Chapter 13 Bankruptcy. Next Assignments. In re Edry

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1 Next Assignments Pages (Distribution of Proceeds; Lien Revival; Statutory Redemption; Deficiency Judgments) Pages (Merger; Deeds in Lieu of Foreclosure; Short Sales ) Chapter 13 Bankruptcy Ch. 13 provides mechanism for homeowner in default to cure /de accelerate her home mortgage and reinstate it E.g., X is in default 6 months on X s mortgage, due to lost job (total arrearage = $6,000) In Ch. 13, X can begin resuming regular monthly payments, and instead can repay $6,000 arrearage separately over 3 or 5 year plan In re Edry Debtor defaulted on her mortgage to Bank Balance of mortgage debt = $85,536 Alleged FMV of land = $190,000 Gurtler (third party) bought at sale for $86,500 After sale, Debtor filed Ch. 13 petition, and sued to set aside the sale, arguing Bank did not sufficiently advertise the sale Bank ran required legal notices, but did not run display ads in real estate listings Court invalidated the sale based on insufficient advertisement, noting that the use of display ads was a common practice of its auctioneer Contrast: MO courts haven t required advertising beyond minimum legal notices required by statute Which approach is more sound? 1

2 Requiring display ads might produce greater interest and more informed bidding But, how is lender/trustee supposed to know how much is enough? To avoid post sale attack, lender/trustee may run too many ads (diminishing returns problem) This could prompt charge that lender/trustee incurred unreasonable sale expenses and can t recover the unreasonable expenses from the sale proceeds Compare UCC Article 9 with MO nonjudicial statute Article 9 allows nonjudicial foreclosure sale of personal property collateral, but all aspects of the sale must be commercially reasonable By contrast, MO nonjudicial statute does not require commercial reasonableness but mere statutory compliance Notice to Junior Lienholders Some nonjudicial foreclosure statutes require the foreclosing mortgagee to search for and give notice to holders of all recorded junior liens (e.g., WA) Others (e.g., MO) only require notice to junior lienholder if junior lienholder specifically recorded a request for notice of sale Thus, a junior that did not request a notice of sale could thus have its lien extinguished by senior mortgagee s foreclosure, without notice! Glidden v. Municipal Auth. of Tacoma Mount Bay Corp. owned land subject to: Glidden (1st mortgage = $37,640) OSB (2d mortgage = $89,000) Municipal Authority (3d mortgage = $39,000) Glidden foreclosed by power of sale, but trustee failed to give notice to OSB Municipal Authority was high bidder at price = $37,845 ($205 over 1st mortgage debt) Trustee s deed recited Trustee s complied with all requirements of nonjudicial foreclosure statute 2

3 OSB argues: sale was invalid b/c of lack of notice FMV of land = $146,000 We could ve bid against our debt, acquired the land, and re sold it for enough to pay off 2d mortgage debt But instead, if our lien was extinguished by a sale we didn t know about and never got notice of, we have only an unsecured claim against Mount Bay Corp. Is lack of notice a legitimate reason for OSB to be able to invalidate the foreclosure sale? Judicial foreclosure: sale w/out joining junior lienor does not extinguish junior lien (deprivation of property w/out due process) Nonjudicial foreclosure: sale does not involve state action ; sale w/out notice to junior lienholder does not violate due process (at least where government is not the mortgagee) Due Process? Here, low price + lack of notice could provide basis for court to set aside the sale But, Municipal Authority argues: trustee s deed certified that trustee complied w/ statutory requirements, which gave rise to a statutory presumption of compliance In some states (CA, WA), this presumption is conclusive in favor of a BFP In other states (e.g., MO), a presumption arises, but that presumption is rebuttable by contrary evidence (i.e., evidence of trustee s noncompliance) Glidden holding: OSB can t set aside the sale, but it can proceed against Glidden (senior foreclosing lender) for wrongful foreclosure Debt to Glidden = $37,640; debt to OSB = $89,000; FMV of property = $146,000 B/c FMV of property was greater than total debt owed to Glidden and OSB, OSB could recover $89,000 in damages from Glidden 3

4 Albice Trustee conducted foreclosure, delivered a deed to Buyer reciting trustee s compliance with WA statute Mortgagor sued to set aside sale, arguing (a) low price and (b) Trustee s improper postponements of sale Trial court: Buyer was a BFP entitled to conclusive presumption of trustee s compliance Court of appeals: no, b/c deed didn t recite the specific facts indicating how the trustee complied Do you think the court was correct in Albice? Bank forecloses on Smith s home At nonjudicial foreclosure sale, home is sold to Buyer Buyer files unlawful detainer suit vs. Smith to recover possession What defenses, if any, can Smith raise in unlawful detainer? I didn t get notice of sale? I wasn t in default? Mo. Rev. Stat The complainant shall not be compelled to make further proof of the forcible entry or detainer than that he was lawfully possessed of the premises, and that the defendant unlawfully entered into and detained or unlawfully detained the same. Mo. Rev. Stat The merits of title shall in nowise be inquired into, on any complaint which shall be exhibited by virtue of the provisions of this chapter. 4

5 Wells Fargo Bank v. Smith Case pending before Missouri Supreme Court Foreclosed mortgagor has brought due process challenge to Missouri UD statute, to the extent that it precludes mortgagor from challenging the validity of the foreclosure Why not a due process violation? 5