Opinion ID: 196026
Heading Depth: 1
Heading Rank: 1

Heading: Breach of Common Law Duty of Mortgagee to Mortgagor

Text: 4 Massachusetts law regarding a mortgagee's responsibility to a mortgagor in the context of a foreclosure sale is as follows: 5 The law governing a mortgagee's responsibility to the mortgagor in the exercise of a power of sale is relatively straightforward. The mortgagee must act in good faith and must use reasonable diligence to protect the interests of the mortgagor. The mortgagee's duty is more exacting when it becomes the buyer of the property. When a party who is intrusted with a power to sell attempts also to become the purchaser, he will be held to the strictest good faith and the utmost diligence for the protection of the rights of his principal. Consistent with these requirements, the mortgagee has a duty to obtain for the property as large a price as possible. 6 Williams v. Resolution GGF Oy., 417 Mass. 377, 382-83 (1994) (citations omitted). However, [t]he rule that 'mere inadequacy of [the foreclosure sale] price alone does not necessarily show bad faith or lack of due diligence' has been repeated or applied by this court in many cases. Seppala & Aho Construction Co. v. Peterson, 373 Mass. 316, 328 (1977). 7 The bankruptcy court made the following factual findings at the June 4, 1992, proceeding: 8 I find that the fair market value of the property at the time of the sale was $135,000.... I find that it was more likely than not-whether or not the sale was advertised as a two-family sale or as a sale with an in-law apartment or words of that affect ... that in June of '91, it was more likely than not that no qualified bidders would appear who would be prepared to bid more than seventy percent of fair market value. I find that the bank acted in accordance with custom that has developed over the last few years in bidding in at what it believed to be seventy percent of the fair market value.... I do find that there were code violations, and ... this property as a two-family, would have been in violation of the zoning bylaw ..., even though a certificate of occupancy had been issued. 9 In light of those findings, the court ruled that the advertisements placed by WCIS were not unreasonable. The appraiser, on whom the bank relied, was not acting unreasonably in determining that this was essentially a ... single-family home. 10 The burden is on appellants to prove that the bankruptcy court's factual findings are clearly erroneous. See In re Payeur, 22 B.R. 516, 519 (U.S. Bankruptcy Panel for the First Circuit, 1982). Under the clear error standard of review, reversal is warranted only if after reviewing the entire record, the reviewing court is left with a  'definite and firm conviction that a mistake has been committed.'  I.C.C. v. Holmes Transp., Inc., 983 F.2d 1122 (1st Cir. 1993) (citation omitted). 11 WCIS hired ATR Appraisal Consultants (ATR) to prepare two appraisals of the subject property, one in November, 1990 (prior to the first scheduled sale of the property, which was postponed when the Simones filed for bankruptcy) and one in May, 1991 (prior to the second scheduled sale of the property). The November appraisal noted in an addendum that the property consisted of a multi-level style dwelling with finished basement set up as an in-law apartment. ATR explained its decision to treat the dwelling as a single- family as follows: 12 As the basement apartment contained windows which did not appear to be code and as its present layout created functional problems, the subject was treated as a single family residence with finished basement. It should also be noted that current zoning requirements require an 8,000 sq. ft. lot for a two family dwelling. It is not known if a permit was filed in order to obtain a variance to allow for a two-family building. 13 The November report estimated the market value of the property to be $144,000. 14 ATR's May 1991 report, noting that market appears to be declining, estimated the property's market value to be $135,000. The second appraisal also treated the dwelling as a single-family given the condition of the unit revealed by the November, 1990 inspection. (ATR was unable to re-enter the apartment for inspection in May, 1991.) Both reports relied primarily upon the Sales Comparison Approach as yielding the most accurate estimate of the property's market value. ATR noted that [t]ypically the price paid at foreclosure is substantially less than the indicated Market Value of the foreclosed property. The May 1991 report estimated a foreclosure sale value of between $108,000 and $115,000. 15 The Simones contend that ATR's appraisals were unreasonable in failing to treat the dwelling as a two-family and in failing to apply the income approach to estimating its market value. That contention is undercut, however, by their own appraiser's report. Thomas Head, an appraiser hired by the Simones, testified at trial that his November, 1991 appraisal, which treated the dwelling as a two-family, estimated the market value of the property at that time to be $135,000. Therefore, whether treating the dwelling as a single-family with a finished basement or as a two-family, the appraisals arrived at the same estimated market value. In addition, ATR researched the value of the property as a two-family dwelling and concluded in a June 18, 1991 letter to WCIS that the estimated value would remain in the $135,000 to $145,000 range. 16 At trial, Kimberly Comeau (one of the two ATR appraisers who prepared the reports) testified that her visit to the Building Department for the City of Worcester had revealed that current zoning required a minimum lot size of 8,000 square feet for a two-family dwelling at the relevant location. Given that the subject lot contained only 7,960 square feet and that there was no evidence that a special permit had been granted, Ms. Comeau concluded that the use of the property as a two-family dwelling would violate the applicable zoning laws. The Simones argue that the Certificate of Occupancy issued to them by the Building Department in 1987, when they converted the basement to an apartment, demonstrates that the unit does not violate the zoning laws. 17 Even assuming, without deciding, that ATR erred in concluding that the use of the property as a two-family dwelling violated the zoning laws, that error would not invalidate its estimate of market value or its treatment of the dwelling as a single-family. As Ms. Comeau stated at trial, ATR's decision to appraise the dwelling as a single-family dwelling was based upon a conclusion that the highest and best use of the subject property was as a single-family residence. She explained that she believed that the property would not be purchased as a two-family for the following reasons: 18 Well, based on our findings upon the inspection in which the layout of the basement unit was awkward and unconventional. We also had some questions as to possible code violations. In addition, we did consider the two- family market; and due to risk involved in the two-family market, we determined that the highest and best use of the property was that of a single-family. 19 A May 17, 1991, Code Inspection Report noted several violations in the basement apartment. Although that report was not received by WCIS until after the sale of the property, it confirms ATR's impression (noted in its reports) that code violations were present in the basement unit. 2 20 WCIS admits that it considered the income from the second unit in granting a second mortgage on the subject property and that it insured the property as a two-family. Those decisions, however, may merely reflect the actual use of the property as a two-family dwelling at the relevant times. It does not necessarily follow, and the Simones have failed to demonstrate, that WCIS was obligated to advertise the property as a two-family because it was being used as such at the time of the sale. ATR determined that single-family occupancy was the highest and best use of the property, i.e., the most profitable and feasible use. WCIS reasonably relied upon that determination in advertising the property. 21 The Simones argue that if the property had been advertised as a two-family dwelling, there would have been more bidders and, consequently, a higher purchase price would have resulted. Plaintiff's professional auctioneer witness, however, only testified that if the property were advertised as a two-family, it would have attracted a different audience. Given ATR's reasonable conclusion that the highest and best use of the property was as a single-family, WCIS' decision to advertise it as such did not violate its duty to the Simones. 22 Based upon the above evidence, we conclude that the bankruptcy court did not err in dismissing the complaint. After reviewing the entire record, we are not left with the definite and firm conviction, I.C.C. v. Holmes Transp., Inc., 983 F.2d at 1129, that the bankruptcy court's conclusion that WCIS acted in good faith was mistaken. Nor are we persuaded that the court was mistaken in concluding that WCIS reasonably relied upon ATR's determination that the property was essentially a single family home. 3 The bankruptcy court properly concluded that the Simones failed to prove that the advertisement and sale of the foreclosed property amounted to a breach of WCIS' common law duty to the Simones.