Johnson v. Nadel

J. FREDERICK SHARER (Retired, Specially Assigned), J. In this mortgage foreclosure case, John S. Johnson, Jr., appellant, seeks to overturn the Order of the Circuit Court for Montgomery County that overruled his exceptions to the foreclosure sale of his property. Jeffrey Nadel, and others, appellees, are the substitute trustees under the purchase money deed of trust that had been executed to secure appellant’s obligation on the residential loan. At issue is whether the circuit court erred by overruling appellant’s exceptions to the foreclosure sale and the trustees’ report of that sale. Appellant complains that the substitute ⁴⁵⁸ trustees violated their fiduciary duty in connection with the foreclosure sale. 1 We are not persuaded by appellant’s arguments, and shall affirm.

BACKGROUND The salient facts are largely undisputed. In 2007, appellant purchased improved property located at 12800 Timber View Court in Silver Spring, Montgomery County. To effect this transaction, appellant borrowed $696,500, as shown by a promissory note in favor of the lender, Guaranteed Rate, Inc. This promissory note was in turn secured by a purchase money Deed of Trust and Note, dated April 30, 2007. 2 The Deed of Trust contained a power-of-sale provision. 3 On October 27, 2011, the Note and Deed of Trust were assigned to U.S. Bank Trust, N.A. On October 31, 2011, the current substitute trustees were appointed. ⁴⁵⁹ Appellant defaulted under the Note and the Deed of Trust in early 2010, and on November 28, 2011, the substitute trustees initiated the instant residential foreclosure action by filing an Order to Docket Foreclosure in the Circuit Court for Montgomery County. 4 See generally Md.Code (1974, 2010 Repl.Vol., 2011 Supp.), § 7-105.1 of the Real Property Article (“RP”) (residential property foreclosure procedures); Md. Rule 14-204. On December 26, 2011, appellant requested foreclosure mediation.

See RP § 7-105.1. This process appeared to bear fruit, for the parties agreed to stay the foreclosure action for 60 days to permit appellant to secure a purchaser. By agreement, the lender placed the foreclosure “on an internal hold for 60 days to allow the Borrower to pursue a short sale and other loss mitigation options.” After this interval passed without an accord, however, the substitute trustees invoked the power-of-sale provision of the Deed of Trust and scheduled the foreclosure sale for June 18, 2012. 5 On June 15, appellant moved to stay, or, in the alternative, to dismiss, the foreclosure action. See Md. Rule 14-211(a)(2).

In support of his motion, he claimed that a short sale “will secure the best obtainable price under the circumstances and further the strong preference in Maryland to avoid foreclosures.” Appellant’s motion for a stay was driven by the presence of two proposed contracts of sale. The first, submitted on June 9, 2012, offered $601,000. The offer required that the sale was to be free and clear of “liens and encumbrances.” The second proposed contract, in the amount of $550,000, also required that the property be “free of liens except for any loans ⁴⁶⁰ assumed by Purchaser.” Both of these proposals were executed by appellant, but had not been approved by the lender. Although each proposal insisted that the sale must be free and clear of any encumbrance, neither proposal mentioned approval by a junior lienholder or the existence of an Internal Revenue Service tax lien.

The circuit court denied appellant’s motion as untimely, see Md. Rule 14—211(a)(2), and the foreclosure sale was held on June 18, 2012, as scheduled. The property was sold to the lender, the “highest and successful” bidder, for $617,605, an amount in excess of appellant’s first two “offers.” On June 27, 2012 the substitute trustees filed their Report of Sale. Appellant sought to overturn the sale, and on July 25, 2012, noted exceptions to the sale and report pursuant to Md. Rule 14-305(d), claiming for the first time that he had secured yet a third proposed contract for a short sale of the property, with an offer in the amount of $650,000. This late offer had been submitted on June 13, 2012, but was not brought to the attention of the substitute trustees until after the sale.

As with the other bids, this proposed contract also required that the property be free and clear of liens, and gave the offeror the right to withdraw the contract if this condition were unmet. The offeror on this third contract was the same individual who had presented the first ($601,000) offer. Similarly, the third offer did not provide for the IRS lien, the presence of a second deed of trust, or any other encumbrances. 6 Moreover, this offeror failed to demonstrate that he had the funds to provide the down payment. Although appellant’s lawyer was present at the sale, the offeror responsible for the eleventh-hour offer was not present. 7 ⁴⁶¹ At the exceptions hearing, appellant’s counsel acknowledged that “[t]here is no argument that the price was inadequate.” Nor was there an argument that the notice was deficient.

He averred, however, that the trustees have the “duty to obtain the best possible price, even if that means withdrawing the [property] from the foreclosure sale.” Referring to a trustee’s standard of care as set forth in Fagnani v. Fisher, 418 Md. 371 , 15 A.3d 282 (2011), Appellant’s counsel continued: And the “his own property” part is important here because the trustee has a duty not just to the bank, to make sure this property is sold. The trustee is a trustee, the same as we have trustees who sell property pursuant to a divorce decree or another matter. The trustee has an obligation to both parties. And here, the trustee did not comply with that obligation, I’m sorry, the trustees did not comply with that obligation because there was another offer, a better offer available, $650,000.

That offer was available. It could have been taken. A man of ordinary business judgment in selling his own property would not ignore a $650,000 offer, which was $50,000 above the, as the trastees note, the SDAT appraised value. And it was $75,000 above what the bank’s BPO was at the time.

So it was more than what could be expected to be achieved at a foreclosure sale and— Counsel acknowledged that a trustee would not be required to entertain an offer well after the sale, but then posited: But that doesn’t mean the trustee can turn away from offers that are live offers at the time of the foreclosure sale, that are better than what can be expected to be received. And in fact in this case, was better than what actually was received through the subsequent action that the trustee took at the foreclosure sale. Counsel emphasized that appellant would be left with a deficiency, and represented that appellant had been “speaking to both the trusteefs] prior to the sale, and [the] servicer as well.” Again, counsel acknowledged that the sale fetched an “adequate price,” but reiterated that “there are two different ⁴⁶² standards by which the Court has to view a trustee sale.” Not only must the price be adequate, he added, but it must also be the “best obtainable[.]” The court had no quarrel with the proposition that a trustee must strive to secure the highest or best offer, but questioned whether that “best offer” had actually been presented at the foreclosure sale: THE COURT: Am I correct that the party that made this offer that you’re referring to, the higher offer, did not go to the foreclosure sale, didn’t go to the auction where they could have bid that? [APPELLANT’S COUNSEL]: Well, it’s, that’s correct, Your Honor, and it’s an interesting question you ask, because he was never invited.[ 8 ] And I say that— THE COURT: Well, I don’t think you need to be invited, since they need to publish it anyway, right? [APPELLANT’S COUNSEL]: That’s correct, Your Honor. But if you’re a trustee with a duty to the owner of the property, and you’re aware that there’s someone out there with a $650,000 cash offer, and you don’t make any effort to let that person know, well, I’m not going to go through with this, but come to the foreclosure sale, that’s not complying with the duty to obtain the best obtainable price, and that’s the duty that the trustee owes to both parties in this case.

THE COURT: All right. Can you just help me again with the chronology here? When did your client inform the trustees that there was this all cash offer waiting out there, that there was a signed sales contract? Appellant’s theory was that the trustees, having been aware of the existence of a better offer, should have pursued that offer, and by failing to do so breached their fiduciary duty to ensure that the best possible price was obtained. ⁴⁶³ The trustees pointed out that they did not receive the third and highest offer before the sale.

Further, they emphasized that the procedural requirements for conducting a foreclosure sale were complied with. The trustees also questioned whether the final offer presented by appellant was indeed bona fide. Following argument, the circuit court rejected appellant’s challenge to the sale, ruling in part as follows: I think it’s pretty clear under Maryland Rule 14-305 that when exceptions are taken to a sale, that the exceptions shall set forth the alleged irregularity with particularity. That is, there must be an allegation of an irregularity in the proceeding of the sale.

As counsel has noted, the ratification, or I should say a foreclosure sale is governed by the Maryland Rules, and that if a party perceives an irregularity in the foreclosure sale, it may file exceptions to the sale of the property. It’s settled law that there is a presumption that the sale was fairly made, and that the antecedent proceedings, if regular on the face of the record, were adequate and proper. And the burden is upon the one attacking the sale to prove to the contrary. Not only must there be a burden of showing that there was error, but that there was prejudice as a result of the error.

In this particular case, there really is no alleged error or irregularity in the way in which the property was sold. There’s no errors claimed in notice or the actual conduct of the sale. What is claimed here is that the trustees failed to seize upon another offer instead of proceeding to the foreclosure. And the argument being that where there is a best possible price, or really a better price offered than what they may receive in a foreclosure.

Because they don’t know what they’re going to receive in a foreclosure sale. They don’t know who’s going to come out to bid. They can’t know that in advance. That somehow or other, the foreclosure sale must be stopped when there is word that there is an offer ⁴⁶⁴ somewhere else.

I don’t believe that’s what the law requires them to do. In this particular case, since there was public notice of the foreclosure sale, clearly if there was a bidder who wanted to bid more money for this property, I’m pretty sure that the trustees would have accepted it. But that didn’t happen in this case. I don’t believe that the proposition that’s taken by and argued by the excepting party here, that they need to get the best possible price, extends to the point at which they need to stop the foreclosure proceedings, where there is a possibility of someone buying the property at a different price.

Particularly given the fact that this property had other liens upon it other than what the lien was just from the foreclosing party. And there are always possibilities that exist where a sale will not go through. There have to be title searches. There has to be all sorts of things done.

Basically the excepting party here would have the trustees have to go away from the bird in hand and wait somehow for the two birds in the bush. I don’t think that’s what they’re required to do. If I’m wrong, perhaps I’ll be educated on that. So based on that, the Court is going—and also, once again looking at the adequacy of the price, I don’t even think that’s being argued here.

No one has argued that it’s inadequate. I don’t find that it’s inadequate. Based upon that, the Court is going to order that the exceptions are overruled. On October 16, 2012, the circuit court denied appellant’s motion for reconsideration, and ratified the sale on October 26, 2012.

This appeal followed. ANALYSIS Standard of Review This Court has set forth the standard of review of a ruling on a party’s exceptions to a foreclosure sale: ⁴⁶⁵ In ruling on exceptions to a foreclosure sale and whether to ratify the sale, trial courts may consider both questions of fact and law. See S. Md. Oil, Inc. v. Kaminetz, 260 Md. 443, 451 , 272 A.2d 641 (1971) (explaining questions of fact and law may be raised in exceptions to foreclosure sales). In reviewing a trial court’s finding of fact, we 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.” Young v. Young, 37 Md.App. 211, 220 , 376 A.2d 1151 (1977).

Questions of law decided by the trial court are subject to a de novo standard of review. See Liddy v. Lamone, 398 Md. 233, 246-47 , 919 A.2d 1276 (2007). Jones v. Rosenberg, 178 Md.App. 54, 68 , 940 A.2d 1109 , cert. denied, 405 Md. 64 , 949 A.2d 652 (2008). Introduction At the outset, we must determine whether appellant’s challenge to the circuit court’s ruling is properly before us.

When a mortgagor is unsuccessful in attempting to halt a foreclosure sale, or fails to seek a proper pre-sale injunction, the mortgagor’s next recourse is to file exceptions to the sale pursuant to Md. Rule 14-305(d). See Jones v. Rosenberg, 178 Md.App. at 68 , 940 A.2d 1109 . “A debtor may challenge irregularities in the foreclosure sale’s procedure by filing post-sale exceptions at the time of the ratification and seek to overturn the sale on those bases.” Greenbriar Condominium, Phase I Council of Unit Owners, Inc. v. Brooks, 387 Md. 683, 746 , 878 A.2d 528 (2005). Md. Rule 14-305 governs post-sale procedures, and relevantly provides at Rule 14-305(d): (d) Exceptions to sale. (1) How taken.

A party, and, in an action to foreclose a lien, the holder of a subordinate interest in the property subject to the lien, may file exceptions to the sale. Exceptions shall be in writing, shall set forth the alleged irregularity with