Notice to Junior Lienholders

Transcription

1 Missouri Power of Sale Process RSMo : trustee must provide notice of sale at least 20 days prior to sale (unless mortgage requires longer period) RSMo : personal notice must be given to: (1) The mortgagor as named in deed of trust (2) The current record owner of the land (as of 40 days prior to scheduled sale date), if different, AND (3) Anyone who recorded a request to receive notice of the sale (at least 40 days prior to scheduled sale) Difference from judicial foreclosure? What if there s a junior lien on the property, but the junior lienholder didn t record a request to receive notice of a foreclosure sale by the senior lienholder? Then the Missouri statute DOES NOT obligate the foreclosing senior to give notice to the junior! Would the sale extinguish the junior s lien? If so, is this a constitutional problem? Should the senior give notice anyway? The overwhelming weight of judicial authority has concluded that nonjudicial foreclosure is not state action Thus, extinguishment of junior lien would not rise to level of a constitutional violation Note: nonjudicial foreclosure statutes in some states (e.g., WA) say that sale will not extinguish junior lien if junior does not receive notice Notice to Junior Lienholders Even if the Missouri statute does not obligate the foreclosing senior to notify junior lienors that didn t file a request for notice, it is good practice to provide notice anyway Junior lienholders have an incentive to bid to protect their interest (more bidders, higher price) 1

2 RSMo : specifies content of notice Must include: recording information for DOT; name of mortgagor; time, terms and place of sale; and description of the mortgaged land Notice must also be advertised in newspaper In counties w/cities > 50,000, at least 20 times (!) up to and including sale date In other counties, once per week for four successive weeks, up to/including the week prior to sale Rationale: publication of notice should help to facilitate bidding (and competitive bidding should help produce sale price reflecting market value) If mortgagor does not redeem (pay off the debt) prior to scheduled sale, trustee conducts the sale Public auction, cash, as is, w/out warranties Foreclosing lender may credit bid Sale is considered final when hammer falls After sale and payment by high bidder, trustee delivers trustee s deed to the high bidder Is the nonjudicial foreclosure process (as established and permitted by Missouri law) well calculated to produce a market value sale price for the mortgaged property? Why or why not? Concerns? Sale can happen very quickly (borrower doesn t have much time to redeem or arrange refinance) Notice is of limited use Street address not required (legal descriptions commonly used) Notice provides little/no information that bidder can use to establish bid price (note: bidders usually can t inspect improvements prior to foreclosure sale) 2

3 Pros/Cons for Lenders Very fast (45 60 days in Missouri, as contrasted with months or more in judicial only jurisdictions) But, there s no judicial supervision or judicial finality What happens if mistakes occur (e.g., what if trustee doesn t appropriately comply with statute?) How can a buyer be sure that its title is good? Nonjudicial Foreclosure: Hypo Lender repossess equipment and sells it in Article 9 foreclosure sale, but didn t give notice to Debtor first (Buyer buys it for $50,000) 2 months later, Debtor sues Buyer to recover the collateral, arguing the sale was void for lack of pre sale notice How would court rule? UCC (a) A secured party s disposition of collateral after default: (1) transfers to a transferee for value all of the debtor s rights in the collateral; (2) discharges the security interest under which the disposition is made; and (3) discharges any subordinate security interest or other subordinate lien. (b) A transferee that acts in good faith takes free of the rights and interests described in subsection (a), even if the secured party fails to comply with this article or the requirements of any judicial proceeding. UCC 9 617: Good faith buyer of personal property at a defective foreclosure sale takes good title Buyer is protected as long as Buyer didn t know that Secured Party had failed to give notice Remedy for Borrower: Borrower can get damages from Lender for wrongful foreclosure Damages = value of collateral in a reasonable sale MINUS foreclosure sale price If FMV of collateral = $100K, Borrower can likely recover $50K in damages from Lender 3

4 Rationale for 9 617: foreclosure sale buyer should have the benefit of finality Without finality, 3d parties won t be willing to buy at foreclosure sales (or they will discount their bids to account for the risk of collateral attack on the sale) Thus, if we want foreclosure sales to bring prices that reflect the collateral s real value, we need to provide finality Baskurt v. Beal 1991: The Moores sold 2 parcels to McAlpine, taking a deed of trust covering both parcels, which secured the repayment of 2 separate notes Note A: $95K, payable to Mr. Moore (for Parcel 1) Note B: $135K, payable to Mrs. Moore (for Parcel 2) McAlpine then deeded the parcels to Beal 1994: Note A gets repaid in full But, DOT covered both parcels and secured both notes So DOT remained valid to secure still unpaid Note B 1999: Beal defaulted on Note B Balance due on Note B = $26,780 Baskurt (successor to mortgagee, Moore) conducted a nonjudicial foreclosure sale Baskurt bought both parcels for sale price = $26,780 (although their FMV $225,000) 2000: Can Beal set aside the sale based on low sale price (only 11.9% of FMV)? Low Price as Basis for Collateral Attack Restatement 8.3: sale may be set aside where sale price is grossly inadequate (less than 20% of FMV), even if there was no procedural defect in the sale [p. 653] Holt/HUD/Article 9 [p. 652]: if sale is regularly conducted and is not collusive, sale can t be set aside due to low price 4

5 Restatement rationale: foreclosure process results in auction sales w/ minimal advertising, and thus tends systematically to bring low prices Lenders may exploit this: (1) Lender buys land at foreclosure at bargain price (2) Lender then flips the land (re sells it at a profit) (3) In some cases, lender may get deficiency vs. borrower based on unpaid balance after low sale price UCC 9 615(f) [Calculation of surplus or deficiency in disposition to person related to secured party.] The surplus or deficiency following a disposition is calculated based on the amount of proceeds that would have been realized in a disposition complying with this part to a transferee other than the secured party, a person related to the secured party, or a secondary obligor if: (1) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor; and (2) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought. Low Price UCC 9 615(f) Regulates potential for secured creditor abuse (in Article 9 context) by preventing creditor from acquiring property by low ball bid and getting an inflated deficiency Real estate finance law provides no comparable statutory protection for the mortgagor Most courts won t set aside sale based only on a low price But, low price may cause court to give a hard look to a sale to see if there were other defects in sale Courts are more willing to set aside sale if there s low price + some defect in sale process Potential problems in Baskurt? 5

6 Baskurt Sale in Bulk/by Parcel Deed of trust covered Parcels 1 and 2 Christie (Trustee) sold both parcels together, even though a sale of either parcel, by itself, would have satisfied the remaining balance of Note B! Court: by not selling the parcels separately, the Trustee failed in its duty to act reasonably to protect [mortgagor s] interests Is this an appropriate burden to put on a foreclosing lender or trustee? Note: this problem will rarely arise with improved land, but may arise w/unimproved land How can lender or trustee respond to and/or carry out this duty? Lender/trustee might structure the sale so as to offer the land both ways, e.g., a provisional sale both in whole and by parcel [Fannie 22, p. 1256] If sale of Parcel A is enough to satisfy debt, that sale becomes final, other sales are cancelled If not, then sale occurs for Parcel B Then, Parcels A and B are sold together; the approach (together or by parcel) that brings highest total price = winning bid(s) Chilled Bidding/Collusion Baskurt (the foreclosing lender) and Rosenthal (a possible bidder) agreed to a partnership just prior to the sale As foreclosing mortgagee, Baskurt s agreement with Rosenthal chilled competitive bidding This could ve resulted in a lower sale price 6

7 Suppose that Myers and Rosenthal (two third party bidders) had reached the same agreement prior to the sale (but the lender/trustee were not involved) Would the mortgagor have been able to use this collusion to set aside the sale? 7