Trustees handling a foreclosure sale cannot require a winning bidder to pay their attorneys’ fees for reviewing documents when the deed changes hands, the state’s highest court held Tuesday.
The Court of Appeals overturned the ratification of a foreclosure sale because the notice of sale included a $295 fee that, according to homeowner Bonnie Maddox, had become common practice by “one or more law firms that specialize in foreclosure practice” throughout the state.
Such a fee was not authorized in Maddox’s loan documents, is not authorized by the Maryland Rules and violates the trustee’s duty to get the best price it can for the property, the court said.
“Not even a stretch of logic can support a position that by requiring a buyer to pay other sums outside of the foreclosure process, the trustees were taking an action designed to maximize the sums bid at such a sale,” retired Judge Dale R. Cathell wrote for the court.
Noting several changes adopted in recent years to protect borrowers during foreclosure, the court called the additional fees “contrary to the thrust of the new policies” and “another example of the abuses that have caused these types of problems in the first instance.”
Edward S. Cohn, whose Towson law firm was substitute trustee in Bonnie L. Maddox’s foreclosure, said he and his partners stopped including the requirement “quite some time ago, when this matter came up.”
Maddox’s attorney, John B. Robins IV, raised the issue in challenging the 2009 ratification of her Mardela home.
Homeowners’ attorneys have long believed the charge to be “improper” in foreclosure sales, Robins said. But fee challenges have been few because the amount charged — $295, in this case — was not substantial enough to spur lawsuits from would-be bidders, he said. In addition, the potential reduction in deficiencies from higher bids was not so great that foreclosed homeowners would bring suit, he added.
“It’s not cost-effective for somebody who is aggrieved to hire an attorney to contest it,” said Robins, a Salisbury solo practitioner who brought Maddox’s challenge pro bono.
The Court of Appeals said passing the fees on to the winning bidder would impermissibly drive down bids as would-be purchasers would factor that charge into the amount they offer.
The court also showed no sympathy for trustees and lenders who say charging attorney’s fees is necessary to defray their expenses because the purchase price at foreclosure seldom covers the mortgage indebtedness.
“The remedy in respect to this problem is not to come in at, or near, the last step in the process and attempt to extract money from buyers at foreclosure sales, but to make good loans in the first instance,” wrote Cathell, who was specially assigned to the panel that heard the case. “There is a cost for not conforming to good banking or lending standards. Whatever the cause, that price is now being paid.”
Cohn declined to comment on the decision itself — which went against his firm, Cohn, Goldberg & Deutsch LLC — beyond saying “We respect the court’s opinion.”
The high court overturned the ratification of the sale of Maddox’s home, on which she owed more than $81,000 to Beneficial Mortgage Co., according to court papers.
Beneficial filed a notice of intent to foreclose on Sept. 4, 2009, and appointed Cohn and his law firm partners as substitute trustees.
Prior to the sale, advertisements were placed in the Salisbury Daily Times with the provision that the purchaser would pay $295 to the sellers’ attorneys for reviewing the settlement documents.
Beneficial’s offer of $77,044 was the only bid at the Nov. 9, 2009, auction.
Maddox challenged the ratification of sale based on the demand that the winning bidder pay attorney’s fees.
The Wicomico County Circuit Court held on Feb. 4, 2010, that imposing the fee did not make the sale unfair. The trial court stayed its ratification order pending appeal.
Last May, the Court of Special Appeals said the fee would have been improper had it been charged in the case. The court approved ratification because the fee was not actually charged, as the lender supplied the winning bid.
But the Court of Appeals, which heard argument on Dec. 5, said the lender may have had the highest bid because the attorney’s fee discouraged others from making a higher offer.
Cathell was joined in his opinion by Chief Judge Robert M. Bell and Judges Lynne A. Battaglia, Clayton Greene Jr. and Sally D. Adkins.
Judge Glenn T. Harrell Jr. wrote a concurring opinion, stating the fee was improper because it was not authorized by the loan documents, the deed of trust, the note or Maryland Rules. Judge Mary Ellen Barbera joined Harrell’s concurrence.
WHAT THE COURT HELD
Maddox v. Cohn et al., CA No. 55 Sept. Term 2011. Reported. Opinion by Cathell, J. (retired, specially assigned). Concurrence by Harrell, J. Argued Dec. 5, 2011. Filed Jan. 24, 2012.
Can a substitute trustee require that a successful bidder on a foreclosed property pay an attorney’s fee for review of the transfer documents at settlement?
No; the fee requirement would violate the trustee’s legal duty to maximize the amount of the bids.
John B. Robins IV for petitioner; Bizhan Beiramee and Stephen Goldberg for respondents.