The Court of Appeals of Maryland recently held that a trial court improperly denied ratification of a foreclosure sale, in which the advertisement provided for a $750 fee against a defaulting purchaser, who failed to settle within 10 days of ratification of the sale.
In doing so, the Court determined that the trial court was authorized to review the advertisement of sale sua sponte under Maryland Rule 14-207.1, but that it erred in its interpretation of Maddox v. Cohn, 424 Md. 379, 36 A.3d 426 (2012), in which the Appellate Court determined improper a term of sale requiring a prospective purchaser to agree to pay a settlement fee to review title.
A copy of the reported opinion is available at: http://www.mdcourts.gov/opinions/coa/2013/89a12.pdf.
Following an uncontested foreclosure sale to a third-party purchaser, the circuit court's administrative judge issued a "notice of noncompliance" determining that the advertisement of sale which imposed a $750 fee against a defaulting purchaser, was impermissible in light of the Court's holding in Maddox. The substitute trustee and purchaser filed exceptions, and the hearing judge expressly deferred to the administrative judge, and ordered a resale.
The Substitute Trustees petitioned for a direct writ of certiorari, which was granted. Upon review, the Court of Appeals determined that, although the circuit court was empowered authorized to review the advertisement sua sponte, the hearing judge abused her discretion by deferring to the administrative judge's position without considering the parties' arguments. Further, finding the record sufficient to decide the issue, the Appellate Court held that the $750 fee was not impermissible, in light of its narrow interpretation of Maddox.
Specifically, the Appellate Court held that Maryland Rule 14-207.1(a)'s "plain language expresses nothing that might limit the court's authority to review the pleadings and papers sua sponte after the foreclosure sale." Slip. Op. at 14.
Moreover, the Appellate Court held that advertisements constituted "papers," noting that the Maryland Rules and "common practice in foreclosure proceedings [do] not distinguish between the advertisement of sale and other papers filed in the action." Slip Op. at 16.
In addition, the Appellate Court determined that the circuit court properly placed the burden of compliance on the Substitute Trustees (and purchaser), and that the circuit court's sua sponte post-sale screening of the advertisement did not infringe impermissibly upon the Substitute Trustees' fiduciary duties.
Nevertheless, in rejecting the trial court's interpretation of Maddox, the Appellate Court characterized Maddox as a narrow holding and distinguished it from the advertisement of sale at issue. In particular, the Court emphasized that the following factors which were present in Maddox did not exist in the case at hand: "(1) the lender bought-in the subject residential property at the foreclosure sale; (2) the fee was not subject to court review for reasonableness; and (3) . . . [t]he possible imposition of the advertised fee likely had a chilling effect on both potential bidders and the maximum sum to be obtained at the foreclosure." Slip Op. at 20-21.
As to the first factor, the Appellate Court explained that, because the property was purchased by a third-party rather than the lender, "[t]he concerns of front-loading and shifting of the expenses of the secured party, with attendant exposure to the defaulting borrower, . . . are inapplicable," and hence heightened judicial scrutiny was not warranted. Slip Op. at 21. The second factor was also missing, because Maryland Rule 14-305(g) specifically authorizes the trial court, on application and after notice to a defaulting purchaser, to order a resale at the risk and expense of the purchaser.
Finally, the Appellate Court emphasized that the imposition of the fee at issue in Maddox "could divert money from the successful bid price of the sale of the subject property" and thereby "'cost the mortgagor 'the benefit of the extra sum . . . either as part of a surplus or as a reduction in the deficiency for which the mortgagor might be liable.'" Slip Op. at 23 (quoting Maddox).
In contrast, the imposition of the $750 fee plus costs on defaulting purchasers was not improper because "a 'prudent and careful man' may be well-advised to utilize a conditional fee-shifting reimbursement . . . to discourage bidders from default," and because the fee would not apply automatically but rather only if a successful bidder defaults. Slip Op. at 24.
Further, such a fee would not have a chilling effect, as the Appellate Court "could not 'see how discouraging bidders who never intended to complete settlement on their bids could be against public policy' because 'the exclusive purpose of a foreclosure sale is to timely and efficiently recoup the balance remaining on the mortgage account.'" Slip Op. at 25 (quoting White v. Simard, 152 Md. App. 228, 252, 831 A.2d 517, 531 (2003) (emphasis in original).
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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