FELTON R. HOOD, et ux.
JOHN E. DRISCOLL, III, et al. SUBSTITUTE TRUSTEES
Woodward, Leahy, Wilner, Alan M. (Retired, Specially Assigned) JJ.
In 2007, appellants executed a note in the amount of $345, 000 and, as security for the note, a deed of trust on their home in Harford County. The note called for interest on the loan at the rate of 6.805 percent. Appellants defaulted on their obligations under the note and deed of trust, and, in July 2013, the substitute trustees under the deed of trust instituted foreclosure proceedings in the Circuit Court for Harford County. Appellants were able to forestall a sale of the property for two-and-a-half years, first by requesting mediation, which failed, and then seeking protection from the U.S. Bankruptcy Court, which was partly successful. The Bankruptcy Court discharged them from the underlying debt but permitted the sale to proceed.
The sale was conducted on January 21, 2015. In the Notice of Sale sent to appellants and published in two newspapers of general circulation in the county earlier that month, the trustees stated, as one of the terms of sale, that interest would accrue on any unpaid part of the purchase price at the rate of 6.805 percent - the same rate as provided in the note - from the date of sale to the date of settlement. No objection was made to that provision by appellants prior to the sale. The property was sold to Federal National Mortgage Association, for $490, 005, that being the highest bid and the full amount of the debt that had been owed by appellants and discharged in bankruptcy. In his Report of Sale, filed on February 18, 2015, the substitute trustee affirmed that the sale was fairly made and that the property brought a fair price. The purchaser filed the required affidavit that no one was discouraged from bidding.
The seeds of this appeal were planted on March 20, 2015, when appellants filed exceptions to the foreclosure sale. The sole ground raised by them was that the interest rate on the purchase price was "excessive." With no supporting documentation, but with a request for a hearing, they claimed that "[i]t is well known and public knowledge that the current prevailing interest rate on mortgage loans is in the vicinity of 4 percent and the Court may take judicial notice of this fact under Rule 5-201(b) of the Maryland Rules." They contended that, in the absence of payment terms set in the lien instrument, terms set by the trustee must be reasonable and that it was not reasonable to require the purchaser to pay interest on the purchase price at the rate of 6.805 percent when the prevailing rate for mortgage loans was only about four percent. They urged that "it is quite likely that, " absent the higher rate "the price could have been higher, " and thus "a possibility that there could have been sufficient proceeds to yield some funds to Defendants."
The substitute trustee responded that (1) there was nothing improper about requiring the purchaser to pay the same rate appellants had agreed to pay, (2) if there was anything improper, it should have been raised in a pre-sale motion to enjoin the sale, (3) it is not a proper ground for exceptions designed to upset a sale, and (4) appellants were not prejudiced in any event, as charging a lesser rate would have reduced the amount paid for the property.
The court held a hearing on the exceptions, which mostly was limited to argument. The one item of evidence was in the form of a stipulation that, if called to testify, an expert retained by appellants would opine that the 6.805 rate "was too high given the current market conditions and that a lower market based rate would yield a higher sale price and perhaps produced more qualified buyers." The proffer did not include any backup data for that opinion. The court accepted the proffered testimony, not as being persuasive but merely that the expert would so testify. The court listened to argument and, three weeks later, filed a Memorandum Opinion and Order denying the exceptions and ratifying the sale. The court assigned three reasons for ruling as it did: first, that the issues raised by appellants "were not filed in a timely fashion;" second, that those issues "are inappropriately raised at this stage of the proceeding;" and third, assuming that appellants' challenge to the sale was timely raised, it was legally insufficient to deny the trustee's request to ratify the sale.
We believe that the court erred in its first two conclusions but not in the third, which is dispositive.
There are two avenues by which a borrower may challenge a foreclosure sale. One is a motion to dismiss the foreclosure action or stay or enjoin a threatened sale; the other is to file exceptions to a sale that already has occurred. The law regarding when one may or must be used to the exclusion of the other has shifted somewhat during the past eight years, as both the Legislature and the Court of Appeals, in its rule-making capacity, attempted to respond to the disastrous fallout from Wall Street's inexcusable misadventure. The proper guidance is found in Rules 14-211 and 14-305(d) and in the recent case law interpreting those Rules. Rule 14-211 deals specifically with a motion to stay a sale or dismiss the foreclosure action altogether, both as to when such a motion may be filed and what it must contain. Rule 14-305(d) deals with exceptions to the trustee's or mortgagee's report of sale, including when they must be filed and, in an exceedingly brief statement, what they must contain. The Rules and the case law complement each other.
Rule 14-211(a)(3) requires that a motion to stay and dismiss must "state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action." (Emphasis added). That describes the function of the motion – to raise a challenge to the foreclosure action itself -- not to the manner in which the sale is conducted but to whether there should be a sale at all.
Consistent with that function, Rule 14-211(a)(2)(A) requires that the motion must be filed prior to the sale. It sets forth alternative deadlines, depending on the circumstances. The one applicable here, where a "postfile" mediation was held, is 15 days after the administrative law judge selected to conduct the mediation filed a notice that no agreement had been reached in the mediation. That notice was filed in this case on September 19, 2013, which, subject to seeking an extension pursuant to subsection (a)(2)(C) of the Rule, which was not done, made October 4, 2013 the effective deadline for moving to dismiss the action or enjoin or stay any sale. No such motion was filed in this case, nor could it have been by that deadline, as notice of the sale was not published until January 2015.
Rule 14-305(d), which deals with exceptions to a sale, has a more narrow focus. Exceptions to a sale must set forth, with particularity, alleged irregularities in the sale itself. The court must ratify the sale if convinced that "the sale was fairly and properly made." The focus of the exceptions is on the conduct of the sale, not whether the trustee had a right to have the property sold.
The case law supports that distinction. Most recently, in Thomas v. Nadel, 427 Md. 441, 445 (2012), the Court of Appeals confirmed what it had said in Bates v. Cohn, 417 Md. 309 (2010) and Maddox v. Cohn, 424 Md. 379 (2012) – that a homeowner/borrower ordinarily "must assert known and ripe defenses to the conduct of a foreclosure sale prior to the sale, rather than in post-sale exceptions." Thomas, 427 Md. at 445, quoting from Bates, 417 Md. at 328. Consistently – harmoniously – with that approach, Bates made clear that Rule 14-305 "is not an open portal through which any and all presale objections may be filed as exceptions, ...