Daily Development for Wednesday, January 22, 2003

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; FORECLOSURE; VALIDITY; INADEQUATE PRICE: Foreclosure sale for less than 20% of market value that occurred because mortgagee erroneously failed to appear and bid at the sale will not be set aside as "unconscionable" or unlawful, even when done while automatic stay was in effect.

McNeil Family Trust v. Centura, 2003 WL 57908 (Wyo. 1/8/03)

In 1996, mortgagors owned property with an appraised value of $119,000. They borrowed $89,000 from Centura and $30,000 on a home equity second mortgage from U.S. Bank. In 1997, mortgagors filed for bankruptcy, and both lenders were notified of the automatic stay. The next year, Centura sent its mortgage to its attorneys (a Colorado law firm) to foreclose the mortgage.

Centura's lawyers, without first obtaining relief from the automatic stay, proceeded to initiate a private power of sale foreclosure. In Wyoming, apparently, the sheriff may conduct the foreclosure sale in such instances.

The lawyers obtained a title report that erroneously failed to mention U.S. Bank, and the lawyers did not notify U.S. Bank of the foreclosure proceeding.

Thereafter, U.S. Bank got word of the proceeding and notified Centura of its interest and, apparently, Centura's lawyers resolved to restart the foreclosure process and this time to notify U.S. Bank properly.

Unfortunately, no one told the sheriff, who already had marching orders to conduct the sale.

And conduct the sale he did, but no one attended except McNeill, who apparently was responding to the published notice or else hanging around the courthouse looking for opportunities. McNeil certainly found an opportunity here. When no other bidders appeared at the sale, McNeil bought the property in the name of his family trust for $20,000.

The sheriff allowed McNeil time to go to his bank to obtain a certified check, and contacted Centura to find out the appropriate payee of the check. Someone at Centura instructed that the check be made out to Centura, and so it was. Apparently someone else at Centura realized that something was wrong, and notified the Centura attorneys, who immediately called McNeil and sought to obtain the certificate of sale. McNeil offered to sell it for $10,000 (presumably the court's statement of the price is in addition to the $20,000 McNeil had already expended). The Centura attorneys rejected the offer and promised McNeil that they'd work to get the foreclosure sale set aside, which they proceeded to continue to do until the decision in this case.

McNeil, meanwhile obtained the statutory redemption rights of U.S. Bank. (Wyoming apparently recognizes statutory redemption rights in power of sale foreclosures - somewhat of a rare occurrence.) One assumes that McNeil also reached some accommodation with the mortgagor, who supported McNeil's position here. But the court doesn't mention what arrangements were made.

The first effort by the Centura attorneys was to file a lawsuit invoking the equitable discretion of the state court to set aside the sale because of the absence of Centura and U.S. Bank.

While this suit was pending, the Centura attorneys announced that, apparently for the first time, they had become aware of the timing of the bankruptcy, and therefore proceeded to petition the bankruptcy court to set aside the foreclosure as void because it occurred in violation of the automatic stay. The bankruptcy court, after a hearing at which one of the debtor/mortgagors opposed Centura's motion, retroactively granted relief from the automatic stay ("annulled" it), thus upholding the validity of the sale. The bankruptcy court reasoned that it had latitude to do this where all the parties had apparently acted as if the automatic stay did not exist and where to set the sale aside would unduly reward Centura for its negligence. There is no indication what position, if any, was taken by the bankruptcy trustee.

In the state court action, Centura amended to allege the void character of the sale due to the automatic stay, and also that the sale was void due to the absence of both lenders, an unconscionably low sale price, and unjust enrichment. The trial court granted the motion in a special equitable decree designed to get all parties to the status quo ante. It set aside the sale, but concurrently ordered that Centura pay to McNeil his $80,000 attorney's fees. It did not make any order relating to the monies McNeil had paid to U.S. Bank, so McNeil was not made whole completely.

McNeil and Centura each appealed that part of the decision they contrary to their respective interests.

The Wyoming Supreme Court, hearing the case de novo as an equitable appeal, reversed both aspects of the opinion.

The court indicated that the question of whether a sale can be set aside for an inadequate price alone was one that Wyoming courts had rarely, if ever, addressed. The court seemed to adopt the rule that a foreclosure sale will never be set aside for inadequacy of price alone, but then concluded, anomalously (to the editor), that this position was consistent with the view of the Restatement of Mortgages, Section 8.3, which it then proceeded to quote. The quoted language from the Restatement indicates that foreclosure sales, although usually immune from attack if properly conducted, might be set aside if they result in a sale price that is "grossly inadequate." The court noted later that notes to the Restatement Section indicate that a price of less than 20% of the value of the property may be viewed as "grossly inadequate."

The court concluded that, in any event, equitable relief ought not have been granted to Centura here, due to a number of factors. First, the court held, Centura did not come to the court with clean hands: "Centura's unilateral errors, and those of its legal representatives, set the stage for the dispute." Secondly, the court noted that there was an adequate remedy at law, since Centura could recover against its attorneys for malpractice. Further, the court noted that Centura might have settled with McNeil for $10,000 for the purchaser's certificate, and refused to do so.

But even assuming that these general bars to equitable relief did not exist, the court concluded that it would be inappropriate to set aside the sale. First, relief should not be granted where all parties cannot be restored to their original state. The court could not undo the U.S. Bank sale of its certificate of redemption to McNeill. U.S. Bank was not in the case. Further, there was no argument that McNeil took advantage of Centura unfairly. He did not know in advance of the sale that Centura would not be there. He simply attended a lawfully announced and conducted sale. As to the slight delay while McNeil went to get the check, the court did not conclude that this delay was justified under the statutes, but did conclude that the delay did not warrant setting aside the foreclosure in this case, since the delay was inconsequential. More important was that, during the period of the delay, Centura received notice of what was going on and still did nothing to stop the proceedings.

Further, consistent with law in virtually every jurisdiction, the court held that the sale was not infirm because the lender didn't appear, nor could it be attacked because U.S. Bank did not get formal notice. At most, the latter defect would result in U.S. Bank's lien being undisturbed (an issue now moot anyway, due to the deal between U.S. Bank and McNeil.) Although, as indicated, the court suggested that at some level it would set aside a sale for inadequate price, and although it appeared that the price here was less than 20% of the fair value of the property, a "benchmark"

suggested by the Restatement, the court concluded that it would not be bound by any such benchmark: "We will not substitute arbitrary limitations for thorough examination of the facts and equities of each case to determine unconscionability or unjust enrichment."

The test for "unjust enrichment" in Wyoming includes a requirement that the party charged with such enrichment have had notice at the time it received the questioned benefit that the party providing it intended to be paid. There was no such suggestion here. McNeil bid at a lawfully called and conducted foreclosure sale. He had no reason to suspect that Centura had any desire to be paid outside of the sale.

Notwithstanding all of the above, the court also reversed the finding of attorney's fees from Centura to McNeil. In one sense, this is understandable, since the fees were part of a "global remedy" that the trial court had fashioned. In another sense, it seems inconsistent with the court's view of the equities, since the $80,000 fee essentially "bled out"

most, if not all, of the benefit that McNeil expected to obtain from his little windfall. (It may be that in the end McNeill's actual fees charged by his own counsel will turn out be less than that amount awarded by the trial court and here reversed.)

Comment 1: Loud Huzzahs for the Wyoming court!! This is business. It's only money. Let the chips fall where they may. Too bad the court snuck in that recognition that in some other case it will set aside the results of the auction. But the "unjust enrichment" test, if that is the primary basis for setting aside the sale, does require that the bidder have reason to believe that the party providing the benefit expects to be paid in some other way. This injects a workable equitable control over the court's discretion in this area, if it indeed serves as a test of "unconscionability" as well as "unjust enrichment."

Comment 2: Even in an equitable setting, the editor is a bit uncomfortable with the court relying upon the presence or absence of a malpractice claim against a third party as a basis for its decision. This is very close to taking into account the presence of insurance, a practice the editor has decried before, and one that can only distort the marketplace in the long run. Prudent people who buy insurance, or who hire insured lawyers, deserve at least the same equitable rights as careless ones. Of course, "prudent" might not be quite the proper description for Centura's conduct overall here.

Comment 3: What would have happened if Centura had cried foul during the period that McNeil was out getting the check? Since the court here does not indicate that the sheriff had a lawful right to permit that delay, it may be that the court would have concluded that the objection was a sufficient basis to deny McNeil the benefits of the auction. Another way to look at things was to conclude that the auction had merely been suspended and thus the process was not over until McNeil returned with the check. Compare 6 Angels, Inc. v. StuartWright Mortgage, Inc., 85 Cal.App.4th 1279, 102 Cal.Rptr.2d 711 (2nd D.C.A. 2001) (The DIRT DD for 1/5/02) (A successful bidder at a regularly conducted nonjudicial foreclosure sale may enforce its right to receive a trustee's deed, over objections by the foreclosing beneficiary that the sale price was inadequate due to erroneous communication of the opening bid.) (Although the editor agreed with 6 Angels, noted California commentator Roger Bernhardt did not.)

Comment 4: For another case, which the editor finds more troubling, setting aside the sale for inadequacy of price, see In re Krohn, 2002 Westlaw 1969655 (Ariz. 8/27/02) (The DIRT DD for 9/16/02).