White v. Simard

ADKINS, J. In this case of first impression, we are asked to decide whether parties to a power of sale foreclosure may “contract out” of the common law rule that the defaulting purchaser is entitled to any surplus proceeds of resale. Elizabeth A. White, Nancy P. Regelin, and Patrick M. Martyn, Substitute ²³⁶ Trustees (“Trustees”), and Washington Mutual Bank, FA, successor to Home Savings of America, F.S.B. (“Lender”), appellants/cross-appellees, challenge the decision of the Circuit Court for Prince George’s County sustaining the exceptions of David J. Simard, appellee/cross-appellant, to an Auditor’s Report following a foreclosure sale of real property. Together, through their cross-appeals, the parties present the following issues for our review: I. Did the circuit court err in ruling that Simard, the defaulting purchaser, was entitled to the surplus proceeds from the resale notwithstanding a contrary provision in the advertised terms of sale?

II

Did the circuit court err in awarding the Lender and Trustees attorney’s fees on the restated account of the auditor? We hold that the circuit court erred in ruling that Simard was entitled to the surplus proceeds of the resale of the property. Therefore, we reverse the judgment of the circuit court on this basis. Because Simard failed to take exception to the Restated Account of the auditor that credited the Trustees and Lender with $11,951.75 in attorney’s fees, we will not address his challenge to those fees in this appeal.

FACTS AND LEGAL PROCEEDINGS Beginning on April 1, 1999, the Trustees advertised, in a local newspaper of general circulation, the sale of improved fee-simple property located at 5511 Fisher Road in Prince George’s County. The sale was to be held on the steps of the Prince George’s County Courthouse on the morning of April 20. Under a section entitled “Terms Of Sale,” the advertisement announced that: This advertisement, as amended or supplemented by any oral announcements during the conduct of the sale, constitutes the Substitute Trustees’ entire terms upon which such premises shall be offered for sale. The purchaser shall comply with the terms of sale within ten (10) days after ratification thereof by the Circuit ²³⁷ Court....

If the purchaser shall fail to comply with the terms of the sale or fails to go to settlement, in addition to any other available legal or equitable remedies, the Substitute Trustee may declare the entire deposit forfeited and resell the premises at the risk and cost of the defaulting purchaser. In such event, the defaulting purchaser shall be liable for the payment of any deficiency in the purchase price, all costs and expenses of sale, reasonable attorney’s fees, all other charges due and incidental and consequential damages. The purchaser shall not be entitled to any surplus proceeds or profits resulting from any resale of the property. If the Substitute Trustees cannot convey insurable title, purchaser’s sole remedy at law or in equity shall be the return of the deposit.

(Emphasis added.) Simard made the winning $53,000 bid at the April 20 sale. On that date, Simard signed a “Memorandum of Purchase at Public Auction,” in which he certified: “I, the undersigned purchaser, hereby acknowledge that I ... have this day purchased the property described in the attached advertisement, subject to the conditions stated therein!.]” The circuit court ratified the sale on September 24, 1999. 1 The net proceeds of this sale were insufficient to pay the secured debt and accrued interest, and left a $51,424.34 deficiency on the mortgage account. Simard defaulted on his purchase of the subject property by not completing settlement within ten days after ratification of the sale. Therefore, on December 10, 1999, as authorized by Md. Rule 14-305(g), the court issued an Order Directing Resale Of Mortgaged Property At Risk And Cost Of Defaulting Purchaser.

The Trustees placed a second advertisement of sale in a local newspaper of general circulation, setting forth terms identical to those outlined in the first advertisement of sale. At the February 22, 2000 resale, Simard again made the winning bid on the property, this time bidding $101,141. He ²³⁸ again signed a “Memorandum of Purchase at Public Auction” after the February 22 sale. The court ratified the resale in April of that year.

Again, no exceptions were taken to the sale. Simard again failed to timely complete settlement. On May 26, 2000, Simard filed in the circuit court a Petition To Substitute Purchasers, stating that he had assigned his rights as purchaser to Jose W. Barias and Daysi Y. Alverenga (“the Substitute Purchasers”), who had agreed to proceed to settlement on the property. He agreed to retain primary responsibility for “all liabilities in connection with the performance of their contract to purchase the property, and for compliance with the terms of the sale as set forth in the Trustee’s Notice of Sale[.]” The court granted his petition on May 26, and the Substitute Purchasers consummated the purchase.

Thereafter, the court referred the matter to an auditor to state an account. See Md. Rule 14-305(f). In his August 2, 2000 report, the auditor stated that the resale of the property had produced a surplus profit of $46,831.29, and authorized payment of this surplus to the mortgage account. See Md. Rule 2-543(e).

Although the auditor recognized that the defaulting purchaser generally would be entitled to this surplus under Maryland law, the auditor pointed to the term of sale specified in the advertisement, which expressly provided that “the purchaser shall not be entitled to any surplus proceeds or profits resulting from any resale of the property.” The auditor explained: In foreclosure sales, the advertisement of sale becomes the contract between the trustees and the foreclosure purchaser, and the “terms of sale” specified in said advertisement become binding between them. As a result of this agreement, the surplus proceeds resulting from the resale have been applied to the mortgage debt as opposed to being awarded to the defaulting purchaser. Simard filed exceptions to the auditor’s report in the circuit court. At hearings on his exceptions, Simard claimed that the property’s higher resale price was due to improvements he made to that property before the second sale.

The Lender ²³⁹ and Trustees disputed Simard’s claim. The circuit court sustained Simard’s exceptions, ruling that the “surplus proceeds” provision in the advertisement of sale was contrary to the Maryland law governing said circumstance and ... no valid consideration existed for the forfeiture of the right of surplus to which the defaulting purchaser would otherwise be entitled. The Court further finds that the language contained in the advertisement cannot operate to alter the principles] of law governing entitlement to surplus and that to so allow would be a contract of adhesion and can have a chilling effect on securing foreclosure bids. The court remanded the matter to the auditor “to re-state his account in accordance with” the circuit court’s ruling.

The auditor’s re-stated account not only credited Simard with the surplus proceeds, but also awarded the Lender and Trustees $11,951.75 in attorney’s fees in connection with Simard’s exceptions. The Lender and Trustees filed exceptions to the auditor’s restated account, 2 and moved “for authorization to pay surplus into registry of the court,” rather than directly to Simard. In a July 9, 2001 order, the court ratified the auditor’s restated account, thereby denying the Lender’s and Trustees’ exceptions, and granted the latter’s motion. By separate order dated the same day, the court directed the auditor to allow the Lender and Trustees $11,951.75 in attorney’s fees “in connection with the exceptions to the Auditor’s Report.” The parties thereafter noted these cross-appeals.

DISCUSSION I. Entitlement To Surplus Proceeds Of Resale It is a well-established principle in Maryland that the defaulting purchaser generally is entitled to the surplus pro ²⁴⁰ ceeds from a resale due to a foreclosure. See Werner v. Clark, 108 Md. 627, 633 , 71 A. 305 (1908); Aukam v. Zantzinger, 94 Md. 421, 428 , 51 A. 93 (1902); Early v. Dorsett, 45 Md. 462, 466 (1877); Mealey v. Page, 41 Md. 172, 183-84 (1874). Although the cases establishing this rule are roughly a century old, the rule is generally recognized in modern legal literature. See Alexander Gordon, IV, Gordon on Maryland Foreclosures (“Gordon ”), § 28.02 at 840 (3d ed. 1994)(“In the event that the property sells for more at the subsequent sale, the additional revenues will first be credited against the additional expenses, but a balance remaining goes to the defaulting purchaser at the first sale, not to the mortgaged account”).

Despite this legal tradition, the Lender and Trustees contend that parties may expressly “contract out” of this rule by agreeing to shift the benefit of any surplus on a resale to the mortgage account. Although we find no precedent concerning the enforceability of such an agreement, we agree with the Lender and Trustees for the reasons set forth below. Contract Principles Applied To Judicial Sales The public sale in this case was instituted in accordance with a power of sale in a 1993 deed of trust. Paragraph 24 of that deed of trust authorized the Trustee to sell the property at public auction upon default. “The power of .sale is derived exclusively from the agreement and contract of the parties to the mortgage.” Edgar G. Miller, Jr., Equity Procedure, § 454 at 536 (1897)C Miller”); see Waters v. Prettyman, 165 Md. 70, 75 , 166 A. 431 (1933).

Such contractual provisions conferring a power of sale upon the Trustee are governed by Md.Code (1974, 2003 Repl.Vol.), section 7-105(a) of the Real Property Article (“RP”)(“A provision may be inserted in a mortgage or deed of trust authorizing any natural person named in the instrument, including the secured party, to sell the property or declaring the borrower’s assent to the passing of a decree for the sale of the property, on default in a condition on which the mortgage or deed of trust provides that a sale may be made”). ²⁴¹ 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.... ” “Before 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 Miller, § 510 at 602, 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”). Trustees acting under a power of sale contained in a deed of trust have discretion to outline the manner and terms of sale, provided their actions are consistent with the deed of trust 3 and the goal of securing the best obtainable price: While the discretion in the manner and terms of sale, lodged in the trustee under the terms of the deed of trust, is contractual, and gives a wider latitude to the trustee than that ordinarily allowed trustees making sales under orders or decrees of the court, yet such discretion has never been held to be unlimited.

When a sale thus made is attacked, it must be shown that the trustee did not abuse the discretion reposed in him, and that the sale was made under such circumstances as might be fairly calculated to bring the best obtainable price. The trustee not only represents the holder of the note secured by the deed of trust, but also the owners of the property, who would be entitled to any ²⁴² surplus remaining after the payment of expenses and the note secured by the deed of trust. The power of sale is derived from the contract of the parties contained in the deed of trust, but the report of the sale must be made to and ratified by the court before a deed for the property is given by the trustee to the purchaser. Upon the sale being reported to the court, it assumes jurisdiction and permits those interested in the sale or the proceeds thereof to file objections to its ratification.

Upon such being filed, it is the duty of the court, in order to ratify the sale, to ascertain that it was fairly made and under such circumstances and conditions as might be reasonably expected to have produced the largest price obtainable. Waters, 165 Md. at 75 , 166 A. 431 (emphasis added); see also Miller, § 456 at 538 (mortgagee acting under power of sale “acts not for himself alone, but as a fiduciary, and for the benefit of all parties interested in the proceedings”). 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 [cjourt 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”); Four Star Enters.

Ltd. P’ship v. Council of Unit Owners of Carousel Ctr. Condo., Inc., 132 Md.App. 551, 563-64 , 752 A.2d 1272 (2000)(“It has long been the rule in Maryland that foreclosure sales are not final prior to court approval”). Until the sale by the trustee is ratified by the court, it stands as merely an executory contract. See ²⁴³ Talbert, 210 Md. at 43 , 122 A.2d 469 (citing Miller, § 510 at 602).

Equitable Title In Purchaser Once the foreclosure sale is ratified, the original purchaser becomes the equitable owner of the property: When the sale is finally ratified, the purchaser’s inchoate equitable title, acquired at the time of the acceptance of his offer by the trustee, becomes complete and the purchaser’s equitable title is established retroactively to the time of the original acceptance of the offer by the trustee. The purchaser is entitled to the rents and profits of the land sold as he has become the substantial owner of the property. He is not only entitled to possession of the property, but it remains at his risk, even though legal title may not be conveyed. Merryman v. Bremmer, 250 Md. 1, 8 , 241 A.2d 558 (1968) (citations omitted); see Maas v. Lucas, 29 Md.App. 521, 531 , 349 A.2d 655 (1975); Continental Trust Co. v. Balto.

Refrigerating & Heating Co., 120 Md. 450, 456-57 , 87 A. 947 (1913). Moreover, defaulting in payment of the purchase price does not cause him to lose this equitable title. See Merryman, 250 Md. at 12 , 241 A.2d 558 (after ratification, purchaser maintained right to pay purchase price in return for deed despite 20 year delay, when trustee never petitioned court to set aside sale or compel a resale at his expense). We perceive a lack of clarity in the Maryland cases as to what happens to a defaulting purchaser’s equitable title after a resale is ordered.

Compare Werner, 108 Md. at 633 , 71 A. 305 (order for resale is revocation of the order confirming the first sale) with Continental Trust Co., 120 Md. at 456 , 87 A. 947 (suggesting that equitable title held by first purchaser entitles him to surplus at second sale, and viewing resale as enforcement of bidder’s contract at first sale). Regardless of who owns equitable title after an order for re-sale, the cases agree that the nature of a resale is different from the first sale, because the property is sold ²⁴⁴ not as a new, distinct, independent procedure, but as a means and solely as a means to realize the money which the original but defaulting purchaser failed to pay. The resale ... is made with a view to pay off the same indebtedness for the payment of which the property was sold in the first instance, and the money realized by it is always applied precisely as would have been applied the money bid at the original sale had that money been paid by the first purchaser. Werner, 108 Md. at 635 , 71 A. 305 (emphasis in original); see also Continental Trust Co., 120 Md. at 457 , 87 A. 947 (recognizing “ ‘[t]he summary proceeding against a defaulting purchaser to obtain an order of re-sale at his risk’ ” as being “ ‘grounded upon the equitable lien held and controlled by the [c]ourt as vendor of the property, for the benefit of those interested in the proceeds of sale’ ’’)(quoting Schaefer v. O’Brien, 49 Md. 253, 256 (1878)).

Advertisement Of Sale Before selling the property at public auction, a trustee must publish an advertisement or notice of sale in a local newspaper of general circulation. See Md. Rule 14-303(b). This notice must set forth “the time, place, and terms of sale[.]” See id. (emphasis added).

These terms of sale become part of the contract that is made when the sale is ratified. See, e.g., Donald v. Chaney, 302 Md. 465, 477-78 , 488 A.2d 971 (1985)(in foreclosure sale, terms of sale contained in advertisement of sale became binding and enforceable upon ratification). The contractual offer and acceptance phase of a foreclosure sale is analogous to the offer and acceptance phase of a private auction. Corbin explains the offer and acceptance process of an auction or other solicited offer: Sometimes the expressions of a ... soliciting agent amount to no more than an invitation to submit an offer.

The solicitor may be authorized neither to make an offer nor to accept one. In such a case, an order for goods given by the ²⁴⁵ solicited customer is a mere offer, even though it clearly states all the terms and even though it is on a printed form supplied by the solicitor’s own principal. 1-4 Corbin on Contracts § 2.3 (2003). In this situation, the terms of the advertisement are incorporated into any bid that is made. See Restatement (Second) of Contracts (“Restate ment”) § 28(2) (1981)(“Unless a contrary intention is manifested, bids at an auction embody terms made known by advertisement, posting or other publication of which bidders are or should be aware, as modified by any announcement made by the auctioneer when the goods are put up”).

Although Simard is correct that an advertisement of sale itself is not a contract, such an advertisement does set forth the terms that later will be embodied in the contract of sale upon acceptance of a bid by the trustee (forming an executory contract), contingent upon ratification of that contract of sale by the court. See Donald, 302 Md. at 477 , 488 A.2d 971 . In effect, by choosing to bid on the property at the public sale, a bidder “offers” to purchase the property under the express terms advertised by the trustee. In other words, bidders are or should be aware of terms ... published or announced.

A bid need not repeat such term[s]; it is understood as embodying them. Hence