Bierman v. Hunter

WOODWARD, J. The present dispute arises out of a foreclosure sale of residential real estate co-owned by Maria Hunter (“Maria”), appellee, and her husband, Gary S. Hunter (“Gary”), located at 719 Reservoir Street, Baltimore, Maryland (“the property”). On October 20, 2006, appellants, Howard N. Bierman, Jacob Geesing, Carey M. Ward, and Ralph DiPietro, substitute trustees on behalf of Countrywide Mortgage, initiated a foreclosure action by an Order to Docket suit. After the foreclosure sale, Maria filed exceptions raising the defense of fraud. A hearing was held on June 4, 2007, after which the Circuit Court for Baltimore City (Pierson, J.) sustained the exceptions and set aside the sale.

Appellants then filed a Motion to Alter or Amend And/Or Revise Judgment, stating that the court failed to address appellants’ equitable subrogation argument at the June 4 hearing. A hearing on the issue of equitable subrogation was held on December 21, 2007. In an order dated July 22, 2008, the circuit court ordered that the proper ²⁵³ ty was “subjected to an equitable lien in the amount of $170,284.30 in favor of’ appellants. On appeal, appellants present two questions for our review, which we have rephrased: I. Did the circuit court err in sustaining Maria’s exceptions to the foreclosure sale of the property?

II

Did the circuit court err in not subjecting the property to an equitable lien in the full amount sought by appellants? For the reasons set forth herein, we shall affirm the judgment of the circuit court. BACKGROUND Exceptions to Foreclosure Maria and Gary were married when they purchased the property in September of 2002, but Maria filed for divorce in January of 2006. Maria continues to reside at the property with their three minor children, and Gary, having moved out of the property on February 1, 2006, currently lives in Brazil.

Gary refinanced the property in June of 2003 and again in January of 2004 by obtaining Maria’s signature on the refinance deeds of trusts. Maria testified that the signatures on the refinance deeds of trust were hers. On January 29, 2005, Gary took out a home equity line of credit on the property with Irwin Home Equity Corporation (“Irwin Home Equity loan”) in both his and Maria’s names for $70,000.00. Although Maria’s signature appeared on the credit line deed of trust, Maria testified that the signature on that deed of trust “[djefinitely” was not hers.

On April 20, 2006, several months after Maria and Gary had separated, Gary executed an application for a cash-out debt consolidation loan on the property (“consolidation loan”) in the amount of $320,00.00, of which $170,284.30 was to be used to pay off the pre-existing deed of trust to BB & T Mortgage and $77,356.56 to pay off of the Irwin Home Equity loan. On May 22, 2006, Gary’s son (by a previous marriage) completed the ²⁵⁴ transaction, which included executing a deed of trust securing the consolidation loan under the authority of two Specific Powers of Attorney, one signed by Gary and the other purportedly signed by Maria. A joint check for $30,286.73 was issued to Maria and Gary upon closing on the consolidation loan. Maria testified that she received “no money at all” from the consolidation loan, and that she first learned about that loan on June 24, 2006, when she received copies of the settlement papers.

This was also the first time she learned about the Irwin Home Equity loan. Maria further testified that she did not sign the Specific Power of Attorney giving Gary’s son authority to execute the deed of trust for the consolidation loan, and thus her signature was forged. Upon receiving the settlement papers for the consolidation loan, Maria contacted her attorney as well as the mortgage company. Soon after the settlement on the consolidation loan, Gary stopped making the loan payments.

In September of 2006, after a pendente lite hearing in Maria and Gary’s divorce case, the circuit court ordered, inter alia, that, “effective July 1, 2006[,] [Gary] shall pay the monthly mortgage, escrow and late fees, if any, due” on the consolidation loan. Gary, however, failed to make any payment on the consolidation loan, and appellants instituted a foreclosure proceeding by an Order to Docket suit filed on October 20, 2006. Maria was given notice of the foreclosure sale on October 27, 2006. The sale was held, and a report of sale was filed with the court on November 22, 2006.

Thereafter, Maria filed timely exceptions to the foreclosure sale arguing, inter alia, that the court should “deny [appellants’] request to ratify the Report of Sale,” because the consolidation loan was the product of a fraudulent transaction. Appellants filed an opposition to Maria’s exceptions asserting that Maryland Rule 14-209 required Maria to raise her claim in a request for injunctive relief prior to the foreclosure sale and that “under any circumstances, [appellants were] entitled ²⁵⁵ to a lien for the amount used to pay off the deeds of trust ($247,640.86) by virtue of equitable subrogation.” A hearing was held on June 4, 2007. In a Memorandum and Order dated August 15, 2007, the circuit court “found, based on the uncontroverted evidence produced at the hearing, that [Maria] did not in fact sign the special power of attorney.” The court also ruled that Maria was “not barred from raising her defense to the foreclosure by reason of her failure to apply for an injunction before the sale.” Accordingly, the court sustained Maria’s exceptions and set aside the foreclosure sale of the property. Equitable Subrogation The circuit court, however, did not rule on appellants’ request for equitable subrogation.

As a result, on October 18, 2007, appellants filed a Motion to Alter or Amend And/Or Revise Judgment 1 requesting that the court “modify its Memorandum and Order to establish an equitable mortgage on the [pjroperty ... in favor of [appellants] in the amount of the mortgage paid by the refinancing at issue,” which included the BB & T mortgage ($170,284.30), the Irwin Home Equity loan ($77,356.56), and the “equity paid to [Gary] and [Maria] at the time of the closing [ ($30,286.78) ].” In total, appellants requested equitable subrogation in the amount of $277,927.59. The circuit court held a hearing on appellants’ motion to alter or amend on December 21, 2007. Although Maria did not file an opposition to the motion, she represented to the court during the hearing that she opposed only the amount of equitable subrogation being sought. The court did not rule on the motion, but instead stated: [Tjhe Rules require that any party who opposes a motion file an opposition.

I direct that [Maria] supply to me, file ²⁵⁶ with the Clerk and supply a courtesy copy to chambers, of any opposition that you have to this motion not later than next Friday, that is December 28, 2007. ... [Appellants], I will give you one week that is until January 4, to file a reply. At that time I will determine whether a hearing is necessary upon the Motion to Alter or Amend or whether I can decide it based upon the papers. Maria mailed an opposition to appellants’ motion to alter or amend on December 28, 2007, which was received by the court on December 31, 2007. In her opposition, Maria argued that equitable subrogation should apply to the BB & T Mortgage in the amount of $170,284.30, but not to the Irwin Home Equity loan or the check to her and Gary from the consolidation loan.

In particular, Maria contended that “she did not apply for the $77,356.56 line of credit with Irwin Home Equity that was taken out on the property on January 29, 2005 and she was not aware of its existence until June 2006.” Maria also disputed ever receiving “any benefit from the line of credit after it was issued,” or “any of the proceeds from the $30,286.73 joint check that was issued to [Gary and Maria] at the time of closing” on the consolidation loan. On January 4, 2008, appellants responded to Maria’s opposition, arguing, among other things, that Maria clearly received a benefit from the Irwin Home Equity loan, because it was made on January 29, 2005, a year before Maria separated from Gary and filed for divorce, and Gary paid all of the bills out of their joint bank account until shortly after the settlement on the consolidation loan in May of 2006. Appellants also claimed that Maria received the benefit of the Irwin Home Equity loan by continuing to reside in the property and to receive $475.00 per month from the rental of an apartment in the property. Appellants argued that equity demanded that a lien be imposed on the property for the amount of the closing check, $30,386.73, explaining that Maria benefitted from the check, ²⁵⁷ because the circuit court in the divorce action “expressly relied upon” the “fact that [Gary] profited from refinancing the Lp]roperty,” when fashioning Maria’s award of child support, alimony, personal property, and attorneys’ fees.

The court resolved the issue of equitable subrogation in a Memorandum and Order issued on July 22, 2008. The court first cited to the following principle of law: “[0]ne who lends money upon the security of a mortgage that is in fact ineffective because the person executing it had no authority to do so is entitled to be subrogated to the rights of the mortgagee under a prior valid mortgage discharged with the proceeds of the invalid one.” Accordingly, the court ruled that appellants were entitled to equitable subrogation “with respect to the BB & T deed of trust.” Turning to the closing check, the court found that the subrogation does not extend to the $30,286.73. First, because these funds are not the subject of a prior lien, there is no lien to which [appellants] can be subrogated. Second, [Maria] testified at the hearing of June 4, 2007 that she did not receive any portion of the proceeds of this check.

Although the court does not credit all of her testimony, there was no contradiction of this testimony. [Appellants’] argument that [Maria] received the benefit of these funds because they were taken into account by [the divorce court] in fashioning relief in the divorce proceeding ... does not alter the court’s conclusion that there is no basis to grant [appellants] a lien for this item. With respect to the Irwin Home Equity loan, the court ruled: The more difficult issue involves the Irwin Home Equity loan. This transaction occurred while [Gary and Maria] were still living together. The instrument contains an acknowledgment for both grantors.

However, [Maria] testified that she did not sign the instrument in question. There was no contradiction of this testimony. As recited above, subrogation permits a party to accede to the rights attendant upon a “valid” mortgage. This places upon [appellants] ²⁵⁸ the burden to demonstrate that the prior lien was valid.

A valid grant of an interest in real property, including a security interest, requires that the instrument be executed by the grantor. [Appellants] have not offered any evidence to contradict [Maria’s] testimony that she did not execute the instrument, or any other argument to validate this instrument. Therefore, the court must conclude that [appellants] have failed to sustain their burden to demonstrate entitlement to equitable subrogation as to this portion of their claim. Therefore, the court imposed an equitable lien in the amount of $170,284.30 in favor of appellants. This timely appeal followed.

DISCUSSION I. Did the circuit court err in sustaining Maria’s exceptions to the foreclosure sale of the property? Appellants contend that Greenbriar Cond., Phase I Council of Unit Owners, Inc. v. Brooks, 387 Md. 683 , 878 A.2d 528 (2005), and Jones v. Rosenberg, 178 Md.App. 54 , 940 A.2d 1109 , cert. denied, 405 Md. 64 , 949 A.2d 652 (2008), stand for the proposition “that exceptions filed after a foreclosure sale can only raise procedural irregularities to the sale itself, such as insufficient advertisement or notice of the sale,” and that “in order to raise the type of substantive challenge asserted here by [Maria], a debtor is required to file a pre-sale injunction pursuant to [Rule] 14-209.” Appellants thus conclude that, because Maria did not seek injunctive relief prior to the foreclosüre sale, the court, “as a matter of law,” was required to overrule Maria’s exceptions. We disagree and explain. This Court in Jones articulated the standard of review for exceptions to a foreclosure sale: In ruling on exceptions to a foreclosure sale and whether to ratify the sale, trial courts may consider both questions of fact and law.

In reviewing a trial court’s finding of fact, we ²⁵⁹ do “not substitute our judgment for that of the lower court unless it was clearly erroneous” and give due consideration to the trial court’s “opportunity to observe the demeanor of the witnesses, to judge their credibility and to pass upon the weight to be given their testimony.” Questions of law decided by the trial court are subject to a de novo standard of review. 178 Md.App. at 68 , 940 A.2d 1109 (citations omitted). Maryland’s foreclosure procedure is set forth in Title 14 of the Maryland Rules, “Sales of Property.” 2 Rule 14-202(a) authorizes the lender, under power of sale or assent to decree, to initiate foreclosure on real or personal property upon default without the necessity of a prior court order. Like the instant case, “[a]n action to foreclose a lien pursuant to a power of sale shall be commenced by filing an order to docket.” Rule 14-204(a). Rule 14-204(c) provides: “In an action to foreclose a lien pursuant to a power of sale ..., including a foreclosure on residential property, it is not necessary that process issue or that a hearing be held prior to sale.” In other words, a foreclosure action under a power of sale does not begin with the filing of a complaint and the opportunity for the defendant to respond by answer.

The court becomes involved in a foreclosure action only after the sale is completed. Rule 14-305, entitled “Procedure following sale,” provides in paragraph (a): “As soon as practicable, but not more than 30 days after a sale, the person authorized to make the sale shall file with the court a complete report of the sale and an affidavit of the fairness of the sale and the truth of the report.” Upon the filing of the report of sale with the court, the clerk issues a notice with a description of the property “stating that the sale will be ratified unless cause to the contrary is shown within the 30 days after the date of the notice.” Rule 14—305(c). ²⁶⁰ Within this 30 day period, a party may file exceptions to the ratification of the sale. 3 “Any matter not specifically set forth in the exceptions is waived.... ” Rule 14—305(d)(1). After the filing of exceptions, the court then determines if a hearing is necessary, but “it may not set aside a sale without a hearing,” and must hold a hearing if one is requested and the exceptions “clearly show a need to take evidence.” Rule 14—305(d)(2). A court will ratify the sale if the time for filing exceptions “has expired and exceptions to the report either were not filed or were filed but overruled, and ... the court is satisfied that the sale was fairly and properly made.” Rule 14-305(e).

The historical context of exceptions to a foreclosure sale is necessary to understand its scope. Rule 14-305 is derived from former Rule BR6, 4 also entitled “Procedure Following Sale,” which must be read together with former Rule W74 e, entitled “Procedure Following Sale—Report—Ratification— Audit.” 5 Former Rule W74 e, and by extension former Rule BR6, supplanted Article 66, § 9 of the Maryland Code, which governed the enforcement of mortgages. Wilson Brothers v. Cooey, 251 Md. 350, 360 , 247 A.2d 395 (1968). In Albert v. Hamilton, 76 Md. 304 , 25 A. 341 (1892), the Court of Appeals discussed the importance of exceptions to a foreclosure sale under Article 66, § 9: The Court, sitting in equity, had jurisdiction of the questions arising under the proceedings to enforce the mortgage.

By the ninth section of Article 66, of the Code, it ²⁶¹ is enacted that it should have full power to hear and determine any objections against the sale of the land which might be filed by any person interested in the property, and that it might confirm or set aside the sale; and by the eleventh section it is provided that when the sale is confirmed by the Court, it shall pass all title which the mortgagors had at the time of the recording of the mortgage. Until the sale is reported by the mortgagee all the proceedings are ex parte; but when the report is made, an opportunity is afforded to all parties interested to make their objections to the sale. As the ratification of the sale will pass all the title of the mortgagors, it must follow that they have a right in objecting to the ratification, to show, if they can, that their title ought not to pass. If this were not the case, their title would, under the terns of the Act, be taken from them without a hearing.

If the mortgage under which lands are sold is void for any cause, undoubtedly this is a most sufficient reason why the sale should not be ratified which takes away the title of the mortgagor. The statute says, that the Court “shall have full power to hear and determine any objections which may be filed against the sale;” not merely objections to the regularity of the mode in which the sale was conducted. The object was to enable mortgagors and others to prevent the ratification of a sale which would unjustly deprive them of their property. The purpose of this legislation was to provide a more expeditious and less expensive method of enforcing mortgages than the former proceeding by formal bill in equity; but not, by any means, to impair or defeat the right of the mortgagor to be heard in defense of his property.

And in enabling him to make any objections against a sale, which would take away his title, the statute has preserved to him his unquestionable right to show that the mortgage was invalid, and therefore did not justify a sale of his property. Id. at 307-08, 25 A. 341 (emphasis added) (italicization in original). ²⁶² Albert , like the instant case, dealt with allegations of a mortgage procured by “false and fraudulent representations.” Id. at 305 , 25 A. 341 . In Albert , the appellants filed exceptions to a foreclosure sale, but did not allege therein that the mortgage was fraudulent or invalid for any other reason. Id. at 306 , 25 A. 341 .

The exceptions were overruled and the sale was ratified by the circuit court. Id. Subsequently, the appellants “filed a bill in equity ... in the same Court ... in which they charged that the said mortgage was obtained by fraud.” Id. at 305-06 , 25 A. 341 . Relying on Article 66, § 9, the Court of Appeals explained that the validity of the mortgage was “determined under exceptions to the ratification of the sales,” and that the question of fraud “ought at that time to have been presented to the court for decision.” Id. at 309, 25 A. 341 .

Accordingly, the Court held: “It is not in the power of a party to split up a subject of litigation into portions, and bring them before a Court of justice for adjudication in successive suits.” Id. at 309 , 25 A. 341 . In Wilson Brothers , the Court of Appeals explained that, although former Rule 74e supplanted Article 66, § 9, “the scope of the hearing ha[d] not been narrowed.” 251 Md. at 360 , 247 A.2d 395 . In stating this, Wilson Brothers discussed Albert , and reinforced the proposition that the equity court, ... with “full power to hear and determine any objections which may be filed against the sale[,]” had power to hear objections not only going to the manner in which the sale was conducted, but reasons why the mortgagor’s title should not pass, which would naturally include an attack on the validity of the mortgage. Wilson Bros., 251 Md. at 360 , 247 A.2d 395 (emphasis added).

The rule upon which appellants base their argument, Rule 14-209(b), entitled “Injunction to stay foreclosure,” is also traceable to Article 66 of the Maryland Code. The Rule was derived from former Rule W76b, also entitled “Injunction to Stay Foreclosure,” which evolved from Article 66, § § 16-18. Consequently, the injunction to stay foreclosure and exceptions to sale have always co-existed as two available forms of ²⁶³ relief, the difference being that Rule 14—209(b) limits the court’s authority to grant an injunction, stating, in relevant part: The motion shall not be granted unless the motion is supported by affidavit as to all facts asserted and contains: (1) a statement as to whether the moving party admits any amount of the debt to be due and payable as of the date the motion is filed, (2) if an amount is admitted, a statement that the moving party has paid the amount into court with the filing of the motion, and (3) a detailed statement of facts, showing that: (A) the debt and all interest due thereon have been fully paid, or (B) there is no default, or (C) fraud was used by the secured party, or with the secured party’s knowledge, in obtaining the lien. [6] See also W76b; Article 66, § 16. On the other hand, in ruling on exceptions, the court has the broad authority to determine “that the sale was fairly and properly made,” see Rule 14-305(e); BR6b; Article 66, § 9.

In fact, the presence of these two separate forms of relief was explained by the U.S. District Court in Fisher v. Federal National Mortgage Association, 360 F.Supp. 207 (D.Md.1973). The court in Fisher stated that “[ujnder Maryland foreclosure procedures” an interested party has “two separate opportunities” to challenge “the legality of the foreclosure” in state court. Id. at 211 . First, under Rule W76b, plaintiffs may move prior to sale to enjoin the foreclosure.

Secondly, after the sale but before ratification, plaintiffs have the opportunity to file objections to the sale. Rules W74e and BR6b[ ]. The equity court has full power to hear and determine all objections which may be filed against the sale. Wilson Bros. v. Gooey, 251 Md. 350, 360 , 247 A.2d 395 (1968).

When an equity court ²⁶⁴ has once assumed jurisdiction, it will retain its jurisdiction in order to settle all questions which might arise out of the subject in controversy. Id. (emphasis added). Appellant’s argument in the case subjudice that Maria needed to file for a pre-sale injunction to raise the substantive challenge of fraud ignores the above historical context of Maryland’s foreclosure rules and the cases interpreting those rules.

Maria’s ability to attack the validity of the deed of trust securing the consolidation loan was not limited to a motion to stay the foreclosure sale under Rule 14-209(b). See Fisher, 360 F.Supp. at 211 . She could, and did, raise this issue as an exception to the ratification of the foreclosure sale under Rule 14-305. See id.

As an equity court, the trial court had full power to hear and determine all objections to the foreclosure sale, “which would naturally include an attack on the validity of the mortgage.” Wilson Bros., 251 Md. at 360 , 247 A.2d 395 ; see Albert, 76 Md. at 307-08 , 25 A. 341 . Accordingly, the trial court did not err in sustaining Maria’s exceptions to the foreclosure sale on the ground that the deed of trust securing the consolidation loan was invalid. Appellant’s reliance on Greenbriar and Jones is misplaced. Greenbriar involved a foreclosure on the appellant’s condominium for failure to pay monthly assessments “on fifty or more occasions, spread over five or more years.” 387 Md. at 716 , 878 A.2d 528 (emphasis omitted).

The appellant challenged the foreclosure by filing exceptions to the sale after the sale was held, id. at 703 , 878 A.2d 528 , arguing that, “by demanding such a high payoff amount, [the condominium association] had effectively denied his right of redemption.” Id. at 716 , 878 A.2d 528 . The circuit court “ultimately [ ] sustained the exceptions and apparently