagor, in the event of a default by a foreclosure sale purchaser, from utilizing the deposit to offset any losses occasioned by a resale.”  Op. at 21, n. 6.

Va. Supreme Court Rejects Borrowers’ Damages and Rescission Claims premised upon alleged failure to Hold Face-to-Face Meeting provided for FHA-Insured Loans

The Supreme Court of Virginia, in Ramos v. Wells Fargo, affirmed the dismissal with prejudice of borrowers’ breach of contract action against their lender.  The borrowers complained, inter alia, that the lender failed to attempt a “face-to-face” interview prior to foreclosing under a deed of trust incorporating certain HUD regulations.  The Court held that the borrowers failed to state a claim because they failed to sufficiently plead damages in their second amended complaint, which failed to include an ad damnum clause.  The Court also rejected the Borrower’s attempt to rescind the sale to a third-party purchaser, even though settlement on the foreclosure sale had not yet occurred.

In doing so, the court clarified the reach of Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014) and Mathews v. PHH Mort’g Corp., 283 Va. 723, 724 S.E.2d 196 (2012) by reinforcing that a borrower still must provide factual allegations of compensable injury or damages, even where conditions precedent to foreclosure were not satisfied.  The court also clarified that rescission of a foreclosure is only permitted in exceptional circumstances.  A copy of the reported order can be found here.

Following the foreclosure of their home, Borrowers filed suit against the Bank, claiming that it “wrongfully initiated” foreclosure.  After their original and first amended complaints were dismissed on demurrer, the Borrowers’ second amended complaint alleged that their Federal Housing Administration (“FHA”) insured mortgage loan documents incorporated certain regulations promulgated by the Department of Housing and Urban Development (“HUD”).  They specifically cited 24 C.F.R. § 203.604, concerning the “requirements for the acceleration of a loan and subsequent foreclosure in the event of a borrower's payment default.”  Slip Op. at p. 2.

The Borrowers alleged that the Bank failed to comply with this regulation “by not having, or attempting to have, a ‘face-to-face meeting’ with appellants following their payment default.”  Id.  Borrowers claimed such a meeting was a “condition precedent to foreclosing on the property,” without which the Bank’s “authority to call a default had not accrued” thereby rendering the foreclosure unlawful.  Id.  They further asserted that the third-party purchaser could be released from its purchase because settlement had not occurred.  See id.  The Borrowers sought compensatory damages and rescission of the sale.

Upon consideration of the Bank’s demurrer (motion to dismiss), the trial court dismissed the second amended complaint with prejudice, and Borrowers appealed.

On appeal, the Supreme Court explained, “[i]n [Squire and Mathews] we held that the subject HUD regulation, 24 C.F.R § 203.604, created a condition precedent to foreclosure under the respective Virginia deeds of trust at issue, both of which incorporated the regulation.”  Slip Op. at p. 4.  Assuming without deciding that borrowers made “sufficient allegations of causation,” the Court nonetheless affirmed the dismissal, concluding that the Borrowers failed to plead factual matters supporting their claim for either money damages or rescission of the foreclosure sale.  Id. at p. 4.  Indeed, an essential element of a breach of contract action is that a defendant’s breach “caused injury or damage” to the plaintiff.  Id. (citing Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671 S.E.2d 132, 135 (2009)).

The Court observed that the Borrowers “fail to set forth a single factual allegation of any injury or damage they incurred as a result of [the Bank’s] alleged breach.”  Slip Op. at p. 5.  Additionally, the Court observed that the second amended complaint was insufficient inasmuch as it contained no ad damnum clause stating the amount of any damages sought.  Slip Op. at p. 5 (citing Va. Rule 3:2(c)(ii) (“Every complaint requesting an award of money damages shall contain an ad damnum clause stating the amount of damages sought.”).

The Court also rejected the Borrowers argument that “absent the closing [of the foreclosure sale], the sale can still be ‘unwound,’ i.e., rescinded” by court action.  Slip. Op. at p. 5 (“That is not so under Virginia law.”).  The court found the rescission right was extinguished upon foreclosure under a deed of trust in Virginia because “‘[t]he contract of sale [is] consummated when the auctioneer crie[s] the property out to the person making the highest and last bid.”  Id. (quoting Feldman v. Rucker, 201 Va. 11, 21, 109 S.E.2d 379, 386 (1959).  And where the Borrowers failed to allege any exceptional circumstances to permit rescission the Borrowers were not entitled to the relief sought.  See Slip Op. at p. 6 note (observing that no allegation of fraud or collusion with the purchaser or “gross inadequacy” in the foreclosure sale price was alleged) (citing Squire, 287 Va. at 519, 758 S.E.2d at 61-62),

Accordingly, the Supreme Court of Virginia affirmed the trial court’s order sustaining the Bank’s demurrer and dismissed the Borrowers’ action with prejudice.