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?