by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; FORECLOSURE; PRIVATE FORECLOSURE; VALIDITY: Court will set aside foreclosure sale when sale price was inadequate if, in addition, trustee failed to advertise so as to notify adequately potential purchasers of unique characteristics of property affecting its value.

Pizza v. Walter, 694 A.2d 93 (Md. 1997).

The procedure in Maryland involves use of a private power of sale enforced by an auction conducted through a private trustee, but prior to the sale the trustee apparently opens a court file to prepare for later proceedings to confirm the private sale. In this case, notice of the court suit was provided to junior mortgagees who then were granted leave to intervene. One of these junior lenders attended the sale but did not bid. Later, she objected to the sale on the grounds that the trustee had not adequately advertised the property.

The trustee's published advertisement had set forth the legal description of the property and the fact that it was improved by a four bedroom, three and one half bath, swimming pool, and three car garage. In addition, the advertisement indicated that the property was waterfront property with a dock.

There were very few inquiries in response to this ad. At the insistence of the junior mortgagee, the trustee ran another ad four days prior to the sale that indicated further that this property was on 3.6 acres, and that the house was a luxury 4400 square foot home with many amenities. The trustee commented that it received an unprecedented number of inquiries on the basis of this ad, but few bidders showed up at the sale four days later.

The property, appraised conservatively (by the bank's appraiser) at $650,000, sold to the bank for $325,000 - the amount of its senior debt. Soon thereafter the bank retransferred the property to its attorney, who represented it at the sale and in fact entered the winning bid for the bank.

The trial court and appeals court upheld the sale. On appeal to the Maryland Court of Appeals: held: Reversed.

The Court of Appeals first held that the sale price alone would not justify setting aside the sale. The $325,000 bid price did not meet the standard of "gross inadequacy" sufficient to lead to that result. Nevertheless, the court held that something less than "gross inadequacy" might also be sufficient to warrant a court in setting aside a sale if there was some other procedural defect of irregularity. One such defect in Maryland is inadequacy of advertising. Although the Maryland statutes do not dictate the content of advertising of the sale, Maryland courts since 1856 have held that advertising insufficient to "bring the property fairly into the market" would justify setting aside a sale.

Modern Maryland lawyers have read that requirement to mean that ordinary published notice of the legal description and a basic description of the improvements is sufficient in most cases, but that further notice is necessary when a property has unique characteristics affecting value.

Citing a 1936 decision, the Court of Appeals stated the test somewhat more broadly:

"The test is: Was the property sold under such conditions and terms as to advertisement and otherwise, as a prudent and careful man would employ, seeking to obtain the best price for his own property."

Here, notwithstanding the fact that a much more effective ad was run prior to sale, the court held that the overall process did not meet the standard. The second ad was "too little too late." The court commented that "a supplemental advertisement cannot cure a defective legal advertisement." The junior mortgagee was one of those persons to whom the trustee's duty ran, and she was entitled to have the sale set aside when the trustee failed to meet the standard and the sale price proved to be inadequate.

In language that may haunt Maryland foreclosure attorneys in the future, the court stated:

"Of course, not every irregularity or deficiency in the advertising will void the sale. There can be no arbitrary rule or thumb for determining in a given case whether the description of the property in the legal advertisement sufficiently informs the buying public of the property, but that question must necessarily be decided upon the facts and circumstances of each case."

Here, the location of the property would have suggested to most potential buyers that it likely was a modest property with a fifty foot wide lot, as was true of most of the properties in the area. Obviously, the property in question was much more than that.

The court also found it a dubious circumstance that the mortgagee's attorney (who later acquired the property, employed the trustee who conducted the sale, wrote the first advertisement, and actually entered the bank's bid, although he had arranged for a bank employee to be at the sale as well.

Comment 1: The second quoted excerpt above suggests that the court, notwithstanding other language in the opinion, is focussed primarily on the adequacy of the official, legal notice. Maryland generally requires three successive legal publications. The court is commenting upon the adequacy of these notices, but is not necessarily suggesting that additional notices might be necessary in particular cases. Other language in the opinion, of course, suggests that in the given case additional publication might be necessary, but such a conclusion would necessarily be viewed as based upon dicta.

Comment 2: Although Maryland lawyers may not have to worry about putting on a structured marketing campaign, clearly they should be concerned about the fact that the court notes that there is "no arbitrary rule of thumb," and that each case must be evaluated on its own terms. This likely will lead lawyers to be specially cautious in drafting foreclosure notices. At the time of drafting, of course, there is no way to be certain what the relationship between bid price and court determined value will be. Consequently, the only protection against a court setting aside the sale will be a very full disclosure of the circumstances of the property in the legal advertisement. If the first advertisement proves inadequate, the case stands for the proposition that the process must start all over again. Less formal advertising is not sufficient to cure any problem.

(Note: Subsequent history indicates that the court has altered its remand instructions apparently in light of a settlement agreement reached by the parties. It is not clear whether the court's actions in this regard affect the precedential value of its opinion.)

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