Baltrotsky v. Kugler

HARRELL, J. We issued a writ of certiorari, 393 Md. 242 , 900 A.2d 749 (2006), to review an unreported opinion of the Court of Special Appeals which considered the propriety of certain practices attendant to a trustee’s foreclosure sale of properties held under a deed of trust. In this case, Petitioner, Martin Baltrotsky, contends that the Circuit Court for Montgomery County’s abatement of interest on the purchase prices from the foreclosure sale of his properties should be declared void as contravening the terms of the sale notice. Petitioner also posits that the five percent trustee’s commission provided for by the deed of trust between Petitioner and his lender amounts to an illegal penalty or, alternatively, an unenforceable liquidated damages clause. Respondent, Mark Kugler, the trustee under the deed of trust, asserts that Petitioner’s ⁴⁷¹ appeal was moot as to the abatement of interest regarding two of the three secured properties and, further, that as to all of the properties, the abatement of interest by the Circuit Court was not an abuse of discretion.

Respondent also defends his commission as a legally enforceable term of the contract between Petitioner and his lender. I. FACTS This case presents a combination of undisputed facts flowing from a tumultuous procedural history. Baltrotsky owned three properties, improved by single-family residences, and located in Montgomery County, respectively, at 1801 Areola Avenue, 5100 Bradley Boulevard, and 9110 Georgia Avenue. All three properties were subject to a single deed of trust held by the lender and beneficiary of the trust, KH Lending Company.

On 8 December 2003, the Respondent trustee commenced an action in the Circuit Court for Montgomery County to foreclose on the deed of trust. The sum overdue and unpaid amounted to $864,170.27. The foreclosure sale was held on 24 December 2003, garnering successful bids totaling $1,261,000.00. The Report of Sale filed by Respondent on 16 January 2004 indicated that each of the properties sold to third-party purchasers: the Areola Avenue property to Segal General Partnership for $296,000.00; the Bradley Boulevard property to FRS, LLC for $550,000.00; and the Georgia Avenue property to Dennis J. Dyer for $415,000.00.

The procedural morass arose following the foreclosure sale when Petitioner instituted pro se litigation in an effort to void the sale and preserve his ownership of the properties. Over the span of approximately 11 months (from 29 December 2003 to 6 December 2004), Petitioner filed myriad motions and lis pendens actions, 1 mostly arguing that Petitioner’s collateral ⁴⁷² pending bankruptcy filing (In Re Baltrotsky, 2004 WL 2937537 (D.Md.2004)) should stay the foreclosure proceedings. Respondent advised the Circuit Court on a variety of occasions, supported by documentary evidence, that the automatic stay on non-bankruptcy proceedings pursuant to 11 U.S.C. § 362 (c) had been terminated in Baltrotsky’s case by order of the United States Bankruptcy Court for the District of Maryland, Greenbelt Division. Thus, despite Petitioner’s efforts, the Circuit Court declined to stay the foreclosure and ratified the sale on 14 June 2004.

Nonetheless, Petitioner persisted in his disputatious attempts to forestall the loss of his properties. See supra footnote 1. Among these efforts was Petitioner’s appeal of the sale’s ratification to the Court of Special Appeals. That appeal was dismissed due to the Petitioner’s failure to file timely an information report required by Maryland Rule 8-205. ⁴⁷³ The foreclosure purchasers each moved in the Circuit Court for abatement of interest from the date of sale to the date of final settlement, citing as justification Petitioner’s filings and the resultant delays and clouds imposed on the properties’ titles.

On 29 September 2004 the Court granted abatement of interest with respect to the Bradley Boulevard and Georgia Avenue properties and extended the time for final settlement on them to 16 October 2004. Interest was abated as requested for the Areola Avenue property on 14 February 2005 after the need for its resale was averted by an eleventh-hour settlement. After settlement was achieved on all of the properties, Respondent submitted to the auditor his proposed distribution of proceeds. Included in the ratified Auditor’s Report was Respondent’s trustee commission of five percent of the gross foreclosure sale, equaling $63,050.00.

Respondent distributed in February 2005 all but $30,119.50 of the sale proceeds, an amount equal to the interest abated on the Areola Avenue property sale. Petitioner appealed to the Court of Special Appeals, which affirmed, in an unreported opinion, the judgment of the Circuit Court. We granted Baltrotsky’s petition for writ of certiorari perhaps to consider the following questions: 2 (1) Whether Petitioner’s appeal as to the abatement of interest on the foreclosure sale of the Bradley Boulevard and Georgia Avenue properties, the proceeds of which ⁴⁷⁴ have been distributed by the trustee, is rendered moot where Petitioner did not post a supersedeas bond; (2) Whether the Circuit Court abused its discretion in abating the interest from the time of sale until the time final settlement was achieved; and (3) Whether the trustee’s five percent commission, as provided for in the deed of trust, constitutes a penalty or unenforceable liquidated damages clause under the circumstances? Because our answer to the first question is in the affirmative and the second and third questions in the negative, we affirm the judgment of the Court of Special Appeals.

II

ANALYSIS A. Mootness of Appeal in the Absence of a Supersedeas Bond Maryland decisional law speaks clearly on the question of the mootness of appellate challenges to ratified foreclosure sales in the absence of a supersedeas bond to stay the judgment of a trial court. The general rule is that “ ‘the rights of a bona fide purchaser of mortgaged property would not be affected by a reversal of the order of ratification in the absence of a bond having been filed.’ ” Pizza v. Walter, 345 Md. 664, 674 , 694 A.2d 93, 97 (1997) (quoting Lowe v. Lowe, 219 Md. 365, 368 , 149 A.2d 382, 384 (1959)), mandate withdrawn, 346 Md. 315 , 697 A.2d 82 (withdrawing by joint motion pursuant to settlement agreement); see also Leisure Campground & Country Club Ltd. P’ship v. Leisure Estates, 280 Md. 220, 223 , 372 A.2d 595, 598 (1977). As a consequence, “an appeal becomes moot if the property is sold to a bona fide purchaser in the absence of a supersedeas bond because a reversal on appeal would have no effect.” Pizza, 345 Md. at 674 , 694 A.2d at 97 (citing Lowe, 219 Md. at 369 , 149 A.2d at 385 ); see also Parker v. Columbia Bank, 91 Md.App. 346, 374-75 , 604 A.2d 521, 535 (1992); Onderdonk v. Onderdonk, 21 Md.App. 621, 624 , 320 A.2d 585, 586 (1974). A bona fide purchaser, in the case of a foreclosure sale, is a purchaser who ⁴⁷⁵ takes the property without notice of defects in the foreclosure sale.

Pizza, 345 Md. at 674 , 694 A.2d at 97-98 . Our precedent has developed two exceptions to this general rule: (1) the occasion of unfairness or collusion between the purchaser and the trustee, Pizza, 345 Md. at 674 , 694 A.2d at 98 (citing Sawyer v. Novak, 206 Md. 80, 88 , 110 A.2d 517, 521 (1955)) and (2) when a mortgagee purchases the disputed property at the foreclosure sale. Id. (citing Leisure Campground, 280 Md. at 223 , 372 A.2d at 598 ).

There is no contention by the parties, nor have we found anything in the record to suggest, that the third-party purchasers of the foreclosed properties were not bona fide purchasers. Further, neither did the third-party purchasers act in collusion with the trustee, 3 nor were they the mortgagees of the properties. Accordingly, the third-party purchasers are embraced within the general rule protecting their purchases from the possible fallout of an appeal by Petitioner, in the absence of the posting of a supersedeas bond by Petitioner. The rationale for the general rule is borne out in this case.

As this Court stated in Leisure Campground, this decisional rule is intended to encourage nonparty individuals to bid on foreclosure sale properties. 280 Md. at 223 , 372 A.2d at 598 . Bidders justifiably would be reluctant to purchase a foreclosure property without assurance in the form of some security that their investments will be protected from subsequent litigation by recalcitrant mortgagors seeking to retain their property. The Court of Special Appeals’s opinion in Creative Development Corporation v. Bond, 34 Md.App. 279 , 367 A.2d 566 (1976), cert. denied, 279 Md. 682 (1977), makes the point that lenders also would be harmed without the rule in place. In Creative, the grantor of a deed of trust attempted to evade the supersedeas bond requirement for an appeal by ⁴⁷⁶ filing a lis pendens action to stay the foreclosure of its property. 34 Md.App. at 283 , 367 A.2d at 568 .

The intermediate appellate court condemned this tactic as an unfair shifting of expenses to the lender, who had succeeded in foreclosure, but yet could not enjoy its success until the new action was fully litigated, all the while bearing the lost interest income. Creative, 34 Md.App. at 283 , 367 A.2d at 568-69 . A mortgagor must post a bond upon appeal from the Circuit Court’s judgment. Md. Rules 8-422, 423.

In the present case, the mortgagor failed to obtain a bond to secure his appeal to the Court of Special Appeals. Thus, the appeal as to two properties, and his other litigious attempts to rescue all three properties from foreclosure, could not be considered properly. His efforts succeeded only in delaying final settlement and potentially causing larger interest obligations to accrue for the bona fide purchasers of the properties. The law is clear that Petitioner may not litigate the validity of the foreclosure at the expense of others; the posting of security is required on his part to protect the purchasers and lender alike.

As the Court of Special Appeals recently pointed out in Weston Builders and Developers, Inc. v. McBerry, LLC, 167 Md.App. 24, 44 , 891 A.2d 430, 441-42 (2006), the supersedeas bond is not the only means by which the stay of enforcement of a judgment may be achieved. 4 Aside from the bond, Maryland Rule 8-422(a) identifies two additional methods of accomplishing a stay, provided that the proceeding does not involve an appeal of an interlocutory order or an injunction ⁴⁷⁷ pending an appeal. A party may file an “alternative security as prescribed by Rule l-402(e),[ 5 ] or other security as provided in Rule 8-424.[ 6 ]” Rule 8-422(a). Because Petitioner posted neither a supersedeas bond nor an alternative security under Rule 1-402(e), nor was he an insured plaintiff under Rule 8-424, there is no basis upon which Petitioner may maintain his appeal after the proceeds of the sale have been distributed. Thus, Petitioner’s appeal regarding the Bradley Boulevard and Georgia Avenue properties is moot.

We are left to consider then the question of the abatement of interest on the Areola Avenue property because the trustee retained from the proceeds an amount equal to the abated interest attributable to the sales price of that property. Before we proceed, however, we note our disagreement with Petitioner’s contention that a controversy may not be “partially moot.” In Billingsley v. Lawson, the Court of Special Appeals found that a mortgagor’s failure to post a supersedeas bond rendered moot that portion of the mortgagor’s challenge to a foreclosure sale ratification. 43 Md.App. 713, 727 , 406 A.2d 946, 955 (1979), cert. denied, 286 Md. 743 , cert. denied, 446 U.S. 919 , 100 S.Ct. 1853 , 64 L.Ed.2d 273 (1980). We see no appreciable difference between that point of law applied in Billingsley and the present case. B. Discretion of Circuit Court to Abate Interest Whether it is properly within a Circuit Court’s discretion to abate interest accruing between the foreclosure sale and the closing was addressed by this Court in Donald v. Chaney, 302 Md. 465 , 488 A.2d 971 (1985). 7 In Donald we recognized three circumstances in which abatement may be permitted: ⁴⁷⁸ [A] purchaser at a judicial sale will be excused from requirement [sic ] to pay interest upon the unpaid balance for the period between the time fixed for settlement and the date of actual settlement only when the delay stems from [ (1) ] neglect on the part of the trustee; [ (2) ] was caused by necessary appellate review of lower court determinations or [ (3) ] was caused by the conduct of other persons beyond the power of the purchaser to control or ameliorate. 302 Md. at 477 , 488 A.2d at 977 (citations omitted).

Donald presented a factual situation similar to the present case. Donald involved a mortgage foreclosure sale to three third-party purchasers of waterfront property owned by a partnership. 302 Md. at 467 , 488 A.2d at 971 . Three of the four partners were also junior creditors of the partnership who would not be paid in full from the proceeds of the sale unless the purchasers were required to pay the accruing interest on the sale price from the expected settlement date to the actual settlement. Donald, 302 Md. at 467-68 , 488 A.2d at 971 .

The partners, by motion, sought to compel the trustee to collect such interest, to which the purchasers demurred. The trustee took no position on the motion. 8 Donald, 302 Md. at 468 , 488 A.2d at 971 . The Circuit Court for Anne Arundel County denied the partners’ motion. On appeal, the Court of Special Appeals affirmed the judgment in an unreported opinion.

Id. Before the Court of Appeals, the partners argued that the common law mandated that purchasers at foreclosure sales should pay interest on the unpaid balance of the sale price from the expected date of settlement until settlement is achieved finally. Id. Although the Court acknowledged that general rule, it catalogued a series of cases excepting from the general rule certain equitable principles, yielding the three abatement circumstances previously noted.

Donald, 302 Md. at 468-72 , 488 A.2d at ⁴⁷⁹ 972-74. The purchasers contended that any of five separate events surrounding the foreclosure sale in that case were sufficient to invoke equitable avoidance of the general rule against the abatement of interest. Donald, 302 Md. at 475-77 , 488 A.2d at 976-77 . The Donald Court, however, observed that the sole reason for the delay in settlement was the purchasers’ inability to obtain proper financing, which reason failed to satisfy any of the three circumstances excusing the duty to pay interest. 302 Md. at 477-78 , 488 A.2d at 977 .

Accordingly, the Court found that the Circuit Court’s abatement of the interest in favor of the purchasers was clear error. Donald, 302 Md. at 478 , 488 A.2d at 977 . While the relevant circumstances in Donald were found not to satisfy any of the principles for abating interest, such is not the case here. Petitioner’s tenacious exploits to void the foreclosure sale and delay settlement places the present case squarely within the third equitable circumstance delineated in Donald , “conduct of other persons beyond the power of the purchaser to control or ameliorate.” 302 Md.