Island Financial, Inc. v. Ballman

FISCHER, Judge. Appellant, Island Financial, Inc. (Island), appeals from a decision of the Circuit Court for Prince George’s County denying Island’s motion to vacate the ratification of a foreclosure sale. On July 19, 1989, Island loaned money to Gregory S. Rogers and Yolanda A. Rogers, husband and wife. The loan was secured by a second deed of trust on 5 Daimler Drive in Seat Pleasant, Maryland.

Payments on the second deed of trust fell in arrears, and on November 7, 1990, appellant’s trustees initiated a foreclosure proceeding in the Circuit Court for Prince George’s County. In the process of foreclosing, the trustees learned that the property had already been sold by appellees, B. George Ballman and Sherri E. Turner, substitute trustees for Trustbank Savings, F.S.B., as a result of the foreclosure of the first deed of trust. Island received no notice of the sale and was, therefore, unable to attend the sale or otherwise endeavor to protect its interest in the property. Island moved to intervene in the foreclosure proceeding and, on December 5, 1990, permission to intervene was granted.

The court auditor filed his account of the sale which showed a surplus of only $321.33 payable to Island. Subsequently, Island filed ex ¹²⁸ ceptions to the auditor’s account and moved to vacate the ratification of the sale. After a hearing, the circuit court denied Island’s motion to vacate and overruled its exceptions. This appeal followed, and Island raises one issue for our consideration: Did the circuit court’s action in denying Island’s motion and overruling its exceptions deprive Island of property in violation of the due process clause of the Fourteenth Amendment to the United States Constitution?

Appellees aver that they correctly followed the procedures set forth in Md.Rule W74 regulating foreclosure sales. In addition, appellees contend that Island itself did not exercise due diligence, because it failed to record, in accordance with the provisions of Md.Real Prop.Code Ann. § 7-105(c), a request for notice of foreclosure. Section 7-105(c) states: (c) Notice to holder of subordinate mortgage, etc. — (1) The holder of a superior recorded mortgage or deed of trust shall give written notice of any proposed foreclosure sale to the holder of any subordinate recorded mortgage, deed of trust, or other subordinate recorded or filed interest, including a judgment, in accordance with the requirements of the Maryland Rules applicable to the giving of notice to the mortgagor or grantor of the mortgage or deed of trust being foreclosed, if the holder of the subordinate interest has recorded in the land records office of each county where the property is located a request for notice of sale at least 30 days prior to the date of a foreclosure sale which is actually held. A request for notice of sale shall: (i) Be recorded in a separate docket or book which shall be indexed under the name of the holder of the superior mortgage or deed of trust and under the book and page numbers where the superior mortgage or deed of trust is recorded; (ii) Identify the property in which the subordinate interest is held; ¹²⁹ (iii) State the name and address of the holder of the subordinate interest; and (iv) Identify the superior mortgage or deed of trust by stating: 1.

The names of the original parties to the superior mortgage or deed of trust; 2. The date the superior mortgage or deed of trust was recorded; and 3. The office, docket, or book, and page where the superior mortgage or deed of trust is recorded. Island admits that it failed to comply with § 7-105(c)(l) and that appellees complied with the Md.Rules with respect to the foreclosure.

Island’s contention is that the Fourteenth Amendment requires that adequate notice and an opportunity to be heard must be provided before any state action may be taken to deprive one of his or her property. The Fourteenth Amendment provides in part that no state shall “deprive any person of life, liberty or property, without due process of law.” The Supreme Court in recent decisions has tempered the harshness of foreclosure and tax sales by requiring that the states protect an individual’s property interests through procedural due process. The Fourteenth Amendment is implicated when there is “a sufficiently close nexus between the State and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the State itself.” Jackson v. Metropolitan Edison Co., 419 U.S. 345, 351 , 95 S.Ct. 449, 453 , 42 L.Ed.2d 477 (1974). The appellees do not contest that State action is involved.

See McCann v. McGinnis, 257 Md. 499, 505 , 263 A.2d 536 (1970) (citing Warfield v. Dorsey, 39 Md. 299, 307 (1874)), in which the Court of Appeals stated, “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 Mennonite Board of Missions v. Adams, 462 U.S. 791 , 103 S.Ct. 2706 , 77 L.Ed.2d 180 (1983), the Court set out a two part analysis to determine whether an individual’s ¹³⁰ property interest had been violated without due process. The first prong of the test is to determine whether the party holds a legally protected property interest and the second prong requires a balancing of needs between the interest holder’s right to notice and the burden of providing that notice. Although Mennonite involved a tax sale, the language has been read broadly to encompass foreclosure sales. In Mennonite, the Mennonite Board of Missions held a purchase money mortgage on Indiana property on which the mortgagor failed to pay real property taxes.

Under Indiana law, before the property was sold at a tax sale, notice was published for three weeks, posted in the county courthouse and a certified mail copy of the notice was sent to the owner. As mortgagee, Mennonite Board of Missions was not entitled to notice under the statute and subsequently was not notified of the tax sale. Under the statute, after two years free of any interest claims on the property, the tax sale purchaser obtained the property free and clear of all encumbrances, even prior recorded mortgages. The Supreme Court in Mennonite held that failure to give the mortgage holder actual notice of the pending tax sale violated procedural due process.

The Supreme Court relied on its earlier decision in Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 , 70 S.Ct. 652 , 94 L.Ed. 865 (1950), to illustrate the proper form of required notice. In Mullane, 339 U.S. at 314 , 70 S.Ct. at 657 , the Court stated that procedural due process protection requires a State to provide “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Specifically in Mullane, 339 U.S. at 318 , 70 S.Ct. at 659 , the Court found that published or posted notice did not meet the standard of procedural due process when the address of an interested party is reasonably ascertainable. Under Mennonite, 462 U.S. at 798 , 103 S.Ct. at 2711 , procedural due process protects “persons” holding a legally protected property interest by requiring actual or mailed ¹³¹ notice of a proceeding if the person’s name and address are “reasonably identifiable.” Our first task is to determine whether Island, an inferior lienholder, has a legally protected property interest under Mennonite. There is no doubt that a first mortgage holder is protected.

Mennonite, 462 U.S. at 798 , 103 S.Ct. at 2711 (“a mortgagee clearly has a legally protected property interest”). Second mortgagees also have a significant, constitutionally protected property interest. See Fuentes v. Shevin, 407 U.S. 67, 82 , 92 S.Ct. 1983, 1995 , 32 L.Ed.2d 556 (1972); Federal Deposit Ins. Corp. v. Morrison, 747 F.2d 610, 614 (11th Cir.1984).

In Davis Oil Co. v. Mills, 873 F.2d 774 (5th Cir.1989), Davis was a mineral lessee whose interest was extinguished by a mortgage foreclosure sale. The Fifth Circuit Court of Appeals held, “The termination of Davis’ lease by FNB’s foreclosure and the subsequent seizure and sale of the subject property ‘deprived’ Davis of a legally protected property interest within the meaning of the fourteenth amendment.” Davis Oil, 873 F.2d at 787 . Other states similarly construed the language of Mennonite to encompass foreclosure actions. See Dossett v. Hub City Bank & Trust Co., 546 So.2d 597 (La.App. 3 Cir.1989); City of Boston v. Shirley James, 26 Mass.App.Ct. 625 , 530 N.E.2d 1254 (1988).

It is clear that Island’s interest is protected, because the ratification of the foreclosure sale has the ultimate effect of nullifying Island’s interest in the property (Island would receive only $321.33 of its loaned money) — the same effect that the tax sale in Mennonite had upon the mortgagee’s interest. The second prong of the Mennonite test is to determine whether the foreclosing party would be unfairly burdened with providing notice to holders of subordinate property interests. The Court in Mennonite, 462 U.S. at 800 , 103 S.Ct. at 2712 , stated, “[Njotice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and ¹³² address are reasonably ascertainable.” The mortgage on file in Mennonite identified the mortgagee as “MENNONITE BOARD OF MISSIONS a corporation, of Wayne County, in the state of Ohio”, but the corporation’s address was not provided. The Court, however, concluded that it would not have been a difficult task to find the address and to mail notice of