Md. App. Holds that Trustees’ Lack of Physical Presence (as Opposed to Constructive Presence by Telephone) At Auction Does Not Invalidate Foreclosure Sale

In Fisher v. Ward, a majority of a panel of the Court of Special Appeals of Maryland affirmed the trial court’s ratification of a foreclosure sale, determining that the trustee’s constructive presence by telephone, rather than “in-person” presence at the foreclosure auction, did not warrant invalidating the sale absent a showing of prejudice.   Rather, the “absence of the trustee from the sale is merely a circumstance to be considered by the court in the ultimate determination of the fairness of the proceedings.”  Op. at 8.  “Absent other irregular factors,” the intermediate appellate court concluded, “‘presence’ by telephone did not create unfairness or prejudice to [the borrower] to warrant reversal…”  Op. at 10.

A copy of this opinion is available here.

Background

Following Borrower’s default on her mortgage payments, the lender appointed Trustees to begin foreclosure proceedings.  At the sale, although none of the Trustees were physically present, one Trustee monitored the sale and was connected by cell phone to the auctioneer, who was at the sale.   Auctioneer announced the initial bid, which the Trustee had offered via telephone, on behalf of the lender, which was conceded to be more than the fair market value of the property.  Op. at 3.  Borrower filed exceptions to the sale, claiming that the sale was unlawful because no Trustee was physically present, and that the report of sale incorrectly represented that the Trustee had directed and supervised the auction.      

In response, Trustees asserted that the constructive presence of the trustee was sufficient to satisfy the “presence” requirement, and that Borrower suffered no prejudice from the alleged irregularity.   The trial court overruled the Borrower’s exceptions, and Borrower appealed.

Discussion

Although the Court of Special Appeals determined that “ancient” precedent required a trustee to attend the sale, Op. at 6-7 (citing Hopper v. Hopper, 79 Md. 400 (1894)), the Court observed that case law “condoned, if not actually permitted” the concept of constructive presence.  Op. at 7 (discussing Wicks v. Westcott, 59 Md. 270 (1883)).   Thus, “absence of the trustee from the sale is merely a circumstance to be considered by the court in its ultimate determination of fairness of the proceedings.”  Op. at 8. 

“[W]hat is sufficient to constitute constructive presence will depend on the facts before the court.”  Op. at 8.  On the record of this appeal, the Court deemed the Trustee “readily accessible” throughout the sale via the auctioneer’s cell phone, and concluded that “[a]ny problems or concerns could have easily been addressed.”  Op. at 8-9.   Notably, the proceedings were “brief and uncluttered,” no competing bids or questions to the auctioneer were presented, and no objections were made by persons in attendance.  Op. at 8.  Consequently, the Court was satisfied that the Trustees satisfied the requirement that the “property [be] sold under such conditions and terms as to the advertisement and otherwise, as a prudent and careful man would employ, seeking to obtain the best price for his own property.”  Op. at 9 (citations omitted).

Moreover, the ratification of a foreclosure sale is presumed to be valid.  Op. at 9.  Although the burden is on an excepting party to show prejudice caused by any irregularities in the sale, there is also a heightened scrutiny of the sale when the foreclosure sale purchaser is the mortgagee or his assignee.  Op. at 9-10.  “Despite the heightened standard, the burden continues to be borne by the excepting party to show both invalidity and resulting prejudice.”  Op. at 10.  In this case, the Borrower’s challenge was based solely on the “absentee participation” of the Trustee in the sale itself; no assertion of irregularity was asserted to any other aspect of the proceeding, and there was no challenge to the sufficiency of the price.   Op. at 10.  “Absent other irregular factors,” the Court concluded that, although required, the Trustee’s “presence” at the sale by telephone did not create unfairness or prejudice to Borrower to warrant reversal of the foreclosure judgment.  Op. at 10.  Accordingly, the appellate court affirmed the judgment of the trial court.  Op. at 10.

In a concurring opinion, one judge agreed there was no prejudice, and therefore that reversal was not appropriate.   Concurring Op. at 5.  However, according to the concurring judge, “the failure of a trustee (or an empowered and properly supervised delegate) to physically attend the sale remains an irregularity in the sale, which, should it result in actual prejudice, would be fatal to the sale.”  Concurring Op. at 1.

Md. App. Ct. Reverses Dismissal of Foreclosure Case; Non-Borrower Spouse’s Post-Sale Challenge to Due-On-Sale Clause was Untimely Post-Sale

In Devan v. Bomar, the Court of Special Appeals reversed the dismissal of a foreclosure case, where such dismissal was premised on a non-borrowing spouse’s claim that the secured party violated federal law prohibiting the exercise of a “due-on-sale” clause, where title to the property was transferred to a surviving spouse upon the death of her husband.  The Court reaffirmed that such pre-sale challenges must be made prior to the foreclosure sale, explaining that “[a]s with statutes of limitations generally, procedural deadlines for raising certain challenges are established and strictly enforced.  An unexcused failure to comply with a clear deadline may doom what might otherwise have been a highly meritorious challenge, has it been timely filed.”  Op. at 1.

A copy of the opinion is available here.

Background

Husband and Wife owned their marital home as tenants by the entireties, however, only Husband was a borrower under the promissory note.  Following his death in 2008, Wife continued making monthly mortgage payments.  After her husband’s estate was closed, the loan servicer refused to accept further monthly payments from her, and demanded payment in full.  Thereafter, foreclosure proceedings were initiated, and nearly one-year later, the property was sold to the lender. 

After the sale, Wife filed exceptions to the sale claiming that she was wrongly prevented from making payments on the promissory note in violation of federal prohibitions on the exercise of a “due-on-sale” clause upon a transfer caused by the death of a spouse.   See 12 C.F.R. § 591.5(b).  The trial court sustained the exception, and set aside the foreclosure sale.  The substitute trustees appealed.

Discussion

As an initial matter, the Court determined that it need not consider the binding effect of the federal regulation.  Rather, the Court noted that the appeal concerned the procedural issue of whether a challenge to the sale based upon a violation of the regulation must be raised before the foreclosure sale, or if it is one that may also be raised as a post-foreclosure exception.

Under Maryland law, a foreclosure proceeding is a two-step process.  “A borrower’s ability to challenge a foreclosure sale is in part determined by whether relief is requested before or after the sale. Prior to the sale, a borrower may file a motion to stay the sale and dismiss the foreclosure action under Maryland Rule 14-211. . . . The situation is different after a foreclosure sale.” Op. at 5 (quoting Thomas v. Nadel, 427 Md. 441, 443-44, 48 A.3d 276 (2012)).

Consequently, the Court reaffirmed that “[a] post-sale exception to a foreclosure sale is not an appropriate vehicle to challenge the broad equities of the entire foreclosure proceeding itself. It is, rather, a narrow challenge to the procedures employed in the execution of the sale process itself.” Op. at 8.

In this case, the Court observed that Wife’s claim was “a sweeping attack on the Bank’s entitlement to initiate the foreclosure proceeding at the very outset,” Op. at 12, that was “fully knowable” to Wife a full year before the sale.   Thus, the Court determined that the subsequent challenge, whatever might have been its merit, simply came too late.  “Bad timing can be as fatal as lack of merit.”  Op. at 12.

The Court rejected attempts to “wriggle out” from prior decisions establishing the timing requirements of a foreclosure challenge.   The Court determined inapplicable its decision in Bierman v. Hunter, 190 Md. App. 250, 988 A.2d 530 (2010), in which the intermediate appellate court upheld a challenge to a foreclosure sale where a spouse proved her signature on the mortgage documents were forged.   The Court noted that part of the rationale in that case had been expressly rejected by subsequent opinions of the Court of Appeals, and noted that “[t]he Bierman opinion, despite its earlier tilt in a different direction, does not help [Wife] in this case.”  Op. at 17.  

Accordingly, finding Wife’s claims untimely, the Court reversed the trial court’s order to set aside the sale, and determined moot the substitute trustee’s evidentiary challenges to the trial court’s ruling.

D.C. Court Of Appeals Holds Complaint For Judicial Foreclosure is Not Subject to Foreclosure Mediation, and Does Not Require A “Mediation Certificate”

In Advance Bank v. Matthews, the D.C. Court of Appeals determined that the trial court properly granted summary judgment in favor of the Bank on its complaint for breach of contract, judicial foreclosure and/or judicial sale of a residential mortgage, without first requiring the parties participate in mediation pursuant to D.C. Code § 42-815(b), which it determined was only applicable to non-judicial foreclosures.

According to the Court, judicial sales under D.C. Code §42-816 are “wholly different from non-judicial foreclosures because of the court’s involvement in the process, which reduces the risk of error and predatory foreclosure practices.  Therefore, § 42-816 authorizes the court to order a judicial sale and there is no mediation requirement.”  Op. at 10.

A copy of the opinion is at: http://www.dccourts.gov/internet/documents/13-CV-1473.pdf

In Matthews, an action against the Borrower for loan fraud, the Bank ultimately amended its lawsuit adding a breach contract claim, judicial foreclosure and/or judicial sale claim in the alternative, and thereafter moved for summary judgment.  

After court-ordered mediation was unsuccessful, the trial court granted summary judgment on the breach of contract claims finding undisputed that the Borrower had defaulted on his residential loan and his promissory note.  The trial also granted summary judgment on the judicial sale claim pursuant to D.C. Code §42-816.  That statute provides in pertinent part:

 In all cases of application to said court to foreclose any mortgage or deed of trust, the equity court shall have authority, instead of decreeing that the mortgagor be foreclosed and barred from redeeming the mortgaged property, to order and decree that said property be sold and the proceeds be brought into court to be applied to the payment of the debt secured by said mortgage . . . .

D.C. Code §42-816; accord Op. at n. 2 (“Section 42-816 authorizes the court to order a judicial sale instead of a judicial foreclosure. ‘A suit for judicial foreclosure to enforce a lien on real property is historically an equitable action, . . which involves an adjudication of the parties’ rights and obligations before any property is sold.’” (citations omitted)).

According to the trial court, although there existed a power of sale provision in the deed of trust, which the Bank could have used to initiate non-judicial foreclosure proceedings under § 42-815, the court found that a judicial sale was appropriate in light of Borrower’s opportunity to fully litigate the case; opportunity to participate in a mediation session; and knowledge that foreclosure would eventually occur.

The Borrower appealed, claiming that he was entitled to foreclosure mediation pursuant to D.C. Code § 42-815.02.  He asserted that court-ordered mediation was insufficient, as it did not comply with the statutory mediation requirements of § 42-815.02 “because it was not geared toward loss mitigation, which provides the homeowner with alternative options for curing the mortgage default in lieu of foreclosure. . . . ” Op. at 4 n. 5, including “renegotiation of the terms of a borrower’s residential mortgage, loan modification, refinancing, short sale, deed in lieu of foreclosure, and any other options that may be available.” Op. at 5 (quoting D.C. Code § 42-815.02(a)(5)).  According the Borrower, the Bank’s summary judgment motion requesting judicial foreclosure under § 42-816 circumvented the requirements in § 42-815 (b) and § 42-815.02, and further claimed that § 42-816 did not apply to residential mortgages.

Rejecting the Borrower’s arguments, the Court of Appeals observed that, although § 42-815 was amended in 2011 to require lenders and home owners to participate in mediation and obtain a “mediation certificate” prior to foreclosure, “[t]his amending act did not cause any changes to the law of judicial sales and judicial foreclosures under § 42-816.6.”  Op. 8.  Rather, “§ 42-815 controls when dealing with ‘power of sale’ [non-judicial] foreclosures under an instrument such as a deed of trust and § 42-816 refers to judicial sales, where the sale is requested by a lender then ordered by the court or an officer acting under court order.” Op. at 9.  

Consequently, the Court determined that the amendment to § 42-815 providing for mediation “intended to protect District residents from predatory practices by mortgagees because of the lack of oversight during the non-judicial foreclosure process.” Op. at 9-10. 

“Although mediation is not required for a judicial sale, there exists judicial oversight, which embodies the [City] Council’s intent in amending § 42-815 (b) to include the mediation requirement.”  Op. at 10-11.  In any event, the Court noted that Borrower “was provided with the same protections of § 42-815 because the parties participated in a court-ordered mediation in addition to the protections provided by § 42-816.”  Thus, the Court concluded that “judicial sales pursuant to § 42-816 are not a means for bypassing the requirements in § 42-815, but are only alternative procedures for lenders seeking action with the court for a defaulted mortgage loan.” Op. at 11.

Finally, the Court rejected the Borrowers assertion that judicial sales under § 42-816 only apply to commercial mortgages, noting that the Borrower cited no authority for such proposition, and “that there is no basis, in the statute itself or in the legislative history, for concluding that the Council intended any such limitation on judicial sales.”  Rather, the Court held that judicial sales under § 42-816 are applicable to residential mortgages.  Op. at 11.

Accordingly, the D.C. Court of Appeals affirmed the trial court’s grant of summary judgment in favor of the Bank.