Greentree Series V, Inc. v. Hofmeister

⁵⁶⁰ SALMON, J. The appellant in this case is Greentree Series V, Inc. (hereafter “Greentree”); the appellees are C. Larry Hofmeis-ter, Jr., Craig B. Leavers, and Stephanie H. Hurley, Substitute Trustees (hereafter, collectively “the Substitute Trustees”) and Wells Fargo Bank, N.A. The legal issue presented is one of first impression and arises because Greentree placed the winning bid on land sold by the Substitute Trustees at a foreclosure sale, then put down a $33,197 deposit, but failed to go through with the purchase after the circuit court ratified the sale. As a consequence, the Substitute Trustees sold the property a second time. When the property was resold, Greentree was once again the high bidder, having bid $244,000, which was $72,000 more than it had bid initially. Ultimately, the court ratified that sale and Greentree, after some delay, went through with the sale.

In the auditor’s corrected amended account, he gave Green-tree credit for the $33,197 deposit. The Substitute Trustees and Wells Fargo filed exceptions to the auditor’s corrected amended account and the exceptions were heard in the Circuit Court for Anne Arundel County. The circuit court overruled the auditor and held that Greentree was not entitled to the return of all or any part of its deposit, even though, after payment of all interest and expenses, Wells Fargo had substantially more money in hand than it would have had if Greentree had not defaulted initially. In this timely appeal, Greentree raises one question, which it phrases as follows: May a court ... forfeit entirely the deposit of a defaulting purchaser at foreclosure without regard to actual loss or damage resulting from the subsequent resale?

I. UNDISPUTED FACTS In 2007, Joseph A. Wheeler signed a $320,000 promissory note that was secured by a deed of trust. That deed of trust ⁵⁶¹ encumbered property located in Anne Arundel County known as 10 River Drive, Severna Park, Maryland (hereafter “the Property”). The grantors of the deed of trust were Negar Wheeler and Joseph Wheeler. Payments were not made when due on the note and as a consequence the Substitute Trustees, on behalf of Wells Fargo, the holder of the promissory note, filed a foreclosure action in the Circuit Court for Anne Arundel County on May 12, 2011.

The terms of the sale, as set forth in a newspaper advertisement that was published in Anne Arundel County prior to the sale, read, in pertinent part, as follows: A deposit of $33,000.00 will be required at the time of sale .. . [bjalance of the purchase price is to be paid in cash within ten (10) days of the final ratification of sale[.] ... If payment of the balance does not take place within ten days of ratification, the deposit will be forfeited and property will be resold at the risk and expense of the defaulting purchaser. A public sale of the Property was held by the Substitute Trustees on June 30, 2011. Greentree’s bid of $172,000 was the highest received.

Greentree then gave the Substitute Trustees a deposit in the amount of $33,197, which was $197 more than required. The sale was ratified by the Circuit Court for Anne Arundel County on August 29, 2011. Green-tree, however, failed to settle on the Property within ten days as required, and as a consequence, Wells Fargo and the Substitute Trustees, on September 26, 2011, filed a pleading entitled: “Petition to Order Resale of Property at Defaulting Purchaser’s Sole Cost and Expense.” The circuit court judge who held the hearing on the petition provisionally denied it on January 11, 2012. The judge explained, in a footnote to his order, that Greentree had demonstrated good faith and, due to that demonstration, Greentree would have thirty additional days to “follow the appropriate course of action” and to settle on the Property.

The judge’s footnote also said that if Greentree did not settle on the Property within thirty days of January 11, 2012, “the [PJroperty shall be resold at the defaulting purchaser’s cost and expense.” Thereafter, the ⁵⁶² Substitute Trustees filed an affidavit stating that Greentree, in the past thirty days, had not even established contact with them and had, once again, failed to settle on the Property. Based on that affidavit, an order was docketed, on February 10, 2012, which directed that the Property “shall be resold at the risk and expense of’ Greentree. That order also provided that “the deposit monies in the amount of $83,197.00 be and are hereby forfeited.” 1 The Property was sold for the second time at public auction on April 12, 2012. Greentree’s bid of $244,000 was the highest received.

Greentree put down a second deposit, this time in the amount of $35,000, which was $10,000 more than the amount required in the advertisement that immediately preceded the resale. The second sale was ratified by the Circuit Court for Anne Arundel County on June 14, 2012. Once again, Greentree failed to go to settlement as scheduled. As a result, an order directing the sale of the Property for a third time was entered on August 9, 2012.

That order, however, permitted the Substitute Trustees, in their discretion, to go to settlement with Greentree at any time before the resale. On October 25, 2012, which was the date that the Property was ⁵⁶³ scheduled to be sold for the third time, Greentree finally went to settlement. The court auditor filed his first report in December of 2012. That report contained a miscalculation concerning the total amount owed on the underlying debt.

Also, the first auditor’s report treated Greentree’s initial deposit of $33,197 as forfeited. Greentree filed exceptions challenging the auditor’s treatment of the $33,197 deposit. The auditor, on April 1, 2013, filed an amended auditor’s report in which he addressed the problem concerning the total debt amount. The amended report once again treated the first deposit of $33,197 as forfeited.

The auditor also treated the second deposit of $35,000 as forfeited. Again, Greentree filed exceptions. On April 19, 2013, the auditor filed a “corrected amended audit” in which he stated that expenses incurred by the Substitute Trustees as a result of the resale totaled $15,591.35. This time he ruled, however, that the $33,197 deposit should be returned to Greentree and that the second deposit of $35,000 be credited to Greentree.

The Substitute Trustees and Wells Fargo filed exceptions to the corrected amended auditor’s report (hereafter “the final auditor’s report”). On July 19, 2013, a hearing was held in the Circuit Court for Anne Arundel County to consider the exceptions. The main issue presented at the hearing was whether Greentree was entitled to the return of its initial $33,197 deposit. The circuit court, in a written opinion filed on August 12, 2013, ruled that Greentree was not entitled to a return of that deposit.

The court noted that by virtue of Greentree’s failure to go to settlement initially, the Substitute Trustees had incurred additional expenses in the amount of $15,591.35 and interest on the debt had increased by $17,788.26, which was calculated at $61.98 per day. Therefore, “the total cost” of having to resell the Property was $33,379.61 ($17,788.26 + $15,591.35), which was considerably less than the $72,000 [$244,000 less $172,000] additional monies realized from the second sale. Put another way, even if the first deposit had been returned to Greentree, the Substitute Trustees, after the second sale, realized $38,620.39 ($72,000 - $33,379.61) more ⁵⁶⁴ than they would have received if Greentree had gone to settlement as scheduled on the first sale. In reaching her decision, the judge opined that she could not justify the forfeiture of the deposit based on the terms of sale that appeared in the newspaper ad.

The court gave the following explanation: Since there were no actual damages from the resale, forfeiting the deposit pursuant to the first sale advertisement would be akin to enforcing a penalty. Furthermore, since damages were ascertainable at the time of the resale, the deposit forfeiture provision in the first sale advertisement, which is considered a liquidated damages clause, is unenforceable. See Lee Oldsmobile, Inc. v. Kaiden, 32 Md.App. 556 [ 363 A.2d 270 ] (1976) (holding that where the presence of a resale remedy under the Uniform Commercial Code rendered damages ascertainable and a liquidated damage clause thus unenforceable). Thus, the first sale advertisement alone does not provide the [c]ourt with the authority to forfeit the First Deposit.

Having decided that application of contract law principles would not justify the forfeiture of the deposit, the court then segued into a discussion of equitable principles. Quoting from Simard v. White, 383 Md. 257, 317 , 859 A.2d 168 (2004), the judge said that “the underlying origins of the proper priorities to be applied to sums received at any foreclosure sale, be it an initial sale or a resale, have been for over two hundred years to primarily protect the interests of mortgagors and mortgagees.” The circuit court then noted that the Court of Appeals said in Simard that “courts have sought outcomes that are equitable and fair both to the mortgagee and to the mortgagor and other creditors.” Id. The circuit court also observed that the Court noted in Simard v. White, that “[i]t is the defaulting purchaser’s exposure, on the other hand, that somewhat differs from that of the other parties.” Id. at 320 , 859 A.2d 168 . According to the circuit court, the Simard Court, 383 Md. at 320-21 , 859 A.2d 168 , “indicated that the interests of the ⁵⁶⁵ mortgagor and the mortgagee are paramount to those of the defaulting purchaser[.]” 2 The circuit court’s written opinion stressed that if Greentree were allowed to receive back its initial deposit, the deficiency judgment that would be entered against the maker of the note would be $149,751.25, but if the defaulting purchaser were not entitled to a return of the deposit, any possible deficiency judgment would be “lowered considerably” (i.e., lowered by $33,197).

Next, the court indicated, although it did not say so explicitly, that Greentree’s request for the return of its initial deposit was barred by the doctrine of unclean hands. Citing Wells Fargo Home Mortgage, Inc. v. Neal, 398 Md. 705, 729-30 , 922 A.2d 538 (2007), the court said that the unclean hands doctrine provides that “courts of equity will not lend their aid to anyone seeking their active interposition, who has been guilty of fraudulent, illegal, or inequitable conduct in the matter with relation to which he seeks assistance.” The judge did not explicitly find that Greentree’s conduct was “fraudulent, illegal, or inequitable,” but, implied that this was the case. The court emphasized that, due to Greentree’s default, “more than a year had passed since the first sale was ratified on August 29, 2011.” The circuit court concluded its opinion by stating: Now Greentree is asking the [cjourt to reconsider Judge Silkworth’s February 10, 2012, Order and return the First Deposit. The [cjourt is not inclined to do so.

Md. Rule 14-305(g) provides that “if the purchaser defaults, the court, on application and after notice to the purchaser, may order a resale at the risk and expense of the purchaser or may take any other appropriate action.” Taking into consideration [T]he Court, then, has remained cognizant of the need to protect the interests of the mortgagor, who has not been relieved of his liability for deficiency on the mortgage at any time during the sale and resale in the foreclosure process, as well as the interest of the mortgagee who has invoked the power of the court in pursuit of satisfaction of the debt owed to him. ⁵⁶⁶ Greentree’s conduct in not making it to settlement on two occasions after sales were ratified, and the paramount interests of the mortgagor, and mortgagee in reducing the deficiency judgment as well as recovering outstanding debt, the [c]ourt finds that it is appropriate to forfeit the First Deposit.

II

A. Contract Principles As will be discussed infra, the primary argument made by Greentree in this appeal is that under the dictates of Md. Rule 14 — 305(g), the circuit court did not have the discretion to order both a resale of the Property at the defaulting owner’s risk and expense and to order as well a forfeiture of the deposit made by the defaulting purchaser. But before reaching that issue, we will address two subsidiary ones that were raised below and decided by the circuit court. The first of those issues is whether the forfeiture of the deposit can be justified based on Greentree’s breach of the terms of sale that were set forth in the newspaper advertisement that preceded the June 30, 2011 auction. As mentioned supra, the advertisement said that if the purchaser defaulted, the Property would be resold at the risk and expense of the defaulting purchaser and the $33,000 deposit would be forfeited.

In White v. Simard, 152 Md.App. 229, 241 , 831 A.2d 517 (2003), aff'd, 383 Md. 257 , 859 A.2d 168 (2004), Judge Sally D. Adkins, speaking for this Court, said: The purchase and sale transaction at any judicial sale is governed by general principles of contract, with the court acting as vendor: “In all sales made under the authority of a decree of a court of equity, the court is the vendor, acting for and in behalf of all parties interested. The contract of sale is a transaction between the court as vendor, and the purchaser; and the contract is never regarded as consummated until it has received the sanction of the court....” “Be ⁵⁶⁷ fore ratification the transaction is merely an offer to purchase which has not been accepted.” Talbert v. Seek, 210 Md. 34, 43 , 122 A.2d 469 (1956) (quoting [Edgar G.] Miller, [Jr., Equity Procedure] § 510 at 602 [1897], and Hanover Fire Ins. Co. v. Alexander Brown & Sons, 77 Md. 64, 71 , 25 A. 989 (1893)); see also McCann v. McGinnis, 257 Md. 499, 505 , 263 A.2d 536 (1970) (“The court is the vendor in the case of a sale under the power contained in a mortgage, just as it is a vendor in any other chancery sale.”). In the context of a foreclosure sale, the contract of sale is not final until the court ratifies the sale.

Such a sale does not pass the title unless it is ratified and confirmed. The [c]ourt is the vendor acting through its agent the trustee.... He reports to the [c]ourt the offer of the bidder for the property; if the offer is accepted, the sale is ratified, and thereupon, and not sooner, the contract of sale becomes complete. Before ratification the transaction is merely an offer to purchase which has not been accepted.

Hanover Fire Ins. Co., 77 Md. at 71 , 25 A. 989 ; see also Plaza Corp. v. Alban Tractor Co., Inc, 219 Md. 570, 578 , 151 A.2d 170 (1959) (“When [the trustee] reported the offers of the bidders for the property to the court, no contracts of sale had been completed and no title had been transferred to the prospective purchasers”)!..] Id. at 241-42, 831 A.2d 517 . Judge Adkins also pointed out in White that “trustees must act equitably toward contract purchasers” (citing Stewart v. Devries, 81 Md. 525, 526-27 , 32 A. 285 (1895)) and that courts will strike down contracts that are contrary to public policy. Id. at 249, 831 A.2d 517 .

At first blush, it might appear that the issue of whether the defaulting purchaser’s deposit should be forfeited could be resolved by simply applying the words of the newspaper advertisement, which said, in plain English, that the $33,000 ⁵⁶⁸ deposit would be forfeited if the purchaser did not pay the balance due “within ten (10) days of the final ratification.” In arriving at the conclusion that the forfeiture provision was unenforceable as a penalty, the circuit court used the definition of “forfeiture” set forth in Black’s Law Dictionary, (9th ed. 2009), viz.: 1. The divestiture of property without compensation. 2. The loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty. Title is instantaneously transferred to another, such as the government, a corporation, or a private person. 3.

Something (esp. money or property) lost or confiscated by this process; a penalty. In this appeal, neither party contends that the circuit court erred in using Black Law Dictionary’s definition of “forfeiture.” We agree that the court did not err in this regard. Using the aforementioned definition, if the terms of the ad were enforced, Greentree would have automatically lost all rights to the return of the deposit once it defaulted. In Zorzit v. 915 W. 36th Street, LLC, 197 Md.App. 91, 102 , 12 A.3d 698 (2011), we said “ ‘the purchase and sales transaction at any judicial sale is governed by general principles of contract, with the court acting as vendor.’ ” (quoting this Court’s opinion in White v. Simard, 152 Md.App. at 241 , 831 A.2d 517 ).

And, as already mentioned, in the case sub judice the circuit court held that the forfeiture of deposit provision in the advertisement could not be enforced as a matter of contract law, because it constituted an invalid liquidated damage clause and therefore, to enforce it would be “akin” to enforcing a penalty. In Blood v. Gibbons, 288 Md. 268, 274 , 418 A.2d 213 (1980), the Court was called upon to interpret a real estate contract that included the following provision: FORFEITURE OF DEPOSIT ... If the Purchaser shall fail to make full settlement the deposit herein provided for may be forfeited at the option of the Seller, in which event ⁵⁶⁹ the Purchaser shall be relieved from further liability hereunder unless the Seller notifies the Purchaser and the Broker in writing within 30 days from the date provided for settlement herein of his election to avail himself of any legal or equitable rights, other than the said forfeiture, which he may have under this contract. In the event of the forfeiture of the deposit or in the event of an award of damages by a court or a compromise agreement between Seller and Purchaser, the Seller shall allow the Broker one-half thereof as compensation for services, said amount not to exceed the amount of the full brokerage fee....

Id. at 269-70 , 418 A.2d 213 . In Blood , the contract purchaser defaulted and “the sellers assert[ed] that the forfeiture of deposit provision in the contract ... permitted] the election of any legal or equitable rights in addition to the forfeiture of the deposit.” Id. at 271 , 418 A.2d 213 . Relying, in part, on Casey v. Jones, 275 Md. 203 , 339 A.2d 33 (1975), the Blood Court said: The forfeiture of the deposit under the contract provision in this case can be supported on the theory that it was in the nature of liquidated damages rather than a penalty. See Macon v. Zeiler, 233 Md. 160, 163-64 , 195 A.2d 687 (1963); Alois v. Waldman, 219 Md. 369, 377 , 149 A.2d 406 (1959).

Liquidated damage, of course, is a specific sum of money agreed upon as the amount of damages to be