• Better Late Than Never: Court's Delay in Ratifying Foreclosure Sale is Not Grounds for Abating Interest
  • March 10, 2017 | Author: Seth M. Rotenberg
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • A version of this article was published in The Daily Record on October 5, 2016.

    In AMT Homes, LLC v. Fishman, 228 Md. App. 302, 137 A.3d 1056 (2016), the Court of Special Appeals (CSA) held that the circuit court’s delay, resulting from judicial backlog, in ratifying a foreclosure sale did not constitute grounds for reducing the interest that the foreclosure purchaser was obligated to pay.

    Background

    In a typical foreclosure auction sale, the successful bidder pays a deposit at the time of the sale, and then pays interest on the balance of the purchase price from the date of sale to the date of settlement. After the sale, the trustee files a Report of Sale with the circuit court and the court clerk’s office issues a Notice of Sale, which states that the reported sale will be ratified by the court unless cause to the contrary is shown (by the filing of exceptions to the sale) within 30 days after the date of the Notice of Sale. After the court ratifies the sale, settlement takes place, at which time the purchaser pays the balance of the purchase price with accrued interest, and the property is conveyed to the purchaser.

    AMT Facts

    The AMT case concerned a property in Prince George’s County, which AMT purchased at a foreclosure auction on July 30, 2014. Its bid was $108,000, and it paid a deposit of $10,000. The trustees filed the Report of Sale with the Circuit Court for Prince George’s County on August 1, 2014, and the circuit court issued the Notice of Sale on August 11, 2014.

    The Notice of Sale stated that the sale would be ratified unless anyone showed cause prior to September 11, 2014 why it should not be ratified. No exceptions were filed, but as a result of the circuit court’s backlog, the court did not enter the order of ratification until January 29, 2015, nearly six months following the foreclosure sale. AMT filed a motion in which it asked the court to abate interest on the unpaid purchase price for the period in excess of 60 days following the sale, arguing that the relevant Maryland Rules require that the circuit court ratify a sale within 60 days. The circuit court denied the motion, holding that the Rules did not create a strict time limit, but only required that the sale be ratified within a reasonable period of time. The court also held that where the delay in ratification was not caused by either party, but rather by judicial backlog, interest should not be abated. AMT appealed to the CSA.

    Background

    In a typical foreclosure auction sale, the successful bidder pays a deposit at the time of the sale, and then pays interest on the balance of the purchase price from the date of sale to the date of settlement. After the sale, the trustee files a Report of Sale with the circuit court and the court clerk’s office issues a Notice of Sale, which states that the reported sale will be ratified by the court unless cause to the contrary is shown (by the filing of exceptions to the sale) within 30 days after the date of the Notice of Sale. After the court ratifies the sale, settlement takes place, at which time the purchaser pays the balance of the purchase price with accrued interest, and the property is conveyed to the purchaser.

    AMT Facts

    The AMT case concerned a property in Prince George’s County, which AMT purchased at a foreclosure auction on July 30, 2014. Its bid was $108,000, and it paid a deposit of $10,000. The trustees filed the Report of Sale with the Circuit Court for Prince George’s County on August 1, 2014, and the circuit court issued the Notice of Sale on August 11, 2014.

    The Notice of Sale stated that the sale would be ratified unless anyone showed cause prior to September 11, 2014 why it should not be ratified. No exceptions were filed, but as a result of the circuit court’s backlog, the court did not enter the order of ratification until January 29, 2015, nearly six months following the foreclosure sale. AMT filed a motion in which it asked the court to abate interest on the unpaid purchase price for the period in excess of 60 days following the sale, arguing that the relevant Maryland Rules require that the circuit court ratify a sale within 60 days. The circuit court denied the motion, holding that the Rules did not create a strict time limit, but only required that the sale be ratified within a reasonable period of time. The court also held that where the delay in ratification was not caused by either party, but rather by judicial backlog, interest should not be abated. AMT appealed to the CSA.

    Risk of Delay is Properly Allocated to Purchaser

    The CSA began by noting that a foreclosure purchaser acquires equitable title to the property at the time of the sale with the knowledge that the sale is subject to judicial ratification. Therefore, “the purchaser should bear the risk associated with judicial review” (emphasis in original). Experienced foreclosure purchasers (and the CSA noted that AMT was one) take into account the obligation to pay interest on the unpaid purchase price in computing their bid amount.

    Additionally, interest on the underlying debt continues to accrue during the period prior to ratification of the sale, and the interest on the unpaid purchase price is a component of the sale proceeds applied to the underlying debt. Therefore, the CSA reasoned, abating the purchaser’s interest obligation would not make the obligation disappear, but rather would simply shift the economic loss of the interest to either the borrower or, if the borrower is unable to pay, to the lender.

    Such a shifting of the interest obligation in a delayed foreclosure ratification, the CSA noted, has only been recognized where the delay resulted from neglect by the trustee, appellate review of lower court rulings, or actions of third parties outside of the purchaser’s control. AMT argued that the court’s delay of ratification, being out of the purchaser’s control, fell into the third category. The CSA noted, however, that notwithstanding the general nature of this category, it has only been applied in circumstances where the borrower caused the delay. AMT did not cite any authority to the contrary. Therefore, the circuit court’s delay in ratifying the sale would not form the basis of an interest abatement claim under this theory.

    The CSA also declined to interpret the Maryland Rules as imposing a 60-day time limit for ratification of the sale, reasoning that doing so would impose financial ramifications on another party (i.e., the borrower or the lender), which also has no control over the timeliness of ratification.

    Therefore, the CSA ultimately held that AMT is not entitled to abatement of interest “simply because the court exercised its oversight role over a longer-than-ideal period of time.” 

    Practical Considerations

    The time in which the circuit court generally enters orders of ratification in foreclosures will vary by county, depending on the procedures followed by the clerks’ offices, the number of judges available to sign orders, and similar factors. An attorney representing a prospective foreclosure purchaser should get a sense from the circuit court or from local practitioners of the general timing of the court in entering orders of ratification, and factor into the bidding strategy the likely interest accrual.

    Alternatively, a prospective purchaser might consider paying the balance of the purchase price to the trustee right after the time for filing exceptions to the sale expires, assuming no exceptions have been filed. Although the purchaser would not receive a deed for the property until the sale is actually ratified, there would be no “unpaid purchase price” on which interest would accrue. Of course, this would not be possible where the purchaser is obtaining purchase money financing, but in a situation where the purchaser has the funds, it could be a device to stop the interest accrual on the purchase price. The purchaser would need to evaluate the risks associated with payment of the funds to the trustee, including the nature and titling of the account in which the funds will be held.