The Court of Special Appeals of Maryland recently affirmed the denial of a borrower’s exceptions to a foreclosure sale under a deed of trust, where the borrower claimed that the trustees breached their fiduciary duty to obtain the best possible price by refusing to entertain last minute or post-sale “short sale offers” presented by the borrower’s counsel.
A copy of the opinion is attached.
Following a default on a mortgage loan and the initiation of a foreclosure action, Appellant (Borrower) requested mediation, which resulted in the lender affording Borrower sixty (60) days to pursue a short sale and other loss mitigation options. After this period expired without any accord, Appellees, substitute trustees under the deed of trust (Trustees), proceeded to advertise the property for sale by public auction.
Days before the scheduled sale, Borrower filed an emergency motion to stay the sale, claiming that he had two short-sale offers to purchase the property for $601,000 and $550,000, respectively. Both offers required the property to be sold free and clear of liens, and failed to mention or account for a junior deed of trust or IRS tax lien. Also, neither offer had been approved by the lender. Nevertheless, Borrower claimed that these short sale options would “secure the best obtainable price under the circumstances and further the strong preference in Maryland to avoid foreclosure.”
The trial court denied the motion as untimely, and the property was sold at auction to the lender for $617,605.
Borrower filed exceptions to the sale, asserting for the first time that he had procured a third proposed contract for a short sale, with an offer in the amount of $650,000, which he claimed was more favorable than the foreclosure sale price. Borrower had obtained the third offer days before the sale, but did not present it to the trustees until after the sale. The offeror was the same individual who had presented the prior $601,000 offer, and as with the prior offers, this third offer required the property to be free and clear of liens, and gave the offeror the right to withdraw the contract if this condition was unmet. Notably, the third offer also did not provide for the IRS tax lien ($16,999), the presence of a junior deed of trust ($62,007), and commissions for the real estate brokers.
Although conceding that that the foreclosure sale price was not inadequate, Borrower claimed that Trustees had a duty to obtain the best possible price, even if that means withdrawing the property from the foreclosure sale.
The trial court rejected Borrower’s challenge and ratified the foreclosure sale, concluding that Trustees did not act improperly in declining to halt the sale process upon learning of the new offers. Borrower appealed, and the Court of Special Appeals affirmed.
As an initial matter, the Maryland Appellate Court determined that Borrower’s allegations that Trustees ignored a putative better offer constituted the type of irregularity that could be raised as exceptions to a foreclosure sale under Maryland Rule 14-305(d). Op. at 11. However, the Court determined that the foreclosure sale and the conduct of Trustees were proper, Op. at 16, and that the Trustees were not obligated to halt or reschedule the sale, even if they had learned of a short sale offer just prior to the sale. Op. at 14. Nor were Trustees required to personally “invite” the putative short-sale offeror to the foreclosure sale. Op. at 4, n. 7.
As you may recall, in conducting foreclosure sale pursuant to the power of sale under a Maryland deed of trust, the trustee is “bound, for the protection of the interests of all parties concerned, to bring the property into the market as to obtain a fair market price,” and should exercise the “same degree of judgment and prudence that careful owner would exercise in the sale of his own property.’” Carroll v. Hutton, 88 Md. 676, 679 (1898). However, “trustees have discretion to outline the manner and terms of the sale, provided that their actions are consistent with the deed of trust and the goal of securing the best obtainable price[.]” White v. Simard, 383 Md. 257, 312 (2004).
Thus, the trustee “is not bound to accept every bid. He is necessarily clothed with a prudent and sound discretion, and the court will always sustain him in refusing bids which would manifestly defeat and frustrate the very object and purpose of a sale.” Gray v. Viers, 33 Md. 18, 22 (1870); see D’Aoust v. Diamond, 424 Md. 549, 583 (2012). Further, “[a] trustee is also entitled to exercise personal judgment when determining the price to accept for the sale of the property.” Id.
In this case, the Court observed that “[t]here were no assurances that the [short sale] bid would hold up.” Op. at 15. Moreover, the Court noted three significant facts: “(1) the fact that the bidder did not appear at the sale; (2) [Borrower]’s counsel did not attempt to alert the trustees, pre-sale, to the existence of the bid, or if so, alleviate any concerns the trustees might have as to the bona fides of the offer; and (3) the offer did not account for the tax lien or junior mortgage on the property.” Id. Thus, the Court determined that, “[i]n the final analysis, we are not inclined to question the actions of a trustee who acts in good faith in rejecting an offer, or who was unaware of the existence of an offer at the time of the foreclosure sale. A trustee is not obligated to reopen the sale to entertain an offer, whether sound or speculative, that arrives after the sale has been completed.” Id.
Finally, the Court held that “[t]he foreclosure sale before us, and the conduct of the trustees, pass muster. There is nothing in this record to support a conclusion that the trustees failed to exercise an appropriate degree of prudence, case, diligence, and judgment.” Op. at 16. “Given the presumption in favor of the regularity of the sale, the lack of any challenge to the notice and description of the property, the lack of any demonstration that the amount offered was firm and the bidder capable of appearing at the sale to close a deal, and finally, the fact that the trustees had not learned of the high bid until after the hammer had fallen on the only bid advanced at the sale, we are not persuaded that the trial court erred in rejecting Borrower’s challenge.” Id.
Accordingly, the Maryland appellate court affirmed the denial of Borrower’s challenge to the foreclosure sale.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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