Daily Development for Tuesday, October 20, 2009
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; AVOIDANCE OF SALE:  Where a foreclosure sale takes place after a mortgagor and a mortgagee have entered into a forbearance agreement and have agreed to set aside any foreclosure sale, the wrongful foreclosure sale should be set aside and the down payment returned to the successful bidder.  Wells Fargo Bank Minnesota, N.A. v. Ray, 880 N.Y.S.2d 454 (Sup. 2009). 

The New York Supreme Court (the “Court”) entered a judgement on June 7, 2005 to foreclose a mortgage encumbering real property (the “Property”) belonging to the defendant (“Mortgagor”) and scheduled a foreclosure sale for April 17, 2008.

On April 16, 2008, Mortgagor paid the plaintiff, its mortgage lender (“Mortgagee”), $4,000.00 and was told by Mortgagee that the foreclosure sale would be cancelled and that a forbearance agreement would be prepared whereby Mortgagor would be given the opportunity to pay the arrears owing under her mortgage. 

The following day, the Property was nevertheless sold in a foreclosure sale to the successful bidder (the “Successful Bidder”) for a price that was below the appraised value of the Property, and a down payment was tendered by the Successful Bidder to the referee (the “Referee”). 

The Court found that although Mortgagor did not follow the redemption procedures mandated by Section 1341 of New York Real Property Actions and Proceedings Law, other factors in the case compelled the Court to set aside the foreclosure sale.  The Court cited Guardian Loan Co. Inc. v. Early, 47 N.Y.2d (1979), where the mere inadequacy of the purchase price did not furnish sufficient grounds for vacating a foreclosure sale, but relief could be granted by a court where one of the categories integral to the invocation of equity, such as mistake, was shown.  In this case, the Court noted that in addition to the fact that Mortgagee agreed to enter into a forbearance agreement with Mortgagor (which agreement Mortgagor relied upon) and to accept payment from Mortgagor (which payment Mortgagee did accept), (i) Mortgagee mistakenly failed to notify the Referee that it had accepted payment from Mortgagor and (ii) Mortgagor had notified the Successful Bidder of her arrangement with Mortgagee

on the day of the foreclosure sale. 

In vacating the foreclosure sale and directing the return of the down payment to the Successful Bidder, the Court also noted that “[a]t a time when homeowners are struggling to keep their homes without the financial means to do so, this homeowner was able to tender the money, without a bailout, to save her home... [I]f ever there was a case for equity, this is it.”                

Comment: Note that there was no bona fide purchaser relying on the foreclosure because mortgagor herself had informed the bidder that a deal had been made. It’s not clear whether she would have won notwithstanding this information, but it certainly was in her insterest to be proactive in this way. 

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