The
seemingly dormant decision of the U.S. Bankruptcy Court in Edry v. R.I. Hospital Trust National Bank (201 B.R. 604 (BANK) D Mass. 1996) has been
revitalized by the holding by the Appeals
The
obligation of the Mortgagee to obtain the highest price at a foreclosure sale
was addressed in cases across the country in the 1980’s. In the case of In RE Ruebeck (1985), Judge Lavien noted that the Bankruptcy Court
would be satisfied so long as all due effort was made to obtain a fair price
for the property. The issues raised in
this decision, including advertising in the real estate section of the Sunday
paper, obtaining appraisals prior to the foreclosure and making certain that
the mortgagor and other interested parties received notice of adjournments,
became regular practice for the foreclosure bar.
In
1994, the United States Supreme Court Decision in BFP v. Resolution Trust Corp., held that the value of foreclosed
property is dictated by the foreclosure sale itself, not the property’s fair
market value. Justice Scalia, writing
for the majority, noted that “when its state’s judicially and legislatively
crafted rules”, governing the foreclosure process are followed, it is “black
letter law” that mere inadequacy the foreclosure sales price is no basis for
setting the sale aside. However, Justice
Scalia’s discussion noted that “a state’s interest encompasses more than mere
statutory requirements”.
In
his opinion in Edry, Justice Quinan,
unable to avoid the sale solely because the foreclosure price was only 45% of
the fair market value, relied on other factors including:
- the bank failed to respond to the debtors
attempts to resolve the deficiency;
– the foreclosure sale was conducted by a
paralegal;
– the bank made no effort to seek the debtors
permission for potential bidders to inspect the inside of the home;
– the bank made no effort to determine the
fair market value of the property; and most importantly;
– the bank’s law firm specifically instructed
the auctioneer not to use display advertising in providing notice of the sale,
when the auctioneer used display advertising in 80% of its foreclosures.
In
the above referenced case of Property
Acquisition Group, LLC v. Kenneth Ivestor Third and another, the Plaintiff, Property Acquisition Group,
LLC, was the purchaser at a foreclosure sale.
The case was decided by the Massachusetts Appeals Court on appeal from
an Essex Superior Court Decision allowing the mortgagees motion for summary
judgment dismissing the mortgagor’s claim that the mortgagee failed to comply
with its duty to exercise good faith and reasonable diligence, to protect the
interest of the mortgagors.
The
Investers purchased their property at 245 Salem Street in Lynnfield for
$399,000.00 in 2003. They refinanced in
2006 with a first mortgage in the amount of $302,000.00 and a second loan in
the amount of $50,000.00. They stopped
payments on the loan in 2013. The
foreclosure sale was conducted with an opening bid of $329,000.00. Two parties bid and the successful bidder, by
the Plaintiff, was in the amount of $355,000.00.
The
property consists of 4.57 acres of which approximately half is buildable, the
remainder being wetland. The property
was improved with a single-family home.
The Investors contend that the property could be developed; however, any
development would require the installation of a new road.
Fannie
Mae relied on the property’s 2015 assessed value of $361,900.00. The Investors’ expert appraised the property
at $975,000.00 and the successful bidder submitted an appraisal valuing the
property at $385,000.00. The Court
citing Edry noted that Fannie Mae took no steps to determine the fair market
value of the property before the auction - and that the mortgagee must in some
way ascertain the fair market value of the property in order to satisfy its
duty of good faith and reasonable diligence in selling the property.
The
Court, citing Edry, noted that it is the duty of the mortgagee to do what a
reasonable person must do to achieve the highest price possible to protect the
interest of the mortgagor. In this
case, where the property has potential for development, the mortgagee must
consider that potential and share it with prospective bidders. However, the Court held that the Investors do
not have superior title to the purchaser because the action was commenced after
the sale had been completed and the foreclosure deed had been recorded. The Ivestors showed no evidence that the
purchaser new or should have known of Fannie Mae’s alleged failure to exercise
good faith and reasonable diligence.
Although the purchaser knew that the property had value above that bid
at the sale, the purchaser is not responsible for knowing that Fannie Mae had
failed to exercise and reasonable diligence.
The case was remanded to the Superior Court for the issue of damages.
What
should we take away from this Decision?
First
off, Ivestor, unlike Ruebeck and Edry, is not a Bankruptcy case and no claim was made to attack the
foreclosure as a fraudulent transfer under state law. Secondly, as the foreclosure was not held to
be invalid, this case is concerning primarily for lenders and foreclosure
attorneys. It would seem clear that best
practice would require obtaining an appraisal in many cases. However, the facts here are so specific, that
even an appraiser might have missed that the property should not be assessed as
a single-family home, but as developable property. Should there be concern with any single-family
house which lies upon a lot that could possibly be subdivided?
There
is no indication in the Decision as to whether the Plaintiff intends to develop
the property. However, in this case, the
Plaintiff is an LLC and their Certificate of Organization notes that the
character of the business is to acquire, sell, develop, manage and otherwise
deal with and operate real estate of any kind. Notwithstanding this, the Court
held that the purchaser at the foreclosure sale was a bona fide purchaser.
A former president
of the association, Joel Stein concentrates his practice in real estate law
with an emphasis on title examination, title insurance and foreclosure. He is a
2006 recipient of the Association’s highest honor, the Richard B. Johnson
Award, and founding editor of the REBA Guide to the Massachusetts Registries of
Deeds. Joel can be contacted at jstein@steintitle.com.
