Opinion ID: 2222275
Heading Depth: 1
Heading Rank: 6

Heading: setting aside trustee's sale

Text: Before 1965, Nebraska did not allow power of sale foreclosure, and any attempted extrajudicial sale of real property, for the satisfaction of a mortgage, was absolutely void. Cullen v. Casey, 1 Neb. (Unoff.) 344, 95 N.W. 605 (1901). Because trust deeds were treated as mortgages, the same rule applies to them, even if the trust deed in question contained a power of sale. See Comstock v. Michael, 17 Neb. 288, 22 N.W. 549 (1885). In 1965, the Legislature altered the landscape of real estate financing when it passed the Act. The Act specifically authorized the use of power of sale foreclosure for trust deeds. See § 76-1005. We stated: [The Act] authorizes the use of trust deeds to secure the performance of obligations and prescribes, generally, the procedures for their execution and enforcement. The [A]ct provides that a trust deed may confer a power of sale upon the trustee. In the event of a default, the trust property may be sold by the trustee to satisfy the obligation secured. The [A]ct also provides for the substitution of trustees, reinstatement after default, and the procedure for the sale and conveyance of the trust property by the trustee. .... The ... Act authorizes the use of a security device which was not available prior to its enactment. The [A]ct permits the use of an instrument which may be foreclosed by sale without the necessity of judicial proceedings. It authorizes and permits a method of financing which was not formerly available, since trust deeds have been considered to be subject to the same rules and restrictions as mortgages. Blair Co. v. American Savings Co., 184 Neb. 557, 558-59, 169 N.W.2d 292, 293-94 (1969). By authorizing the use of power of sale foreclosure, the Legislature provided lenders with a remedy for recovering their collateral that is quicker and less expensive than judicial foreclosure. Here, however, Cynthia claims that the trustee's sale should be set aside because it did not comply with the Act and the terms of the trust deed. Although the Act does not provide a remedy for a defective trustee's sale, the trustor can sue in equity to set the sale aside. See 1 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 7.22 (3d ed.1993). This is our first opportunity to determine when equity will grant such relief. Cynthia argues that the use of the power of sale in a trust deed must strictly adhere to both the requirements of the Act and the trust deed's terms and that failure to do so renders the sale void. We disagree. The Act provides lenders with a remedy for recovering collateral that is quicker and less expensive than judicial foreclosure. The rule advanced by Cynthia would render that remedy unworkable; any error by the trustee, no matter how trivial, would void the sale. The resulting uncertainty and increased chance of litigation would deter bidders from participating at sales and lead lenders to choose judicial foreclosure. See Rosenberg v. Smidt, 727 P.2d 778 (Alaska 1986) (Moore, J., dissenting). Not surprisingly, other jurisdictions that allow power of sale foreclosure have refused to adopt a rule that would set aside every sale that does not strictly comply with the requirements of the trust deed or relevant statutes. See, e.g., 6 Angels, Inc. v. Stuart-Wright Mortgage, Inc., 85 Cal.App.4th 1279, 102 Cal.Rptr.2d 711 (2001); J. Ashley v. Burson, 131 Md. App. 576, 750 A.2d 618 (2000); Coventry Credit Union v. Trafford, 764 A.2d 179 (R.I.2000); VHDA v. Fox Run, 255 Va. 356, 497 S.E.2d 747 (1998); Manard v. Williams, 952 S.W.2d 387 (Mo.App.1997); Garris v. Federal Land Bank of Jackson, 584 So.2d 791 (Ala.1991); Occidental/Nebraska Fed. Sav. v. Mehr, 791 P.2d 217 (Utah App.1990). See, also, 1 Nelson & Whitman, supra; 12 Thompson on Real Property § 101.04(c)(2) (David A. Thomas ed.1994). Instead, courts and commentators have recognized three categories of defects in a trustee's sale conducted under a power of sale in a trust deed: (1) those that render the sale void, (2) those that render the sale voidable, and (3) those that are inconsequential. See, Manard, supra; 1 Nelson & Whitman, supra; 12 Thompson on Real Property, supra. The first category consists of those defects that render a sale void. When a sale is void, no title, legal or equitable, passes to the sale purchaser or subsequent grantees. 1 Nelson & Whitman, supra, § 7.20 at 613. In other words, adversely affected parties may have the sale set aside even though the property has passed into the hands of a bona fide purchaser. 12 Thompson on Real Property, supra, § 101.04(c)(2)(i) at 402. Defects that render a sale void are rare and generally occur when the trustee conducted the sale, but no right to exercise the power of sale existed. See, Williams v. Kimes, 996 S.W.2d 43 (Mo. 1999); 1 Nelson & Whitman, supra; 12 Thompson on Real Property, supra. Typical examples include situations when (1) no default on the underlying obligation has occurred, (2) the trust deed is a forgery, and (3) the trust deed requires the beneficiary to request that the trustee commence foreclosure proceedings and no request has been made. See Manard, supra . Further, even if there is a right to exercise the power of sale, an egregious failure to comply with fundamental procedural requirements while exercising the power of sale will render the sale void. See Graham v. Oliver, 659 S.W.2d 601 (Mo. App.1983). The second category of defects consists of those that render the sale voidable. See Manard, supra . When a defect renders a sale voidable, bare legal title passes to the sale purchaser. 1 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 7.20 at 614 (3d ed.1993). See Graham, supra . An injured party can have the sale set aside only so long as the legal title has not moved to a bona fide purchaser. 12 Thompson on Real Property, supra, § 101.04(c)(2)(ii) at 403. The final category consists of those defects that are so inconsequential as to render the sale neither void nor voidable. 1 Nelson & Whitman, supra; 12 Thompson on Real Property, supra. See, also, Manard, supra ; Rosenberg v. Smidt, 727 P.2d 778 (Alaska 1986). When the party seeking to set aside the sale establishes only an inconsequential defect, equity will not set aside the sale. Courts have offered a variety of tests for determining when a defect becomes more than inconsequential and renders a sale voidable. See, e.g., J. Ashley v. Burson, 131 Md.App. 576, 750 A.2d 618 (2000) (requiring party attacking sale to show error was harmless or affected substantial rights); Manard v. Williams, 952 S.W.2d 387, 392 (Mo.App.1997) (stating that `[a]n irregularity in the execution of a foreclosure sale must be substantial or result in a probable unfairness to suffice as a reason for setting aside a voidable trustee's deed') (quoting Kennon v. Camp, 353 S.W.2d 693 (Mo.1962)); Occidental/Nebraska Fed. Sav. v. Mehr, 791 P.2d 217, 221 (Utah App.1990) (stating that [a] sale once made will not be set aside unless the interests of the debtor were sacrificed or there was some fraud or unfair dealing); Concepts, Inc. v. First Sec. Realty Serv., 743 P.2d 1158, 1159 (Utah 1987) (stating that remedy of setting aside the sale will be applied only in cases which reach unjust extremes). Farmers' Sav. Bank v. Murphree, 200 Ala. 574, 575, 76 So. 932, 933 (1917) (stating that [e]quity does not set aside foreclosure sales merely for trifling irregularities in notice or procedure, which do not appear capable of prejudice to the mortgagor, or those claiming under him). A review of these cases, however, reveals a common theme: Courts will view a defect as voidable if the party seeking to set aside the sale shows that prejudice was suffered because of the defect. We agree with this reasoning and hold that to establish a defect that renders the trustee's sale voidable, the party seeking to set aside the sale must show not only the defect, but also that the defect caused the party prejudice. If the party did not suffer any harm from the alleged defect, there is no justification for imposing the additional costs associated with setting aside the sale. We note that in addition to the analysis we have set out above, the Act allows the trustee's deed to confer additional protection against attacks on the sale. Section 76-1010(1) provides in part: The trustee's deed may contain recitals of compliance with the requirements of sections 76-1001 to 76-1018 relating to the exercise of the power of sale and sale of the property described therein, including recitals concerning any mailing, personal delivery and publication of the notice of default, any mailing and the publication and posting of notice of sale, and the conduct of sale; and such recitals shall constitute prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice. Section 76-1010(1) allows for an affirmative defense whereby bona fide purchasers and encumbrancers for value and without notice can use the recitals in the trustee's deed to defeat any claim that the sale did not comply with the requirements of sections 76-1001 to 76-1018 relating to the exercise of the power of sale and sale of the property described therein. Here, however, Ryberg, Cummins, and Huber have not raised the recitals as a defense, and we need not consider the implications of § 76-1010(1). We now address whether Cynthia established a defect in the sale that warrants setting the sale aside. In the proceedings below, Cynthia claimed several defects in the sale, but she has only preserved three of those claims on appeal. We analyze each of these claims separately.