Pitfalls abound in foreclosure sale chaos.
A recent case heard in Rockland County Supreme Court, describes the pitfalls that can take place in the hurried atmosphere of the foreclosure sale.
In March 1992, Crossland Mortgage Corp. obtained a judgment in foreclosure of a mortgage of approximately $200,000. The judgment directed the sale of the property which was single-family home, by the referee designated for that purpose.
At the public auction, a representative of the bank at the bidding had been given erroneous information. Instead of starting the bidding at $160,000 with instructions to proceed to the amount of the mortgage, he started at $34,000. He was outbid by Mr. Buchman whose daughter was the owner of the property. Mr. Buchman who was there as an observer started to bid when he saw the low bid of the bank's representative. Mr. Buchman made the highest bid of $55,000. Since he was at the bidding simply as an observer, he was unprepared to bid and as a consequence did not have the required certified check of the bid amount. He requested a short time to secure the certified check and the request was granted to him by the referee.
During the short time that Mr. Buchman took to secure the certified check, the bank's representative telephoned the bank's counsel to confirm the bidding instructions and, for the first time, learned of the error in the bidding. He immediately advised the referee of the mistake and requested that the referee reopen the sale. The referee agreed and refused the check of Mr. Buchman and reopened the sale. The property was struck down to the bank at its $160,000 bid.
Mr. Buchman then moved the court for a stay to prevent the delivery of the deed to the bank. The judge ruled that while the referee properly exercised discretion in permitting a certified check to be secured by the highest bidder, the referee was without power to reopen the bidding, after having declared Mr. Buchman to be the successful bidder. The court directed the referee to execute a Referee's Deed but granted the right to the bank to again apply to the court to set aside the referee's sale.
The bank then immediately moved the court to set aside the sale which had just taken place on the grounds that the sale was as a result of a mistake and inadequacy of price.
This complicated legal procedure was necessary because that while the referee was required to deliver a deed after the property was struck down at the auction, the question as to whether or not the sale itself was a result of a mistake or inadequacy of price could then be addressed by the court. Supreme Court Justice Joan Lefkowitz, in a detailed decision Crossland Mortgage Corp. vs. Frankel, (NYLJ Oct. 21, 1992, pg. 27, col. 1), reviewed the extensive case law involved in determining when a court has the discretion to set aside a judicial sale upon the showing of fraud, mistake or other act that casts an aura of suspicion over the sale.
The court stated that a sale made in a mortgage foreclosure will not as a rule be disturbed where it was fairly made and is free from fraud. Judicial sales may be set aside when someone has obtained an undo advantage or where there was overreaching or where one party was unfairly dealt with. The court also noted that judicial foreclosure sales may also be set aside if there was an excusable mistake particularly if such mistake caused the property to bring a much lower price than it otherwise would have. While a mistake in and of 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.
The judge then discussed the definition of "price inadequacy |O He stated that it was clear that the bid price was $55,000 and that the conceded market value of the property was $200,000 and therefore the bid price was grossly inadequate. That in itself is not determinative since it is common knowledge that property sold by judicial sale results in a price much lower than what could be obtained in a arms-length sale of the property. If there is no irregularity in the judicial sale and the price is merely inadequate, the sale will not be set aside. Courts are aware of the inherent inequality of bargaining power in the instance of judicial sales. It is only when the sale price is unconscionably low or where the price is so grossly inadequate so as to shock the conscience, may the sale be set aside.
The judge then traced the history of decisions throughout the country dealing with inadequacy of price. She described cases in which the courts did not consider 25 percent of market value to be inadequate so as to set aside the foreclosure sale although prices below 10 percent of market value have been consistently held to be unconscionably low. There is no definitive rule for sales prices ranging between 10 percent and 50 percent of value nor is a court able to create a categorical percentage figure between 10 percent and 50 percent below which all sales prices are unconscionably inadequate. Each judicial sale must be governed by its own peculiar facts, since public policy requires that the power to nullify judicial sales be exercised with great caution. Creditors seeking to enforce liens should not easily be subjected to the expense and delay involved in the resale of their security, nor should a successful bidder who acts in good faith be deprived of the bid simply because others have failed to bid.
The judicial power justifying vacating sales for gross inadequacy in price is for the protection of the mortgagor property owner. After all, a mortgagee usually has the right to recover a deftciency judgment against the mortgagor if the full mortgage amount was not secured at the sale. In the state of New York, a deficiency may be secured against the mortgagor to the extent that the bidding price was less than the reasonable market value of the property.
In this case, the bid price amounted to 27.5 percent of the undisputed market value of $200,000. The court ruled that as a matter of law, 27.5 percent of market value is not necessarily grossly inadequate, unconscionably low or so disproportionate so as to shock the conscience of the court. However, the judge ruled that the combination of an obvious price inadequacy combined with the bank's initial mistake in the bidding process is sufficient to void the sale.
Under the circumstances since the market value of the property is $200,000 and the amount of the judgment of foreclosure is $208,993.29, the amount of the deficiency recoverable by the bank would be only $8,993.29 even though the bank would have received only $55,000.00 from the auction. The bank therefore would see approximately $145,000 disappear by reason of its failure to bid on the property up to the judgment amount. This tact must also be taken into consideration when the court weights the prudence of exercising its equitable powers in vacating the sale.
The bank's mistake was an honest one through erroneous instructions to its representative at the auction. The mistake was immediately corrected and, coupled with a seriously depressed bid price should not deprive the bank of the right to reopen the sale for new bidding. The court ordered a new sale to take place.
Judicial sales in foreclosure require strict adherence to the statutes involved. However, even when there is adherence, a court will occasionally set aside a judicial sale if a mistake in the procedure results in an unconscionable loss to one of the parties.
Edward L. Schiff is senior partner in the law firm of Schiff, Turek, Kirschenbaum of New York City.
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|Title Annotation:||includes case studies of real estate foreclosures|
|Publication:||Real Estate Weekly|
|Date:||Dec 16, 1992|
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