Legacy Funding LLC v. Cohn

WILNER, J. We have before us appeals from orders entered by the Circuit Court for Prince George’s County in three foreclosure actions. Because the appeals arise from generally common facts and present common issues of law, we have consolidated them. The basic issue is whether the Circuit Court erred in denying a purchaser’s claim against surplus proceeds for the rental value of the mortgaged property between the date of sale and the time the mortgagor vacated the property. We shall vacate the challenged orders and remand the cases for further proceedings. 1 ⁵¹⁴ BACKGROUND In each of the cases before us, appellant Legacy Funding LLC purchased at a foreclosure sale a parcel of residential property that was occupied by its owner as a residence and that was not rented or otherwise commercially productive.

In each case, the sale was ratified by the court, but, when Legacy failed to pay the purchase price and complete settlement in accordance with the terms of sale, the trustees petitioned for leave to resell the property. In each case, Legacy then paid the full purchase price, settled on the property without the need for a resale, and thereafter filed a motion for possession. In each case, the auditor’s report, after accounting for proper expenses, showed a surplus, which would ordinarily be paid to the mortgagor. Upon the filing of Legacy’s motions for possession, the court entered orders awarding possession unless the respective mortgagors showed cause by a certain date why that relief should not be granted.

None of the mortgagors offered any such cause. Prior to the dates set in the show cause orders, however, Legacy filed a motion in each case seeking payment from the surplus proceeds of amounts equivalent to the fair rental value of the property, commencing from the date of the sale. The court eventually denied the motions on the ground that, although a purchaser may be entitled to any rent actually received by the mortgagor following the foreclosure sale, a purchaser was not entitled to recover from the surplus proceeds the rental value of property that was not actually rented. Following ratification of the auditor’s reports prepared in conformance with the court’s rulings, Legacy appealed and we granted certiorari prior to any proceedings of substance in the Court of Special Appeals. 2 ⁵¹⁵ DISCUSSION The ultimate question in these cases is whether Legacy is entitled to recover what essentially would be damages for trespass or wrongful detainer, payable from the surplus proceeds and measured by the rental value of the otherwise unproductive properties.

The key to answering that question lies in determining when the purchaser at a foreclosure sale becomes entitled to possession of the mortgaged property. In light of that determination, we must then decide when the purchaser is entitled to seek and obtain damages if the mortgagor prevents or impedes the purchaser from actually obtaining the possession to which it is entitled and whether damages may, in whole or in part, be measured by the rental value o f the property. We most recently addressed the threshold question of entitlement to possession in Empire v. Hardy, 386 Md. 628 , 873 A.2d 1187 (2005). After reviewing a number of earlier cases dating back to Applegarth v. Russell, 25 Md. 317 (1866) and Lannay’s Lessee v. Wilson, 30 Md. 536 (1869) and the “conflicting statements” that appear in some of the cases in that stream (Empire v. Hardy, supra, 386 Md. at 642 , 873 A.2d at 1195 ), we made clear that the purchaser at a foreclosure sale is not actually entitled to possession until the purchase price is paid and, through delivery of a deed o f conveyance, legal title passes.

We added, however, that, upon ratification of the sale, the purchaser may “seek possession of the property” and that “an equity court, on a case-by-case basis, and upon proper notice, has the discretion, unless the circumstances warrant otherwise, to grant possession.” Id. at 650 , 873 A.2d at 1200 . The effective holding of Empire , and ⁵¹⁶ thus the current view of this Court, is that the purchaser becomes entitled to possession only when it has either paid the full purchase price in conformance with the terms of sale and received a conveyance of legal title to the property, or, following ratification of the sale but prior to settlement, has received an order for possession from the court. In these cases, Legacy did not seek an order of possession until after it had paid the purchase price, so the question of whether, on the facts of these cases, it would have been appropriate for the court to grant an order for possession prior to that time is not before us. 3 We also addressed in Empire the proper procedure to be followed by a purchaser who seeks judicial assistance in actually gaming the possession to which it is entitled. We noted the argument by Empire that there were alternative methods that could be used—a motion in the foreclosure court pursuant to Maryland Rule 14-102 and a proceeding in the District Court pursuant to Maryland Code, § 8-402.4 of the Real Property Article (RP)—and we held that any attempt by a purchaser to seek judicial assistance after ratification of the sale but before the purchase price has been paid and settlement has occurred must be in the Circuit Court pursuant to Rule 14-102.

See Empire v. Hardy, supra, 386 Md. at 634 and 641, 873 A.2d at 1191 and 1195. That, of course, leaves open the prospect of a purchaser seeking relief under RP § 8-402.4 after settlement has occurred, although that did not occur in these cases; Legacy ⁵¹⁷ sought judicial assistance in the foreclosure case in the Circuit Court. 4 The Circuit Court granted the motions for possession, but it denied the claims against surplus proceeds on the ground that there was no entitlement to such damages. The court regarded our holding in Brooks v. Bast, 242 Md. 350 , 219 A.2d 84 (1966), as entitling a purchaser to any rents or profits actually received by a mortgagor following the foreclosure sale, but it did not believe that, where no such rents or profits were so received, the purchaser was entitled to the rental value of the property. Legacy contends that Brooks indeed does entitle it to compensation for rental value.

The Circuit Court was correct in concluding that Brooks , itself, does not mandate the kind of relief sought by Legacy in these cases, although, as we shall explain, it was incorrect in ⁵¹⁸ extending that conclusion to the point of finding that there was no basis for Legacy’s claim. Brooks involved the foreclosure of a mortgage on commercial property containing a motel and restaurant. The proceeds from the sale were not sufficient to pay the mortgage balance, so there was no surplus. The case involved mostly attacks on the sale itself, which are of no relevance here.

During the proceeding in the Circuit Court, the purchaser made a claim for the “rental value” of the property dating from the time of sale, a period, as of the date of the motion, of ten months. It is not clear from the Court’s Opinion whether the motel rooms were being rented during that period, but the record extract and briefs in the case indicate that the motel and restaurant remained in operation following the sale and that the mortgagors collected an d retained those rents an d profits. The extract does not indicate, however, how much was actually received, either gross or after expenses. Experts called by the parties made estimates of the income that should have been received, based largely on the occupancy rates, room charges, and restaurant operations of other motels.

Based on those estimates, experts opined as to the rental value of the motel and restaurant during the 10-month period, ranging from $l,370/month to $l,800/month. There was also evidence that, immediately following the sale, the mortgagor offered to lease the property back from the purchaser for $2,000/month. Among the orders entered by the Circuit Court was one directing the mortgagors to pay to the trustees the sum of $13,700—$l,370/month for the ten-month period— and an additional $1,370 for each month thereafter that the mortgagor remained in possession. This seemed to be in the nature of a deficiency judgment and was based on the lowest estimate of rental value.

The mortgagors excepted to that order and included in their appeal a complaint about the denial of their exception. They conceded “the right of a purchaser at a mortgage sale to a fair rental between the time of purchase and the taking of possession,” which the Court regarded as appropriate under Union ⁵¹⁹ Trust Co. v. Biggs, 153 Md. 50, 56 , 137 A. 509, 512 (1927), and disputed only the amount ordered by the chancellor. See Brooks v. Bast, supra, 242 Md. at 358 , 219 A.2d at 88-89 . With little discussion, the Court found no error in the chancellor’s allowance.

Id. Whether that amount was intended as an estimate of the amount of rent and other income actually received by the mortgagors or the economic rental value of the property irrespective of what was actually received is not at all clear. The Court simply confirmed the concession that the purchaser had a “right” to “a fair rental” between the time of purchase and the taking of possession. The Circuit Court was correct in noting a distinction between Brooks and these cases.

In Brooks , the Court was dealing with property that was commercially productive during the period between the sale and the turnover of possession; income was received from the property by the mortgagor. The only problem was that neither side could, or chose to, show how much gross or net income was received, so estimates were made of the income that should have been received. In holding that the purchaser was entitled to that income, the Court cited Union Trust Co. v. Biggs, supra, which did not involve any right to rents or other income, but in which the Court stated that after a foreclosure sale, equity “regarded the property in the land as in the buyer” and that the deed, when ultimately delivered, “vests the property in the purchaser from the day of sale.” 153 Md. at 56 , 137 A. at 512 . The connection apparently was that, if the deed vested the property in the purchaser retroactively to the date of sale, the purchaser should be entitled to the rents and profits back to that time as well.

We need not consider here whether, in light of Empire, Biggs still suffices to provide a valid underpinning for the conclusions reached in Brooks , because we are