Questions • What are the important goals of a mortgage foreclosure system? • Is the nonjudicial foreclosure process (as established and permitted by Missouri law) an effective means of accomplishing those goals? Why or why not?

Nonjudicial Foreclosure for Land: Key Differences from UCC Regime • Permitted only in 30 states (including Missouri) • Mortgage/deed of trust must contain an explicit “power of sale” (power of sale is not implicit) • Sale must occur by public auction sale (no private sales, either directly or through a broker) – Sale is conducted by lender (if a mortgage) or by trustee (if a deed of trust)

Nonjudicial Foreclosure: UCC Art. 9 • After default, a lender with a valid security interest in personal property can sell it w/out any judicial process [UCC § 9-610(a), (b)] in all 50 states (even Louisiana) – Debtor must receive timely “notice of sale” prior to sale – Sale can be by a public sale (auction) or by a private sale (i.e., a privately-negotiated sale, directly or through a broker) – Sale must be “commercially reasonable” in all aspects

MO Nonjudicial Foreclosure Process • When default occurs, beneficiary (lender) informs trustee of default, directs trustee to schedule a sale – Trustee is named in original DOT, holds legal title – Lender can “substitute” a new trustee to conduct sale

• Trustee then carries out all aspects of sale process in compliance with statutory requirements of RSMo. Ch. 443

• RSMo. § 443.310: trustee must give notice of scheduled sale to certain persons, at least 20 days prior to the sale (unless the deed of trust requires a longer notice period) • RSMo. § 443.325: notice must be given to:

• Mortgagor can redeem (by paying off the full debt) prior to scheduled sale (or reinstate if mortgagor has contractual right to reinstate) • If no redemption or reinstatement, trustee conducts the sale

• Difference from judicial foreclosure?

• Sale is considered final when hammer falls • After sale and payment by high bidder, trustee delivers “trustee’s deed” to the high bidder (no judicial confirmation of sale)

– (1) Mortgagor named in deed of trust – (2) The current record owner of the land (as of 40 days prior to scheduled sale), if different from the Mortgagor, and – (3) Anyone who recorded a request for notice of sale (at least 40 days prior to scheduled sale)

Notice of Sale [RSMo. § 443.320] • Must include: recording information for DOT; name of mortgagor; time, terms and place of sale; description of the mortgaged land • Notice must also be advertised in newspaper – In counties w/cities > 50,000, at least 20 times (!), up to and including date of sale – In other counties, once per week for four successive weeks, up to/including the week prior to sale

– Public auction, cash, “as is,” w/out warranties – Foreclosing lender may “credit bid”

Notice of Sale • On the one hand, the rationale for requiring publication of pre-sale notice is that it should help facilitate competitive bidding (and competitive bidding should help produce a sale price that reflects market value) • On the other hand, the actual notice of sale provides little helpful information to bidders – Doesn’t include: picture, street address, all terms of sale, information re: other liens

Concerns? • Sale can happen very quickly (mortgagor doesn’t have much time to redeem or get refinancing) • Notice is of limited use, if not worthless – Street address not required (legal descriptions commonly used) – Notice provides little/no information that bidder can use to establish bid price (note: typically, bidders can’t inspect improvements prior to sale)

Baskurt v. Beal • 1991: Moores sold 2 parcels of land to McAlpine, taking back a deed of trust that covered both parcels, and securing the repayment of 2 separate notes – Note 1: $95K, payable to Mr. Moore (sale price of Parcel 1) – Note 2: $135K, payable to Mrs. Moore (price of Parcel 2)

• Subsequently, McAlpine deeded both parcels to Beal (who took subject to the mortgages)

Nonjudicial Foreclosure: Features • Process is much faster (45-60 days in Missouri, as contrasted with 12-18 months or more in “judicial only” jurisdictions) than judicial foreclosure, and thus potentially more efficient • But, there’s no judicial supervision or judicial finality – So what happens if mistakes/problems occur? – How can a buyer be sure that its title is good when there’s no judicial confirmation? Will a court allow the mortgagor or another injured party to “set aside” the sale in a later lawsuit?

• 1994: Beal paid off Note 1 – But, because the Deed of Trust covered both parcels, and also secured repayment of Note 2, the Deed of Trust lien remained valid to secure the still-unsatisfied Note 2

• 1999: Beal defaulted on Note 2 (balance due = $26,780) – Baskurt (the assignee of the original lender Moore) directed the trustee to conduct a nonjudicial foreclosure sale, at which Baskurt bought both parcels for price = $26,780 (full credit bid) – FMV of the two parcels was ≈ $225,000

• 2000: Beal brings a lawsuit to set aside the sale

• Low price ($26,780) compared to appraised fair market value ($225K) • Trustee sold both of the parcels as one lot, rather than selling them separately • Mortgagee formed a partnership with a potential bidder

Baskurt v. Beal

Problems with Sale?

• Restatement rationale: foreclosure involves minimal marketing and little competitive bidding, and may thus result in low sale prices relative to “fair market value” • Lenders may exploit this:

– (1) Lender may buy land at foreclosure sale, at below-market price – (2) Lender can then “flip” the land (re-sell it at a profit) (unjust enrichment) – (3) In some cases, lender may even get a deficiency judgment vs. borrower, if low sale price is not sufficient to satisfy the debt

Low Sale Price • Should a low foreclosure sale price, by itself, be a sufficient justification for invalidating the sale, if there were no procedural defects in the sale? – Restatement § 8.3: sale may be set aside if sale price is “grossly inadequate,” even if there was no procedural defect in the sale [p. 730] (20% rule of thumb)

• Bank conducts foreclosure sale

– Balance of mortgage debt = $500,000 – Fair market value of land = $250,000

• In this situation,3d parties may not bid. If no 3d party bids, Bank could:

– Buy at “bargain price” (e.g., $5,000) – Get deficiency judgment vs. borrower for $495,000 and collect it from borrower’s other assets – Later re-sell land for $250,000 (unjust enrichment)

• Most courts won’t set aside a foreclosure sale based only on a low price • But, a low sale price may cause the court to give a “hard look” at the sale, to see if there were defects in conduct of the sale

– Courts are more willing to set aside the sale if there’s a low price + some procedural defect in the sale

• This problem is rare with improved land, but can be common with unimproved land, esp. in “failed” developments • Is this an appropriate burden or duty for the law to put on a foreclosing lender or trustee? • How should a lender or trustee behave in response to this duty?

Baskurt — Sale in Bulk/by Parcel • Deed of trust covered both Parcel 1 and Parcel 2; trustee sold both of them together, as one parcel

– Trustee did this even though a sale of either parcel, by itself, would almost certainly have satisfied the balance of Note 2!

• Court: by not selling the parcels separately, Trustee failed “in its duty to act reasonably to protect [mortgagor’s] interests”

• Lender/trustee could structure sale to offer land the “both ways,” e.g., provisional sales both in bulk and by parcel [Fannie ¶ 22, p. 1456] – Step 1: Sell Parcel 1; if sale is enough to satisfy debt, sale becomes final; if not, go to Step 2 – Step 2: Sell Parcel 2; if sale is enough to satisfy debt, sale becomes final; if not, go to Step 3 – Step 3: Sell Parcels 1 and 2 together – If entire debt is not satisfied, the approach (individually or together) that the brings highest total price = winning bid(s)

Chilled Bidding/Collusion • Mortgagee’s partnership with a potential bidder = “chilled bidding” – This almost certainly resulted in a lower sale price – Rosenthal had been willing to bid higher, but did not bid due to “partnership” with mortgagee Baskurt

Borrower’s Objective(s) in Seeking to Set Aside Foreclosure Sale • Extract settlement from foreclosing lender

– Damages for lost equity, or – Restructure debt (“write-down” of principal), or – Re-do of foreclosure sale (hopefully at higher price)

• More time to remain in home, “rent-free” • Chapter 13 bankruptcy only: ability to reinstate loan and “cure” past default

• Suppose that three third party bidders made a partnership among themselves (but not with the lender or the trustee) to bid jointly and not competitively with each other • Would this collusion be “bid-chilling” that would allow mortgagor to set aside the sale? – Probably not; while this may result in one less bidder and thus have “chilling” effects, third party bidders don’t have any contractual duty to the mortgagor – By contrast, the foreclosing lender owed a duty of good faith/fair dealing in enforcing its mortgage

Edry and Chapter 13 Bankruptcy • Ch. 13 provides a mechanism for homeowner in default to “cure”/de-accelerate her home mortgage and reinstate it (even if neither state law nor the loan documents would

have allowed that!)

– E.g., X is in default 6 months on X’s mortgage, due to lost job (total arrearage = $6,000) – In Ch. 13, X can resume regular monthly payments, and can repay the $6,000 arrearage separately over 3 or 5 year “plan”

In re Edry • Prior to debtor’s Chapter 13 bankruptcy filing, Bank sold debtor’s home at foreclosure sale – Mortgage debt = $85,536 (FMV = $190,000) – Gurtler (3rd party) was buyer at sale for $86,500

• After filing Chapter 13, Debtor sued to set aside the sale • Court: sale was invalid b/c Bank ran only the required legal notices, not “display ads” (as was “customary practice” by other foreclosing lenders in the area) • Is this a sensible result?

UCC § 9-617. Rights of Transferee of Collateral. (a) A secured party’s disposition of collateral after default: (1) transfers to a transferee for value all of the debtor’s rights in the collateral; (2) discharges the security interest under which the disposition is made; and (3) discharges any subordinate security interest or ... lien …. (b) A transferee that acts in good faith takes free of the rights and interests described in subsection (a), even if the secured

party fails to comply with this article or the requirements of any judicial proceeding.

• Is “mere minimum compliance” sufficient, or should courts add a “gloss” on the statute to require “best practice” or “commercial reasonableness” (such as targeted display advertising)? – Problem: if I have to “go beyond,” how can I be sure I’ve done enough? – This may result in “overadvertising” (too much sale expense) to be safe – MO courts haven’t required advertising beyond statutory minimum

• UCC § 9-617: “Good faith” buyer of personal property at a defective foreclosure sale takes good title – If Buyer did not know sale was defective, Buyer would get good title, despite the defect in the sale; borrower could not set sale aside • Remedy for Borrower: damages for Lender’s violation of Article 9 sale requirements – Damages = FMV of collateral (in Edry, $190,000) MINUS foreclosure sale price (in Edry, $86,500)

• Should courts invalidate defective foreclosure sales (as in Edry), or instead take the Article 9 approach and (usually) award the borrower only damages? – Rationale for § 9-617: finality; 3d parties won’t bid at foreclosure sales, or will “discount” their bids, if subject to risk of “collateral attack” on good faith purchases – If we want foreclosures to bring prices that reflect the collateral’s real market value, allowing for sales to be “set aside” would thus be inconsistent with that objective

Glidden [p. 749] • Senior mortgagee conducted a defective nonjudicial foreclosure sale

– Senior was obligated to give notice of sale to junior, but did not

• Trustee’s deed recited trustee’s compliance w/ nonjudicial foreclosure statute (even though this recital was not accurate) • Junior lienholder later sought to “set aside” the sale based on lack of notice

Presumption of Compliance: Trustee’s Deed “Recital” of Statutory Compliance • Some nonjudicial foreclosure statutes attempt to introduce a measure of “finality” through “presumption” statutes • Under these statutes, if the trustee’s deed to the winning buyer recites that the trustee complied with all statutory requirements, the recital gives rise to an evidentiary presumption of the sale’s validity

• Judicial: sale w/out joining junior lienor as party does not extinguish junior lien (deprivation of property w/out due process) • Nonjudicial: sale does not involve “state action”; sale w/out notice to junior lienholder does not violate due process (at least in cases where the government is not the mortgagee)

Due Process?

• Glidden: low sale price + lack of notice to junior could have provided a basis for a court to set aside the sale • But, Trustee’s recitals gave rise to a statutory presumption of compliance, and that presumption operated conclusively in favor of BFP • Junior that didn’t get notice could not set aside the sale, but could proceed against foreclosing lender and trustee for damages resulting from the failure to give notice as required by statute

Albice • Recent WA case interpreting WA presumption statute • Sale was defective (improper postponement), but trustee’s deed contained recital that trustee had complied with all statutory requirements • Mortgagor nevertheless sought to invalidate the sale • Court of appeals: sale was invalid; recital was ineffective b/c the deed didn’t recite the specific facts indicating exactly how the trustee complied with the statute

Missouri Nonjudicial Foreclosure • Missouri law allows the trustee to place a “compliance with statute” recitaI in trustee’s deed [RSMo § 443.380] – This recital gives rise to a presumption that trustee complied with sale – But, that presumption is rebuttable by contrary evidence (i.e., evidence of trustee’s noncompliance)

• WA statute: “[Trustee’s deed] shall recite the facts showing that the sale was conducted in compliance with all of the requirements of this chapter and of the deed of trust” • MO statute [§ 443.380]: “[T]he recitals in the [trustee’s deed] concerning the default, advertisement, sale or receipt of the purchase money, and all other facts pertinent thereto, shall be received as prima facie evidence in all courts of the truth thereof.”

• Is Albice a sensible decision? – Pro: (1) it is consistent with text of the statute; (2) it requires greater “transparency” about trustee’s conduct (lack of transparency and supervision is substantial critique of nonjudicial foreclosure) – Con: If a foreclosure sale buyer doesn’t have a duty to investigate the accuracy of the recitals, what’s the point of requiring the specific facts? – Will 3d parties bid at sales? Will title insurers be willing to insure titles acquired at nonjudicial foreclosure sales?