Purchase Price Challenges to a Commercial Foreclosure Sale in Maryland

October 21, 2008

The below addresses what challenges an owner may make to the purchase price obtained in a Maryland foreclosure sale of commercial real estate. Since this area of the law is changing rapidly, the reader needs to check statutes adopted, and cases rendered, after 10/21/08 and, particularly, not to assume that any of the below applies to residential property.

Re: Foreclosure Purchase Price Challenges in Maryland
Subject: Maryland law, as to when a Maryland court may not accept the purchase price realized, at a Maryland foreclosure sale, because the court deems that purchase price to be too low.

I. Maryland State Foreclosure Law.

The Maryland rule seems to be that, assuming proper advertisement and no other irregularity in the sales procedures, even if the purchaser at a foreclosure sale is the lender, a low purchase price will be upheld unless it is so “grossly inadequate as to shock the conscience of the court”. How low that number is is questionable; however, it appears that a foreclosure purchase price that is around 40% or less, of the fair market value of the property, starts to get highly questionable based upon price alone.

The highest state court in Maryland, the Court of Appeals, summarized the applicable principles, in Pizza v. Walker, 345 Md 664, 694 A.2d 93, 1997 Md. LEXIS 58 (1997) as follows, a case in which the foreclosure purchaser appears to have been an agent of the lender and the foreclosure sale purchase price appears to have been approximately 53% of the fair market value of the property:

“We turn now to examine Pizza’s contention that the sale should be set aside. Pizza contends that the property was sold for an inadequate price. The law is well settled that inadequacy of price alone, unless it indicates fraud, unfairness or some misconduct or mistake for which the purchaser should be held responsible, ordinarily is not a sufficient ground to set aside a sale. [Citations omitted.] Although inadequate price alone does not ordinarily necessitate setting aside a sale, when inadequate price is coupled with other evidence of irregularity the sale may be set aside, even if the price might not shock the conscience of the court. [Citations omitted.] Kauffman v. Walker, 9 Md. 229, 236 (1856) (holding that inadequacy of sale price–under 50% of fair market value–coupled with trustees failure to bring property fairly into the market due to deficient advertising, required vitiation of foreclosure sale); Hurlock, 98 Md. App. at 340-41, 633 A.2d at 451. “Inadequacy of price is a strong auxiliary argument in connection with circumstances which cast doubt or suspicion upon the correctness of the sale.” Walker, 218 Md. at 316, 146 A.2d at 205.

We are satisfied that the property was sold for an inadequate price–a sum well below the market value. The trial judge made an explicit finding that the amount received from the sale was not grossly inadequate. Indeed, Pizza has not urged this Court to find that the price received from the sale was grossly inadequate or that the sale price alone would furnish grounds to set aside the sale. Inadequacy of price, however, has been called “a strong auxiliary argument” in connection with circumstances which cast doubt or suspicion upon the fairness of the sale. [Citation omitted] The question then becomes: Does this inadequacy of price, when considered in connection with all the circumstances surrounding this sale, furnish sufficient grounds for setting aside the sale? We conclude that it does.

We also conclude that the advertisement in this case is inadequate.”

The second highest state court in Maryland, the Court of Special Appeals, summarized those principles with numbers, in Hurlock Food Processors Investment Associates v. Merchantile-Safe Deposit and Trust Company, 98 Md. App. 314, 633 A.2d 438, 1993 Md. App. LEXIS 176 (1993) as follows:

“The very few cases in which the courts of this State have held, or even suggested, that the inadequacy of the price realized at a foreclosure sale, in and of itself, required that a sale not be ratified the ratio of the sale price to the asserted fair market value was less than the 37% ratio here, see, McCartney, 282 Md. at 640, 386 A.2d 784 (sheriff’s sale) (parcel with fair market value of $ 18,000 sold for $ 2,000; ratio of sale price to fair market value was 11%); Hubbard, supra, 23 Md. at 83 (parcel purchased the preceding year for $ 7,000 and valued at $ 8,000 sold for $ 2,000; ratio of foreclosure sale price to fair market value was 25%), or, unlike the case at hand, a substantially higher fair market value was undisputed.[Citation omitted]

On the other hand, in a number of cases proportionately less “adequate” foreclosure sales prices have been upheld. The sales prices here generated funds, which will pay 60% of the HFP debt (sales prices of $ 1,834,435; debt of $ 2,920,552.20) and almost 80% of the HFPIA debt (sales price of $ 175,000; debt of $ 222,666.71). Sales prices that did not recover as much of the secured debt have been upheld. See, e.g., Smith v. Digges, 261 Md. 130, 274 A.2d 92 (1971) (debt in excess of $ 47,000; foreclosure price $ 20,000 recovered 43% of debt); Ten Hills Co., 176 Md. at 454, 5 A.2d 830 (debt in excess of $ 90,000; foreclosure price of $ 18,000 recovered only 20% of debt). 9 [Footnote omitted]

Similarly, although the exceptors bitterly complain that the foreclosure prices have only yielded 35% of their asserted fair market value, prices that yielded a similarly small percentage of the asserted fair market value have not been found inadequate. See Ed Jacobsen, Jr., Inc. v. Chapline, 253 Md. 70, 73, 251 A.2d 604 (1969) (foreclosure price of $ 60,000 only 40% of asserted fair market value of $ 150,000); Butler v. Daum, 245 Md. 447, 452, 226 A.2d 261 (1967) (foreclosure price of $ 2,400, only 30% of asserted fair market value of $ 7,950); de Tamble, 210 Md. at 420-21, 124 A.2d 276 (foreclosure price of $ 28,500, only 15% asserted fair market value of $ 185,000).

The result reached here may seem harsh, but as the Court of Appeals explained more than fifty years ago
It is clear that if a mortgagee or his assignee complies with the terms of the power of sale in the mortgage, and conducts the foreclosure sale properly, the court will not set aside the sale merely because it brings loss and hardship upon the mortgagor. Strict enforcement of a mortgagee’s right may prove to be harsh, but the law generally disregards such a result, because a default by the mortgagor is a violation of the deliberate agreement of the parties, and the remedy is definitely fixed by statute. It is the mandatory duty of the court to recognize the statutory remedy and enforce the right of the mortgagee.”

See, also, J. Ashley Corp v. Burson, 131 Md. App. 576, 750 A.2d 618, 2000 Md. App. LEXIS 71 (2000); Bennett Heating & Air Conditioning, Inc. v. Nationsbank of Maryland, 342 Md. 169, 674 A.2d 534, 1996 Md. LEXIS 39 (1996); PAS Realty, Inc. v. Rayne, 46 Md. App. 445, 418 A.2d 1222, 1980 Md. App. LEXIS 346 (1980); and Southern Maryland Oil, Inc. v. Kaminetz, 260 Md. 443, 272 A.2d 641, 1971 Md. LEXIS 1250 (1971).

The Maryland statutes recently enacted, in light of the current housing crisis, provide borrowers additional rights with respect to foreclosures of only residential property, which means “real property improved by four or fewer single family dwelling units”. Section 7-105.1(a), Real Property Article, Annotated Code of Maryland.

III. Maryland Cases under the Fraudulent Transfer Avoidance Powers of a Bankruptcy Court.

A Bankruptcy Court’s powers to avoid a non-collusive foreclosure sale, as a fraudulent transfer under the applicable Bankruptcy Code provisions, particularly 11 U.S.C.A. Section 548, is limited to assuring that adequate state law foreclose procedures were followed. Specifically, in Bfp v. Resolution Trust Corporation, 511 U.S. 531, 114 S.Ct. 1757, 128 L. Ed. 2d 556, 1994 U.S. LEXIS 3776 (1994), the Supreme Court held, in relevant parts:

“Foreclosure laws typically require notice to the defaulting borrower, a substantial lead time before the commencement of foreclosure proceedings, publication of a notice of sale, and strict adherence to prescribed bidding rules and auction procedures. Many States require that the auction be conducted by a government official, and some forbid the property to be sold for less than a specified fraction of a mandatory presale fair-market-value appraisal. [Citations omitted.] When these procedures have been followed, however, it is “black letter” law that mere inadequacy of the foreclosure sale price is no basis for setting the sale aside, though it may be set aside (under state foreclosure law, rather than fraudulent transfer law) if the price is so low as to “shock the conscience or raise a presumption of fraud or unfairness.” [Citations omitted.]

Fraudulent transfer law and foreclosure law enjoyed over 400 years of peaceful coexistence in Anglo-American jurisprudence until the Fifth Circuit’s unprecedented 1980 decision in Durrett. To our knowledge no prior decision had ever applied the “grossly inadequate price” badge of fraud under fraudulent transfer law to set aside a foreclosure sale.6 To say that the “reasonably equivalent value” language in the fraudulent transfer provision of the Bankruptcy Code requires a foreclosure sale to yield a certain minimum price beyond what state foreclosure law requires, is to say, in essence, that the Code has adopted Durrett or Bundles. Surely Congress has the power pursuant to its constitutional grant of authority over bankruptcy, U.S. Const., Art. I, § 8, cl. 4, to disrupt the ancient harmony that foreclosure law and fraudulent conveyance law, those two pillars of debtor-creditor jurisprudence, have heretofore enjoyed. But absent clearer textual guidance than the phrase “reasonably equivalent value” — a phrase entirely compatible with preexisting practice — we will not presume such a radical departure. [Citations omitted] . . .

For the reasons described, we decline to read the phrase “reasonably equivalent value” in § 548(a)(2) to mean, in its application to mortgage foreclosure sales, either “fair market value” or “fair foreclosure price” (whether calculated as a percentage of fair market value or otherwise). We deem, as the law has always deemed, that a fair and proper price, or a “reasonably equivalent value,” for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.

This conclusion does not render § 548(a)(2) superfluous, since the “reasonably equivalent value” criterion will continue to have independent meaning (ordinarily a meaning similar to fair market value) outside the foreclosure context. Indeed, § 548(a)(2) will even continue to be an exclusive means of invalidating some foreclosure sales. Although collusive foreclosure sales are likely subject to attack under § 548(a)(1), which authorizes the trustee to avoid transfers “made . . . with actual intent to hinder, delay, or defraud” creditors, that provision may not reach foreclosure sales that, while not intentionally fraudulent, nevertheless fail to comply with all governing state laws. [Citations omitted] Any irregularity in the conduct of the sale that would permit judicial invalidation of the sale under applicable state law deprives the sale price of its conclusive force under § 548(a)(2)(A), and the transfer may be avoided if the price received was not reasonably equivalent to the property’s actual value at the time of the sale (which we think would be the price that would have been received if the foreclosure sale had proceeded according to law).

No subsequent decisions of the Fourth Circuit Court of Appeals, the U.S. District Court for the District of Maryland or the Maryland Bankruptcy Court has sought to limit Bfp. The main decision, rendered by those courts, construing Bfp is Whitney v. Newman, 2007 Bankr. LEXIS 2628 (2007). That case distinguishes Bfp since Whitney was a non-foreclosure case, thus not a situation in which the borrower received the protections provided by the Maryland foreclosure statutes and case law.