Daily Development for Friday, October 26, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

FORECLOSURE SALE; DUTY OF CARE:  Although the winning bidder of real property at a judicial foreclosure sale has not yet obtained legal title at the time of a subsequent fire, due to lack of final confirmation of the sale,  it conceivably had equitable title, which could be the basis for a liability claim against it on for failure to prevent a fire that damaged adjacent property.  O'Connell v. ABN Ambro Mortgage Group, Inc., No. 2006-CA-000327-MR, 2007 WL 867632 (Ky. Ct. App. March 23, 2007). (unreported decision)

On April 6, 2004, ABN Ambro Mortgage Group, Inc. (ABN) purchased real property at a foreclosure sale.  Four days later, a fire started on the foreclosed property .  The fire damaged adjoining property owned by O'Connell.  At the time of the fire, ABN did not yet have legal title to the property.  It did not obtain such title until months later, in September, when its purchase of the foreclosed property was confirmed, and it received a commissioner's deed. 

O'Connell filed suit against ABN, claiming that ABN's negligence had caused the fire and the damage to her property.  The trial court dismissed her claim on the basis that at the time of the fire ABN did not hold title to the land.  The Kentucky Court of Appeals reversed and remanded, finding that while legal title to the property had not yet passed to ABN, it possibly possessed equitable title at the time of the fire. 

ABN relied on section 426.575 of the Kentucky Revised Statutes, which provided that a conveyance by a commissioner shall not pass any right until it has been examined and approved by the court; which approval shall be endorsed on the conveyance and recorded with it.  Because a court had not yet approved the foreclosure sale, ABN reasoned, no right had passed to it, and thus it had no legal obligation to make the property safe.  The circuit court agreed with ABN's argument, finding that while ABN could have obtained equitable title if it had taken steps to comply with the terms of the bid, it had not paid any deposit at the time of the fire or done anything else to comply with the bid. 

On appeal, the court of appeals affirmed the general premise that a successful bid at a foreclosure sale, by itself, does not vest the bidder with any title.  But it noted that equitable title of property passes to the purchaser through a valid judicial sale upon the execution of the statutory bond required by Kentucky Revised Statutes (KRS) 426.705.  It then concluded that it was unclear whether ABN had executed such a bond and remanded for clarification.  The court also stipulated that O'Connell be allowed reasonable time to conduct discovery upon remand.       

Comment 1:   Wow!!!  One assumes that, although judicial confirmation of a foreclosure sale certainly is routine in most cases, it is more than a rubber stamp.  The foreclosure purchaser in fact did not have title to the property.  Is there anything in Kentucky law providing that a foreclosure purchaser in these circumstances even has a right to possess the property?  Would it be entitled to bring a summary possession or ejectment action against the prior owner?  Note that, under the doctrine of equitable conversion as generally recognized, equitable title passes while a contract is still executory, but the right to possess the property typically does not.

The court seems to conflate the two concepts, talking about whether a purchaser has an insurable interest.  Under the doctrine of equitable conversion, certainly a buyer has an insurable interest, but this would seem to be irrelevant to whether the buyer has a right of possession in the property.  The court cites a Kentucky statute that states that a foreclosure purchaser shall have no rights in the property until the sale is confirmed.  This would seem to preclude a finding of a possessory right.

Comment 2:  The editor concludes that the question of whether the foreclosure purchaser had equitable title ought not to be dispositive of the liability claim.  If the foreclosure purchaser had no clear right to possess the property and was not in fact in possession, then pinning such purchaser with premises liability certainly seems a stretch.  The court, on remand, did authorize the plaintiff to conduct discovery to ascertain whether ABN AMRO had in fact taken possession of the property.  Presumably it might have done so as a mortgagee in possession or by consent with the borrower prior to confirmation. 

Comment 3: In any event, it appears that Kentucky law has created a kind of suspended animation period for foreclosure properties - between auction and confirmation - and ought to provide greater clarity as to the rights and responsibilities of the parties during this period.  This was a court's opportunity to do just that, but the editor believes the court blew it. 

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