Fairness in foreclosure sales.

In early 1993, Getting Down to Cases described a case where a mistake which was made in a foreclosure sale was later rectified by the court. The discussion of that case, Crossland Mortgage Corp. v. Frankel, reported in the New York Law Journal on October 1, 1992, dealt with an error which occurred at the foreclosure sale resulting from the bank's representative failing to make a bid in accordance to his instructions.

What happened was that Mr. Buchman, who was simply an observer at the foreclosure sale, realized that when the bank's representative made a bid of only $34,000 where the mortgage being foreclosed was approximately $200,000, he immediately made a higher bid of $55,000. The bank's representative, who actually received instructions to start his bidding at $160,000, made a mistake by bidding the much lower amount and not raising his bid.

Since Mr. Buchman was unprepared to make a bid, he asked the referee for time to go to his bank to secure a certified check for the downpayment deposit. The referee granted him that time. In the interim the bank's representative checked with his office and realized that he had made a mistake with his bidding and advised the referee to that effect. He requested that the referee re-open the sale, which the referee agreed to do. The property was then struck down to the bank at its $160,000 bid.

When Mr. Buchman sought to have the court declare him to be the successful bidder, the court ultimately ruled that he was not entitled to the property. The court stated that although the sale at foreclosure will not ordinarily be disturbed where it was fairly made and free from fraud, a judicial sale may be set aside when someone obtained an undue advantage or where a party was unfairly dealt with. The court also noted that a judicial foreclosure sale may also be set aside if there was an excusable mistake, particularly if such mistake caused the property to bring a much lower price that it otherwise would have. While a mistake by itself would not be grounds to set aside a foreclosure sale, if the mistake caused an inadequacy of price, a foreclosure sale might be set aside.

In the Crossland case, the court ruled that the price of $55,000 was "inadequate" compared to the value of the property, which was conceded by all parties to be $200,000. This price inadequacy, coupled with the mistake that was made by the lender's representative, was the basis for the court's denying the property to Buchman.

The issue of dealing with a mistake in a foreclosure sale is revisited by Charles F. Curry Co. v. Yodah Group Inc., (September 14, 1994), involving property in Rochester, NY. A judgment of foreclosure and sale was entered in the amount of $34,000. A referee was appointed by the court to sell the property. The foreclosure sale took place on February 25, 1994.

At the sale, the referee opened the bidding and Charles F. Curry Co. bid $100. There were no other bids and the property was struck down for that amount. However, the referee expressed reservations about the absence of the lender at the sale and requested that the bidder wait until the referee contacted the lender. The referee was advised by the lender's attorneys that the defaulted loan had been reinstated and that the foreclosure sale had been canceled. A message to that effect was left at the referee's office.

The referee then determined that because his authority to complete the foreclosure sale was in question, he refused to accept the bidder's deposit and declined to execute a memorandum of sale. The bidder stated that he regarded the sale as valid and complete. A lawsuit was then started by the mortgagee to declare the foreclosure sale to be invalid.

Justice Thomas A. Stander, of the Supreme Court of Monroe County, first considered the question as to whether or not the foreclosure sale was valid. He stated that while the sale was properly scheduled in accordance with a judgment of foreclosure and sale, with proper publication by the referee, and with proper procedure at the sale, a referee has certain flexibility to meet unforseen circumstances that might otherwise jeopardize the success of a foreclosure sale. A "sale" of the property does not occur until the officer conducting the sale executes a referee's deed to the purchaser.

Under the circumstances involved in this case, Justice Stander ruled that a valid foreclosure sale did not take place.

The court then examined whether the foreclosure sale, if it had been determined to be valid, should be vacated and set aside anyway, on other grounds.

The court noted that if, in addition to a mere disparity in price, there is a lack of equity or fairness, such as fraud or exploitation or overreaching, a court may grant relief.

Mere inadequacy of price does not provide sufficient grounds for vacating a foreclosure sale. Only where the price is so low as to shock the conscience of the court will the sale be vacated. In New York State, foreclosure sales at prices below 10 percent of the value of the property have consistently been held to be unconscionably low.

Justice Stander then reviewed the question as to whether the foreclosure sale price of $100 is so low as to shock the conscience of the court. The judgment of foreclosure was for $34,000.

Evidence was submitted however of fire damage to the property prior to the sale and that the property was in the process of renovation.

Since there was no proof submitted as to the precise value of the property on the date of the foreclosure sale, it could not be conclusively determined that the bid of $100 was less than 10 percent of the value of the property. However, based upon other evidence before the court, Justice Stander concluded that there was an enormous disparity between the bid amount and the value of the property.

In this case, because the property was sold for a shockingly inadequate price, coupled with the mistake made by the referee and the mortgagee as to the cancellation of the sale, equity and fairness demands that the foreclosure sale be vacated and set aside.

Thus, the judge ruled that no valid foreclosure sale took place, since the referee's deed was not executed, nor did the referee accept the deposit from the bidder. The court further ruled that even if a valid foreclosure sale did take place, it would have been set aside because there was a shocking disparity between the price and the property's value, coupled with an honest mistake made by the referee, as well as the mortgagee, in holding the sale in the first place.

While the court has inherent equitable power over a judicial foreclosure sale, that power is exercised sparingly and with great caution. However, a court may set aside its own judicial sale in order to relieve an oppressive or unfair result.

(Edward L. Schiff is senior partner in the law firm of Schiff, Turek, Kirschenbaum, O'Connell, LLP of New York City.)