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.

U.S. Supreme Court holds Chapter 7 Bankruptcy Debtor Cannot Strip Down a Wholly Underwater Lien

In Bank of America, N.A. v. Caulkett, the U.S. Supreme Court reversed an Eleventh Circuit decision that permitted a junior lien to be “stripped down” or voided under Section 506(d) of the Bankruptcy Code because it was wholly underwater.  In doing, so, the Court reaffirmed its holding in Dewsnup v. Timm, 502 U.S. 410 (1992), which defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

Consequently, the Court held that, so long as a claim is supported by a security interest in property, then it is not subject to being “stripped down” or voided under Section 506(d) of the Bankruptcy Code “regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

A copy of the opinion is available here.

In Caulkett, the Court considered two consolidated cases on appeal, each of which involved debtors (“Debtors”) who had a primary and secondary mortgage lien on their respective homes.  The Bank held the junior mortgage lien on each house.  The Debtors each filed for Chapter 7 bankruptcy.  By that time, however, the amount owed under the senior mortgage was greater than each home’s current market value, meaning that the Bank would receive nothing under the junior mortgage lien if the respective property were sold at foreclosure.

The Debtors each moved to “strip off” or void the junior mortgage lien under Section 506(d) of the Bankruptcy Code.  That statute provides that a lien is void “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim.”  Slip Op. at 2 (citing 11 U. S. C. § 506(d)).  The bankruptcy court granted the Debtors respective motions, and both the District Court and the Court of Appeals for the Eleventh Circuit agreed.  Granting certiorari, the U.S. Supreme Court reversed.

The Court noted that, although the parties agreed that BANA’s claim is “allowed” as defined under 11 U. S. C. § 502(a)-(b), at issue was whether BANA’s allowed claims were “secured.”  See Op. at 3.  The Court acknowledged that a strict reading of the applicable statutes “suggests” that BANA’s lien is not “secured.”  Notably, under Section 506(a)(1), “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”  Op. at 3 (citing 11 U. S. C. § 506(a)(1)).

However, the Court determined that its interpretation of the term “secured claim” in Dewsnup v. Timm, 502 U.S. 410 (1992), was controlling, which would include BANA’s junior mortgage liens.  In Dewsnup, the Court defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”  Slip Op at 4.

Thus, in Dewsnup, the Court had rejected a Chapter 7 debtor’s argument seeking to “strip down” (or reduce) a partially underwater lien to the value of the collateral under Section 506(d).  Notably, in Dewsnup, the debtor asserted that the creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.”  Op. at 3-4 (citing Dewsnup, 502 U.S. at 414).  In rejecting such argument, the Dewsnup Court determined that if a claim “has been ‘allowed’ pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of § 506(d).”  Op. at 4 (citing Dewsnup, 502 U.S. at 415).  Consequently, under Dewsnup’s interpretation of an “allowed secured claim,” the Court concluded that BANA’s liens could not be voided.

Although Debtors sought to limit the Dewsnup interpretation to apply only to partially underwater liens, rather than wholly underwater liens, the Supreme Court refused to adopt such a distinction.  See Op. at 5.  The Court explained that such proposition would leave an “odd statutory framework . . . [where] if a court valued the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire junior lien.”  Slip Op. at 6-7.

Accordingly, the U.S. Supreme Court reversed the judgment of the Eleventh Circuit, and remanded the cases for further proceedings.

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.