Opinion ID: 1476585
Heading Depth: 2
Heading Rank: 3

Heading: The Mortgage Foreclosure Process' Protection of the Mortgagor's Interest

Text: The process of selling the whole property at foreclosure dates back to the 1785 statute and the interpretation of it by our 1835 Boteler case, supra. Our interpretation in that case recognized that the statute was designed to protect mortgagors. Boteler recognized that although the statute appeared to require that only that portion of mortgaged property sufficient to pay off the mortgage debt was to be sold, it was impractical to do so because there was no way to determine in advance how much property should be offered for sale because there was no way to predict what the bids for the property would be. Thus, the Boteler Court provided as an alternative that the whole property be sold with surplus proceeds going to the mortgagor. That early statute recognized that the mortgagor was to retain the land not needed to satisfy the debt. It was intended to insure that the mortgagor only lost so much of the land as was necessary to pay the debt. When that process proved impractical, the Court devised another method of insuring that the mortgagor retained the value of land not needed to be sold to pay off the mortgage debt, by permitting the sale of all of the land but returning to the mortgagor any sums received above the costs of sale and the mortgage debt as representing the value of the land above the amount of the mortgage debt. Thus, clearly, from very early days, the practice of mortgage foreclosures was designed to (1) pay the expenses of sale, (2) pay off the mortgage debt, (3) return to the mortgagor the surplus as representing the true remaining value of the property sold. (Later, of course, other holders of liens, judgments, etc. were inserted into the priorities for payment out of surplus funds.) Were the original intents of the 1785 statute to have been accepted and were sales held as that early statute indicated, there would never have been any surpluses or deficiencies. No claims by defaulting purchasers at a first sale against excess proceeds at a resale could have been possible. There would not be any. Thus, as we have stated, the underlying origins of the proper priorities to be applied to sums received at any foreclosure sale, be it an initial sale or a resale, have been for over two hundred years to primarily protect the interests of mortgagors and mortgagees. Absent statutory modifications, and we know of none relating to interests of defaulting purchasers in the excess proceeds at resale (and the parties have not directed our attention to any such statute), defaulting purchasers have no claim against excess proceeds at the resale, albeit they remain liable for shortages. We have undertaken an extensive review of the development of mortgage foreclosure sales and our examination makes clear that preservation and protection of the mortgagor's and the mortgagee's interests have emerged over historical time as the paramount considerations. As the common-law governing lending practices gradually evolved from the draconian strict foreclosure to the more modern approach that provides the defaulting debtor, not only a right to redeem the property by payment of the outstanding lien instrument debt even after default, but also the ability to derive some benefit from the equity he may have accrued in his property, even in the event of a default, courts have sought outcomes that are equitable and fair both to the mortgagee and to the mortgagor and other creditors. That is, the mortgage foreclosure process, in its present form, seeks to assure that if any value remains in the property after the creditor (or creditors) has received full payment, it goes to the mortgage debtor. The antithesis of fairness was the early 18th century (and before) practice of strict mortgages and strict foreclosure, which deprived a defaulting mortgagor of the entire value of the property even where he had defaulted on only a very small portion of the lien instrument, and practice of ejectment actions, in which mortgagees who, at that time, were the title-holders of the pledged propertyendeavored to clear the title of the conditions that might allow the debtor to retake the property following a default. Enforcement by courts of these conveyances with, at times severe, conditions seemed to overlook, as stated in our earlier discussion of Venable's The Law of Real Property, the fact that the real nature and intent of the transaction was that the land was to be held as a security for a debt. Id. at 177. Over time, courts of equity began to ascertain that mortgagors' use of their equity of redemption was an expression of the different interests that the mortgagor and the mortgagee held in the property. In discussing the parties' interests in Washington Fire Ins. Co. v. Kelly, 32 Md. at 440, we stated: Courts of Equity, though a mortgage be forfeited, and the estate absolutely vested in the mortgagee, at common law, yet they will allow the mortgagor, at any reasonable time, to redeem his estate. So long as the estate can be shown to have been treated as a pledge, there is a recognition of the mortgagor's title. Thus, our Court recognized that while the mortgage is intended to secure the debt, both the interests of debtor and of creditor command certain protections, even in the event of default. In a mortgage context, the property's primary purpose is to secure the repayment of a debt. Should the mortgagor fail, once a period of time has elapsed following his default, to repay the entirety of the remaining debt so as to retain and/or recover the property, statutes enable the mortgagee to petition the court for a bill of foreclosure or to proceed to foreclose under the supervision, generally, of the court, while also protecting the mortgagor from complete divestiture of his interest. As indicated, we discussed in Boteler and Belt v. Brookes, supra, the 1785 statute which apparently was Maryland's first statute requiring the sale of the mortgaged premises in default situations and establishing the role of the equity courts ( i.e. the chancellor) in ratifying the foreclosure sale and assuring proper priority of payment of the money raised by the sale through audits. Boteler noted the Legislature's direction that a sale should occur of only that portion of the property sufficient to satisfy the outstanding mortgage debt, but the Boteler court also lamented that there was no formula to assure that a designated portion of the property would produce, with certainty, a specific sum of money. 7 G. & J. at 154. Thus, the trustee's duty to satisfy the debt at the foreclosure sale might result in a surplus of funds. Accordingly, this 1785 law, as interpreted by the Boteler court, provided that the sale proceeds were to be applied first to the costs of sale, then to the mortgage debt and to interest owed to the mortgagee. If a surplus remained, however, the mortgagor was entitled to receive it, his lien instrument debt having been discharged. Apparently, because the price bid at the sale reflected the true value of the property, he was entitled, after payment of the mortgage debt and costs, to receive the residual value as reflecting the remaining value of his land. Although the foreclosure sale cuts off the mortgagor's equitable right of redemption, his legal interest in his property does not cease until the foreclosure sale is complete and a conveyance has occurred. We stated in Union Trust, supra, that the foreclosure sale purchaser acquires the equitable interest in the land commensurate with that conveyed by the mortgage deed, and he was entitled to the legal title upon the final ratification of the sale by the court and the payment of the purchase money. 153 Md. at 55, 137 A. at 512. Full vesting of his interest, therefore, is subject to his obligation to pay which, in turn, is subject to the right to enforce the payment of any of the purchase money by a resale at the risk of the buyer. Id. at 55-56, 137 A. at 512. Thus, when the purchaser defaults, whether due to his/her unwillingness or inability to consummate the sale, the foreclosure process is interrupted, the sale incomplete, and the defaulting purchaser's title remains inchoate. Therefore, a resale is needed to pay off the same indebtedness for the payment of which the property was sold in the first instance, and the money realized by it is always applied precisely as would have been applied the money bid at the original sale had that money been paid by the first purchaser.  Hoboken, 84 Md. at 330, 35 A. at 890 (emphasis added). The trustees' receipt from the court of a decree for resale divests the defaulting purchaser of his equitable title as the substantial owner of the land. Merryman, 250 Md. at 8, 241 A.2d at 563. As indicated supra, the order of resale effectively revokes the ratification of the first sale. This is not to say that the decree necessarily cuts off the defaulting purchaser's interest in the outcome of the resale. He may have an interest because he is responsible for shortages. He may retain the right to except to the way the resale was held, i.e., advertisements, etc., but he has no right to claim excess funds. Our cases have recognized that a defaulting purchaser's interest at the resale is in addition to the undiminished interest of other parties (mortgagor, mortgagee, junior lien holders, etc.) that existed at the foreclosure sale as well as at subsequent sales. We stated in Lannay v. Wilson, 30 Md. 536, 550 (1869), a case involving a judicial sale by a trustee, that the dry legal title, and the right of possession often become completely severed, at least for a time,the legal title remaining in some of the parties to the cause, while the equitable estate and right to possession become vested in the purchaser. See also Dalrymple v. Taneyhill , Mizen v. Thomas, and McCann v. McGinnis, supra . It is the defaulting purchaser's exposure, on the other hand, that somewhat differs from that of the other parties. The trustee (or assignee) at the foreclosure sale and at the resale, acts on behalf of all parties and seeks to enforce the payment of the purchase money; and one of the most effective ways to accomplish that is a resale of the property at the risk of the purchaser. Aukam, 94 Md. at 427, 51 A. at 95. We have defined the risk to the defaulting purchaser as his liability, stemming from his failure to perform his obligations arising out of the initial sale, that if there be a shortage between the price he bid at the foreclosure sale and the price that the property fetches at the resale he will be responsible to the other parties, i.e. the mortgagee, the mortgagor or trustees, if applicable. Since at least 1785, the Court, then, has remained cognizant of the need to protect the interests of the mortgagor, who has not been relieved of his liability for a deficiency on the mortgage at any time during the sale and resale in the foreclosure process, as well as the interest of the mortgagee who has invoked the power of the court in pursuit of satisfaction of the debt owed to him. In some cases, however, proceeds in excess of the price at the initial sale and also in excess of that needed to satisfy the mortgage debt, other liens, costs of sale and commissions may be realized at the resale. In Andrews, supra, our 1830 case involving a judicial sale arising from an estate matter, this Court, even in an estate judicial sale, left open the question of how excess proceeds from a second sale might be distributed pending notification of the decedent's creditors. We noted in our earlier discussion that the Court's reservation, in Andrews, precludes the conclusion that the defaulting purchaser of the estate property was automatically entitled to receive the resale's excess funds. Had that been the case, notice to the creditors would have been unnecessary. On revisiting this issue in Mealey v. Page, supra , another judicial sale under the context of an estate, that Court determined that, unlike a mortgage or deed of sale setting, there had been no actual conveyance of property. Nevertheless, the Mealey court ruled that the defaulting purchaser would have last priority in entitlement to the balance of proceeds from a resale. It was not incumbent upon the vendor in Mealey, a case involving distribution of estate assets, to be concerned with protecting the varying interests of the debtor, the creditor and the defaulting purchaser, as the Court in the instant case must be. Our holding in Brundige v. Morrison, supra , likewise an estate case, echoed our Mealey holding. Accordingly, some of our early encounters with the issue of a defaulting purchaser's entitlement to excess funds arose from judicial sales in estate matters and did not involve the protection of interests of mortgaging parties that are present in a lien instrument, such as a mortgage or as a deed of trust, as in the instant case. This brings us, again, to the 1902 case, Aukam v. Zantzinger, supra , on which the party petitioner primarily bases his claim for entitlement to the surplus funds from the resale. This Court only held in Aukam that a defaulting purchaser was entitled to file exceptions to the second sale prior to its ratification because of his potential liability for the shortage if the second sale resulted in a lower price than the initial sale. Our Aukam dicta included the statement on which petitioner relies in support of the supposed common-law rule that a defaulting purchaser is `entitled to any excess in the proceeds of sale at the resale.' 94 Md. at 427, 51 A. at 95. In Aukam we cited to Miller's Eq. Proc. 620 (sec.526) and its within cases, which included Mealey, Early and Brundige none of which involved a mortgage or deed of trust foreclosure sale and subsequent resale, i.e., the facts of the case sub judice. Notably, we decided State v. Second Nat. Bank of Hoboken, supra, in 1896, six years prior to Aukam, but at least fifteen years after the last estate case discussed in Aukam. Although Hoboken's holding, that a first sale, unconsummated by the original purchaser, is rendered a nullity by the resale, and therefore Baltimore City could not collect taxes on both sales, was available to the Aukam court, it apparently was not utilized. Thus, the Aukam court relied upon inappropriate authority. Soon thereafter in, Werner v. Clark , this Court borrowed Hoboken's articulation of the correct procedures in holding that `[t]he resale is simply an execution of the [original] decree for a sale.' Werner, 108 Md. at 635, 71 A. at 309 (alterations added) (citing Hoboken, 84 Md. at 330, 35 A. at 890). Again, the court's focus centered on its primary obligation to see the sale of the property through to completion and to preserve the interests of the lien instrument parties. Not until 1929 in Mizen v. Thomas, supra , did we again examine the procedures of a mortgage foreclosure sale, and specifically the deficiencies in respect to the original mortgage debt. Our holding in Mizen reflects this Court's recognition of the lien parties' continuing paramount interests throughout the sale and resale. Accordingly, we reiterate our holding that there is no common-law rule that a defaulting purchaser from a first sale is entitled to excess proceeds realized at a resale.