Daily Development for Monday, October 27, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; FAULTY FORECLOSURES:  High bidder at foreclosure sale is not entitled to difference value damages when crier wrongly refuses to deliver deed based on trustee's and attorney's belief that notice may have been inadequate.

Knucklehead Land Company v Acutitle, 172 P3d 116 ( Montana 2007)

Citicorp held a deed of trust mortgage on residential property in, and there was also tax lien held by the IRS. The loan went into default and the lender retained a Colorado law firm [!!!] the administer a nonjudicial foreclosure sale. The law firm substituted ATE in as trustee, and ATE employed FCTC to cry the sale on its behalf.   

On the morning of the sale, the law firm suddenly sent a fax to the trustee, advising it to stop the sale because it believed that the IRS had not been given proper notice. ATE attempted to contact the crier, but the sale was already in progress and the auction continued.

At that sale Knucklehead bid $85,000 and was the high bidder (although the property had been appraised at $172,000). However, when the crier did get word from the trustee, it refused to accept Knucklehead's check and declared that the sale was cancelled. The sale was renoticed and the property later sold for $122,000 to a third party, Knucklehead apparently being outbid at that renoticed sale.

Knucklehead then brought this for damages against the law firm, the trustee and the crier. The defendants cross complained against each other but ultimately settled those matters, leaving only the claim of Knucklehead against the trustee and crier for judicial resolution.

The trial court held that proper notice had been given to the IRS, which meant that the foreclosure sale was valid, and that the trustee therefore had been in breach in refusing to deliver a deed to Knucklehead. But the court further ruled that Knucklehead had shown no recoverable damages under its breach of contract theory, and the trustee had not breached any duties imposed upon it by Montana's Small Tract Financing Act.

Montana statute limits the damages for a breach of a contract to sell land to refund of any expenses incurred in preparing for the sale and refund of any amounts transferred.  Difference value - the difference between fair market value and the contract price - are not permitted except in the case of bad faith defaults:

“The detriment caused by the breach of an agreement to convey an estate in real property is considered to be the price paid and the expenses properly incurred in examining the title and preparing the necessary papers, with interest thereon. If the breach was in bad faith and the agreed price was less than the value of the estate, the detriment is also considered to include the difference between the agreed price and the value of the estate at the time of the breach and the expenses properly incurred in preparing to enter upon the land.”

Knucklehead argued that the statute didn’t apply to the trustee because a deed of trust trustee is not a traditional trustee and its functions are limited to acting in good faith in carrying out the sale, and it owes no fiduciary duties not outlined the Act. 

The Montana Supreme Court affirmed.  With regard to trustee duties, it stated that a trust indenture trustee is not the same as a traditional trustee and is not subject to traditional trust obligations. In enacting the Small Tract Financing Act, the legislature struck a compromise between prompt and final foreclosure sales on the one hand and the prohibition of deficiency judgments on the other. Imposing additional duties on trust indenture trustees other than those stated in the act would upset that balance. This trustee had not failed to give the notices nor take the other steps that the Act required. Its failure to employ a checklist for the sale was not negligence (and the trial court had already determined that there had been no failure of notice to the IRS).

Absent a fiduciary duty, the court applied the statute limiting damages in property sales (absent seller’s bad faith)  to actual monies expended absent seller’s bad faith.  The court found that there was insufficient evidence of bad faith to survive summary judgment for defendants.  Knucklehead had paid no part of the price nor incurred any expenses as to be entitled to any damage award. (Knucklehead had paid a rival $2,500 to stop bidding against it at the trustee sale but it had then induced that rival to destroy the check when the sale to it was cancelled, so that its expenses remained at zero.)

Editor’s comment 1: The editor is not aware how many states have statutes like Montana’s here.  The common law, of course, permits difference value damages except when the sale is not completed because of failure of the seller’s title, in which event a majority would find that seller is liable only to refund monies the seller had paid.

The editor checked the precedent case cited by the Montana court related to the statute.  There is no discussion of the policy behind the statute.  Although it is true that sometimes market value evidence is uncertain, that is often true in breach of contract actions, and the editor doesn’t see why there should be a special statute limiting damages in land contracts.   Of course, the Montana legislature didn’t ask the editor.

Editor’s Comment 2: In case readers are wondering, there is not one word here about specific performance. 

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