Foreclosure Practice Issues Clarified

A recent case decided by the Superior Court* focused on a number of common foreclosure practices and provided the guidance in connection with those areas.

The facts of the case were these:

The mortgagee commenced a foreclosure in the usual fashion and postponed it once pursuant to a request by the mortgagor who was trying to "work out" his liability. The mortgagee had acquired the mortgage and the mortgagor was trying to obtain a discount from the face amount of the mortgage in order to pay it off.

The mortgagor was unsuccessful in negotiating with the mortgagee to either further postpone or to accept a short payoff so the foreclosure sale went forward. The collateral consisted of two separate pieces of property and, at the time of the auction, the two separate pieces were purchased by two separate buyers.

Following the auction and before the completion of the payment of the purchase price, the mortgagor's attorney filed a suit and recorded a lis pendens. A lis pendens is a notice to the world that a law suit is pending and, generally, is considered a title defect which cannot be removed until the law suit is finally adjudicated and, therefore, represents a serious impediment in selling the property.

The mortgagor's attorney alleged that the mortgage contained a provision which required the mortgagee to give notice to the mortgagor at the mortgagor's business address and also required that a copy of the notice be given to the mortgagor's attorney.

When the time came to close on the foreclosure sale auctions, the attorneys for the two respective buyers made note of the lis pendens and demanded that the mortgagee have it removed. The mortgagee countered by saying it would either convey the property subject to the lis pendens or would return the $5,000 deposit paid by each buyer. The auction sale agreement contained the following provision: "In the event the mortgagee is unable to deliver title under the conditions hereinbefore stated or referred to, all deposits made by the purchaser shall be returned and the contract effected hereby shall cease without recourse to the parties hereto" (the "termination clause").

The buyers accepted a return of the deposit but they brought their own suit and in turn filed their own lis pendens seeking to enforce the auction sale agreements to purchase the properties.

The properties were thus encumbered by both the lis pendens from the mortgagor and from the two purchasers.

With respect to the claim of the requirement to give notice to the business address and a copy to the attorney, the Court found that the mortgagee who had acquired the loan found the residential address in the files and that had been the billing address for the prior holder. The mortgagee further had confirmed with the mortgagor that the residential address they were corresponding to was in fact the mortgagor's residence. The mortgagor never complained that the notice and correspondence relating to the notes and the mortgage were being sent to his residence rather than to his business address nor did he complain that the copies of the notices were not being sent to the attorney listed in the mortgages. The Court found that the mortgagor received letters from the mortgagee, as well as from the mortgagee's counsel, in connection with the foreclosure sale. The Court further found, factually, that the notices of sale were sent by certified mail and that they were signed and returned to the mortgagee's counsel even though the mortgagor denied ever having received any of the letters.

The Court found that the mortgagee, through the auctioneer and its attorney, advertised as required under the foreclosure statute for three successive weeks and that the auctioneer appeared on the date required by the ad and postponed the sale.

The Court further found that the auctioneer had placed advertisements concerning the postponed foreclosure sales in the BOSTON GLOBE and distributed copies of the advertisements to approximately one hundred people.

On the date of the sale, nine persons were in attendance. Seven of the nine deposited individual checks in the amount of the deposit in order to qualify them to bid.

After pleadings were filed and documents were submitted, all parties moved for summary judgment.

The Court found that the notice under the applicable statute required that the notice be sent to the "last address of the owner or owners of the equity of redemption appearing on the records of the holder of the mortgage." The Court found that under these circumstances, the notices that were sent to the residential address of the mortgagor were sufficient in order to comply with the statutory requirement.

The mortgagor also complained that the auction was conducted in a commercially unreasonable fashion. However, the Court found that under Massachusetts law a mortgagor has the burden of proving commercial unreasonableness and that a low price does not, by itself, indicate bad faith or a lack of diligence.

The Court found that advertising as required by the foreclosure statute is sufficient for a foreclosure unless the mortgagee's conduct manifested fraud, bad faith or the absence of reasonable diligence in the foreclosure sale process.

The Court further found that under applicable case law, that absent evidence of bad faith or improper conduct, a mortgagee is permitted to buy the collateral at a foreclosure sale as "cheaply" as it can and quoted from other cases indicating that mere inadequacy of the price will not invalidate a sale unless it is so gross as to indicate bad faith or lack of reasonable diligence. In this case, the Court found that the two selling prices of the properties comprised forty-one percent of the estimated combined value of the two properties. In canvassing Massachusetts law cases, the Court found that a price deficiency of as much as thirty-nine percent of the fair market value can support a valid foreclosure.

The Court further found that a forty-one percent differential does not come close enough to the boundaries of "gross inadequacy" to withstand summary judgment.

The mortgagor also complained that although he had been given notice of the original sale, he had not been given written notice of the postponement. The Court found that argument lacked merit. It quoted from a case decided in 1990 which held that "It has long been accepted practice in Massachusetts that, while details of the initial auction must be provided by written notice to the appropriate parties and published in a newspaper in accordance with (applicable statutes), a postponement of the sale may be announced by public proclamation to those present at the auction site." The Court found there was no dispute that the auctioneer actually made the postponement.

The Court further found that with respect to the challenge in regard to the conduct of the foreclosure sales, given the fact that they were advertised as required by law and that the postponements were in fact given and that seven people were qualified to bid (with the required deposit), indicated that there was no evidence of "fraud, bad faith, or absence of reasonable diligence in the foreclosure sale process." The Court then found that the mortgagee was entitled to judgment against the mortgagor.

The Court then turned to the claims by the two buyers against the mortgagee for specific performance of their contracts. The Court found that in light of the termination clause, the foreclosure sale agreement did not represent an "absolute and unqualified" contract to convey. The Court found that a termination clause means that if it turns out that without fault of the seller, subsequent to the execution of the contract, the seller has a defective title, then after refunding payments made, all obligations of both parties shall cease. Thus, a seller who was unable to convey as agreed is protected by such provision unless it has impaired the title after it entered into the contract to sell. In other words, as long as the mortgagee was acting in good faith, it was entitled to the benefit of the termination clause.

The Court noted that the buyers could have purchased the properties subject to the lis pendens and then fought the battle themselves with the mortgagor as to whether or not the claims of invalidity were valid.

The Court gave short shrift to other arguments posed by the buyers indicating the mortgagee had an obligation to clear the title and/or fight more vigorously the battle against the mortgagor. The Court found that the mortgagee had no such special obligations to the buyers and that the termination clause was dispositive of those claims.

In summary, the Court provided guidance to these critical areas of the foreclosure process:

1. The notices that the mortgagee has for its billing purposes can be acted on conclusively with respect to notices to the mortgagor. It is always important, however, that in the event there are any additional addresses the mortgagor has, from time to time, given the mortgagee, that those addresses be provided to the bank's attorney as well.

2. That as long as the statutory requirements of foreclosure are followed, the mortgagee should be free and clear of any claims of collusion.

3. The purchase price as low as thirty-nine percent has been found to be valid as long as the actions by the mortgagee in conducting the sale are found to be free of fraud or bad faith.

4. An auction can be postponed without the requirement of giving further written notice to the mortgagor or those having a record interest in the time period required for the notice under the foreclosure statutes.

5. Every foreclosure auction sale agreement should have a termination clause.

6. Due diligence by the auctioneer in notifying any interested parties from the original sale or any postponements is a good practice and the auctioneer's notice to its usual list of interested parties of any auction is also a good practice and should be encouraged.

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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