• Foreclosures: Bargain Purchase Stands
  • May 15, 2003 | Author: Harris Ominsky
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • A recent Pennsylvania Superior court decision upheld a sheriff's sale even when the buyer obtains a bargain price as low as 57% of the estimated fair market value of the property. Blue Ball National Bank v. Balmer, PICS Case No. 02-1647 (Pa. Super. Oct 25, 2002).

    "Grossly Inadequate"

    In that case President Judge Del Sole held that in order to upset a sheriff's sale where no misconduct occurs in the bidding process, the price would have to be "grossly inadequate." In the Blue Ball Case, after the borrower defaulted on several promissory notes and mortgages covering four tracts of land, the bank obtained a judgment in the amount of $1,037,000 and foreclosed. At the sheriff's sale the property was sold to a third party for almost $1.25 million but the borrower tried to set aside the sheriff's sale, asserting that the bid was grossly inadequate, as evidenced by the fact that she had received an offer of $1.5 million for just one of the four tracts.

    As frequently happens, the parties' appraisers disagreed about the value of the properties. The borrower's expert appraised the four tracts at $2,200,000, but the trial court accepted that the buyers' appraisal of $1,643,000 and calculated that the purchase price represented 76% of this accepted appraisal. According to the trial court and the Superior Court this percentage could not be considered grossly inadequate or "shocking to the conscience" of the court. The trial court further concluded that even if it accepted the $2,200,000 appraisal, the sheriff's sale price would represent 57% of the fair market value and even that would not be "grossly inadequate." It is not clear what the court would have decided about 50%, or even 20%.

    Last Minute Offers

    The Borrower had also argued that the bank had unfairly refused to postpone the sheriff's sale even though she had delivered to the bank an agreement of sale for $1,500,000 on just one of the tracts. That agreement was given to the bank one day before the sale and it was an agreement to the purchaser's sister. Obviously, those two factors did not give the bank warm feelings about the bona fides of the buyer's conduct.

    In addition, on the date of the sale an investor offered the bank a non-refundable payment of $100,000 in return for the postponement of the sale. The investor sought 30 days to put together a financing package to purchase the bank's lien positions and another 30 days after that to close on the properties. The bank turned down that offer but counter-offered with a request for a non-refundable payment of $200,000 and settlement within 30 days. The investor did not accept the counter-offer and the sale proceeded, as scheduled.

    To those of us who have been involved in sheriff's sales, it appears that the bank must have had a busy few days dealing with these last-minute offers. In any event the Court found that the bank had no obligation to delay the sheriff's sale under those circumstances. The Superior Court supported the conclusion of the trial court that the bank was reasonable in refusing to postpone the sale for these reasons.

    On the issue of the inadequate price the court stated: "These sales are advertised and open to the public with the sale going to the highest bidder. The high bidder, however, takes its purchase along with inherent risks, for the future value of property is not certain. In this case, although the Barleys may turn a profit from the purchase, their action is not without risk, and the price they obtain upon resale does not alone control. However even taking into account the resale price, the price bid by the Barleys at the sheriff's sale was approximately 72%-75% of the values submitted. The court's decision on these facts was not an abuse of discretion."

    Issues

    Foreclosing lenders and buyers at sheriffs' sales in Pennsylvania will be comforted by this superior court decision which makes a strong statement supporting the integrity of the successful bid at a properly run sheriff's sale. Buyers at such sales frequently must commit themselves to loans, or other financial arrangements in order to bid at the sale and put up the necessary deposit to bind the sale. In addition, they often incur appraisal, inspection and legal fees in connection with the purchase. If sales could be set aside for mere inadequacy of price, prospective buyers at these sales, many of which are looking for bargain prices, would be turned off and in general, the competition to purchase foreclosed properties would be eroded. That could have a chilling effect on the bidding.

    From the borrowers' perspective, this kind of decision does not generally strip them of their rights. First of all, borrowers generally know months before the foreclosure sale about their default and the pending sale. Usually, there is little reason to wait until the last minute to try to stop the sale, particularly if, as alleged in this case, the property is worth substantially more than the amount owed to the lender. In addition, what is frequently overlooked in these cases is that the borrowers themselves, or through a friend or agent, can participate in bidding up the property to its true value at the sheriffs' sale. In this case, if the property were truly worth $2,200,000, why couldn't the borrower have bid up to that at the sale, or at least up to the $1,500,000 that had been offered by her sister?

    Even if the borrower did not have adequate financial backing to close with the sheriff on the sale, what would happen then? In some jurisdictions the custom is that the sale would go to the next highest bidder. In that context it would be difficult for a bidder to "steal" the property, and by that tactic a defaulted borrower can single-handedly drive up the price of the property to a more realistic figure. However, anyone planning to engage in such a strategy would have to analyze carefully the moral and legal implications of that type of brinksmanship.