Daily Development for Tuesday, October 11, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
MORTGAGES; FORECLOSURE; VALIDITY: Alaska will set aside nonjudicial foreclosure for “grossly inadequate” price, following Restatement test..
Baskurt v. Beal, 101 P.3d 1041 (Alaska 2005).
Annette Beal bought two parcels of land in 1991 for $225,000, taking subject to a blanket deed of trust in favor of the sellers on both parcels. There were two promissory notes: Note 1, for $95,000, associated with the first parcel, and Note 2, for $135,000, associated with the second parcel. Beal paid off Note 1 in 1994, but continued to make payments on Note 2 until she fell behind in 1999. The sellers' daughter, Sarah Baskurt, as trustee of their inter vivos trust, commenced foreclosure of both parcels by trustee's sale of the deed of trust.
Baskurt formed a partnership with a friend, Joyce Wainscott, and they decided to try to buy the property at the foreclosure sale. They brought cashiers' checks in the total amount of $251,000 to the sale. While waiting for the sale to begin, they encountered Allen Rosenthal, who Baskurt knew had considerable real estate experience. On the spot, Baskurt and Wainscott expanded their partnership to include Rosenthal, who had been prepared to bid up to $95,000 himself.
When biding was opened Baskurt bid $26,781.81, one dollar above the outstanding balance on the note. There were no other bids, and Baskurt, on behalf of her partnership, was declared the successful bidder.
Beal brought an action to have the sale set aside. The trial court found that the property's fair market value was the same as the 1991 selling price, or $225,000. Because the high bid at the sale was so low in comparison, the trial court set the sale aside.
The Alaska Supreme Court held that, while an inadequate price alone was not a sufficient ground to set aside a foreclosure sale, it would be grounds to do so if it was (a) "grossly inadequate" or (b) accompanied by other defects in the sale. It found both of these tests were satisfied in Baskurt, although satisfaction of either one would have warranted setting aside the sale.
On the "grossly inadequate" issue, the court quoted with approval the Restatement (Third) of Property (Mortages) Sec. 8.3 cmt b, which adopts a figure of 20 percent of the property's market value as a rule of thumb for "gross inadequacy" of price. The bid in Baskurt, which was 11.9% of the market value, easily satisfied this test. (Inexplicably, the court refers to the bid as "less than fifteen percent" of market value; can the court really be so bad at arithmetic?)
The court also found the sale was defective because the trustee who conducted it failed to meet his fiduciary obligations - obligations that the court said were owed to both the trustor and the beneficiary. In part, these duties included taking "reasonable and appropriate steps to avoid sacrifice of the debtor's property and interest." Since the trustee conducted the sale of the two parcels in bulk when the sale of either parcel alone "would likely have generated sufficient proceeds to satisfy the amount due," the court found the sale defective. That defect, in combination with the inadequacy of the price (even if it had not been "grossly" inadequate) justified setting aside the sale.
Reporter’s Comment 1: The case is significant because it clearly identifies two distinct bases for setting aside the sale: (a) gross inadequacy of price alone, and (b) inadequacy, even if not gross, accompanied by other defects - here, the trustee's sale in bulk when a sale of either parcel alone would have been sufficient. See also Krohn v. Sweetheart Properties, Ltd.. 203 Ariz. 205, 52 P.3d 774 (2002) (employing both "gross inadequacy" and "shock the conscience" terminology in setting aside a trustee's sale for 18.07% of fair value despite absence of any other defect in the sale); In re Edry, 201 B.R. 604 (Bankr. D.Mass. 1996) (setting aside sale for 45.5% of fair value, where the mortgagee failed to advertise in any manner other than that required by the statute).
Comment 2: The case is one of several in recent years that imputes real duties owed by the foreclosing trustee to the trustor. Other examples include Cox v. Helenius, 103 Wash.2d 383, 693 P.2d 683 (1985); Wansley v. First National Bank of Vicksburg, 566 So.2d 1218 (Miss. 1990) (imposing a duty of commercially reasonable sale, but only for purposes of denying a deficiency judgment, not setting the sale aside); In re Edry, supra.
The California approach is much less pro-debtor: As the court noted in Monterey S.P. Partnership v. W.L. Bangham, Inc., 49 Cal.3d 454, 261 Cal.Rptr. 587, 777 P.2d 623 (1989): the similarities between a trustee of an express trust and a trustee under a deed of trust end with the name.
"Just as a panda is not a true bear, a trustee of a deed of trust does not have a true trustee's interest in, and control over, the trust property. Nor is it bound by fiduciary duties that characterize a true trustee."
Comment 3: The court makes no reference to the fact that the mortgagee, immediately before the opening of bidding, made a deal with the only other bidder present (Rosenthal) to form a partnership with him, thus taking him out of the bidding. Moreover, Baskurt testified Rosenthal had been planning to bid up to $95,000 ($68,000 more than the bid entered by Baskurt on behalf of her partnership). Doesn't this constitute "chilling of bidding" by the mortgagee? Wouldn't that be an additional reason to consider the sale defective, and thus to set the sale aside even if the inadequacy of price had not been "gross?" While other bidders are certainly free to form whatever combinations they wish, doesn't the mortgagee have some obligation to avoid ruining the competitive bidding process?
The Reporter for this item was Dale Whitman of the University of Missouri School of Law, Columbia, Missouri, and the Reporter of the Restatement of Mortgages.
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