Monday, July 9, 2012

FYI: Maryland App Ct Rules Mere Gaps in Chain of Indorsements on Note Does Not Provide Basis to Undo Foreclosure Sale

The Maryland Court of Appeals recently held that mere alleged gaps in the chain of indorsements on a promissory note secured by a deed of trust did not amount to fraud that would allow an exception to the general rule that a foreclosure sale could be challenged only on the basis of procedural irregularities in the conduct of the sale itself.
A copy of the opinion is available at: 
Borrowers defaulted on a home mortgage refinancing loan.  The promissory note had been assigned from the original lender to a mortgage company ("Company") that subsequently went out of business.  Prior to its termination, Company indorsed the promissory note in blank to enable enforcement of the note. 
The note was eventually transferred to a firm ("Loan Holder") that allegedly first came into existence about a year after Company ceased doing business.   The ownership of the note during that one-year period was not clear in this case.
Loan Holder's substitute trustees initiated a non-judicial foreclosure action against Borrowers' property pursuant to the deed of trust and Loan Holder ultimately purchased the property at the subsequent foreclosure sale.  Borrowers did not contest Loan Holder's ownership of the underlying debt prior to the foreclosure sale.  However, following the sale, Borrowers filed exceptions to the sale, arguing in part that there was a gap in the chain of title from Company to Loan Holder, as it was not clear who owned the note during the one-year period between Company's termination and Loan Holder's formation.
The Circuit Court denied the exceptions and ratified the sale, ruling that any alleged irregularities concerning assignment and ownership of the note should have been addressed prior to the sale. 
Borrowers appealed, contending that gaps in the note's chain of title amounted to a "fraud on the judicial system" that justified their post-sale exception to the foreclosure.  Granting certiorari on its own motion, the Maryland Court of Appeals affirmed, ruling that the facts alleged did not amount to the type of fraud that would allow a post-sale exception.
As you may recall, under Maryland law a foreclosure sale will be ratified unless borrowers file within 30 days of the sale written exceptions that describe "with particularity" any procedural irregularities in the conduct of the sale.  Maryland Rule 14-305(c).  
Noting that Borrowers failed to allege procedural irregularities at the foreclosure sale, or fraud relating to execution of their loan documents, the Court was not convinced that a gap in the note's chain of title amounted to the type of fraud that would require setting aside the sale.  See Bates v. Cohen, 417 Md. 309, 9 A.3d 846 (2010) (leaving open the question whether fraud infecting the underlying mortgage or deed may be raised by a borrower following a foreclosure sale); Greenbriar Condo. v. Brooks, 387 Md. 683, 688, 878 A.2d 528 (2005)(post-sale exceptions must relate to procedural irregularities at the sale or to auditor's accounting).
In so ruling, the Appellate Court observed, first, that a prior Maryland opinion rejected the notion that courts of equity have broad authority to hear and determine all objections to foreclosure sales and, second, that Maryland Rule 14-305 established a new and limiting structure for post-sale inquiries.  Thus, while acknowledging that prior case law left open the possibility of a challenge based on fraud that "infected" the underlying debt, the Court further observed that, although Maryland commercial law recognizes a defense based on forgery or deceit as to the nature of an instrument, Borrowers failed to allege any facts with particularity that would constitute such a defense.
Among other things, the Appellate Court pointed out that Borrowers never challenged the genuineness of the note and trust deed, never claimed that they were not obligated to pay the loan, and only asserted generally that possible gaps in the chain of title sufficed to create exceptions to the finality of foreclosure sales.    
Accordingly, the Court concluded that the Borrowers' general allegation of fraud did not suffice to set aside the foreclosure sale. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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