Exceptions

• Jurisdiction: Maryland

III. EXCEPTIONS

After a foreclosure sale has been reported to the court, a party may file exceptions to the sale in the manner prescribed in MD. RULE 14-305(d). Filing exceptions to the foreclosure sale is the attempt to halt the case from proceeding towards the issuance and entry of a final order of ratification by the circuit court. Below are items regarding issues related to potential post-sale exceptions. For further discussions related to exceptions, kindly review Chapter 12: Nature of Foreclosure Proceedings.

MD. RULE 14-305(d) provides:

(d) Exceptions to Sale.

(1) How Taken. A party, and, in an action to foreclose a lien, the holder of a subordinate interest in the property subject to the lien, may file exceptions to the sale. Exceptions shall be in writing, shall set forth the alleged irregularity with particularity, and shall be filed within 30 days after the date of a notice issued pursuant to section (c) of this Rule or the filing of the report of sale if no notice is issued. Any matter not specifically set forth in the exceptions is waived unless the court finds that justice requires otherwise.

(2) Ruling on Exceptions; Hearing. The court shall determine whether to hold a hearing on the exceptions but it may not set aside a sale without a hearing. The court shall hold a hearing if a hearing is requested and the exceptions or any response clearly show a need to take evidence. The clerk shall send a notice of the hearing to all parties and, in an action to foreclose a lien, to all persons to whom notice of the sale was given pursuant to Rule 14-206(b).

The basic rules relating to ratification were summarized over 120 years ago: "It is well settled in this State, that in all sales made under a decree in equity, the court is the vendor, acting for and in behalf of all parties interested, the trustee being the mere agent of the court. Green v. Clapp, 11 G. & J. I; Perrin v. Keithley, 9 Gill, 412; Goldsborough v. Ringgold, 1 Md. Ch. 239. "The contract of sale in such cases being one between the court as vendor, and the purchaser, it is never regarded as consummated until it has received the sanction of the court. Wagner v. Marshall, 6 Gill, 100.

All objections therefore to the sale on the ground of error, mistake, or misrepresentation, either in regard to the terms or manner of sale; or in regard to the nature and character of the interest in the property decreed to be sold, are open for such consideration before final ratification; and when such objections are made the court will either ratify or set aside such sale as equity and good conscience may require. Bolgiano v. Cooke, 19 Md. 375 [1863].

Generally, a party has the period during the running of the Order Nisi, the post-sale publication, to file exceptions to the sale. Over time and in the changes over the last number of years to the Maryland Rules and Code, issues raised on exceptions to sale have narrowed to the sale itself, i.e., the conduct of the sale. The party putting forth the exceptions to sale must prove the substance of their contentions regarding the irregularity in how the sale was held. Judicial sales are presumed valid and the burden of proving the invalidity of the sale is on the one attacking the sale.⁷ Under Bates v. Cohn, 417 Md. 309, 9 A.3d 846 (2010), and Thomas v. Nadel, 427 Md. 441, 48 A.3d 276 (2012), reconsideration denied Aug. 16, 2012, the Maryland judiciary has made it clear that exceptions filed in a foreclosure action are limited to procedural irregularities of the sale itself or the lender's statement of indebtedness, and that post-sale exceptions to a foreclosure proceeding must be limited to irregularities in the conduct of the sale itself.

This is an evolution and development of case law, in that exceptions must allege irregularity or misconduct bordering on constructive fraud.⁸ Judicial sales are presumed valid and the burden of proving the invalidity is on the exceptant, Webster v. Archer, 176 Md. 245, 4 A.2d 434 (1939); Hurlock infra. Non-prejudicial inaccuracies or irregularities in the conduct of the sale will not vitiate a sale.⁹

Once the exceptions have been filed and are before the court, there is much latitude for the presiding judge to determine if a hearing is necessary. Even though a hearing can be requested by the exceptant, only if the court finds that the pleadings "clearly show a need to take evidence" will a hearing be granted. This contrasts with MD. RULE 14-211, which is in regards to staying the sale i.e., pre-sale, via the filing of a Motion to Stay or Dismiss. MARYLAND RULE 14-211 motions are to pre-sale matters and exceptions are generally regarding post-sale matters.

While a host of issues can be raised on exceptions to sale, GORDON ON MARYLAND FORECLOSURE, 4th Edition recited a rather exhaustive list of issues commonly raised. And with the introduction of MD. RULE 14-211 in 2009, some issues that previously were raised as "exceptions" and sometimes heard by the court as such, are now relegated to being raised at the pre-sale stage and not via exceptions to sale. It has been argued that if not raised during the MD. RULE 14-211 stage, such issues are potentially waived. Just because exceptions have now been relegated to irregularities with the sale itself, a long list of potential issues still remain to be raised at this stage and as such, the list stated in GORDON ON MARYLAND FORECLOSURE, 4th Edition, still seem to lay it out best.

1. Adequacy of sales price

Perhaps the most common objection to a real estate foreclosure is that the sales price is inadequate for the property sold.¹⁰ It is also the most frequently rejected argument. Very few borrowers are ever satisfied with the nature of a foreclosure proceeding. It is their notion that such a proceeding, in general, is unfair and results in a substandard sales price for their investment.¹¹ It is not uncommon, therefore, for courts to address this issue in Maryland and to have developed a rather substantial body of case law at the appellate level.

Indeed, based on the testimony of the real estate experts at exceptions predicated on a "low" sales price, the value of the foreclosed property in an arm's length transaction might be twenty or thirty percent greater than the proposed foreclosure sales price, depending on which expert one finds most credible. However, a foreclosure proceeding is not part of an arm's length transaction, obviously. Potential purchasers always discount their offering price based on the realistic notion that exceptions and/or bankruptcy are often filed by borrowers and the property can be held in limbo for up to two years during an appeals process. Hoc quidem perquam durum est, sed ita lex scripta est. (This indeed is very hard, but such is the written law.) The courts recognize that:

• foreclosure is a lender's remedy of last resort,

• it is a remedy predicated on a voluntary contractual agreement entered into between two competent parties with the freedom of contract and a marketplace that offers alternatives, and

• it is the failure of the borrower to live up to the covenants in the loan documents that results in the foreclosure.

The Court of Appeals has, generally, found that sales at foreclosure for over 60% of the fair market value should almost always be ratified and, sometimes, the courts have found it acceptable to ratify sales at far less than 60% of the fair market value, but all facts and circumstances will be considered by the court.

In Warfield v. Ross, 38 Md. 85 (1873), the court said that in foreclosure suits mere inadequacy of price, unless it is so gross as to justify a suspicion of fraud, surprise, or mistake, is not grounds for the interference of the court to set the sale aside. This rule was set by the Court of Appeals in 1873 and continues to be the law in Maryland. In Arban v. Rogers, 262 Md. 738, 740, 279 A.2d 457, 458 (1971), the court repeated the rule:

Inadequacy of price, in and of itself, will not justify a refusal to ratify a mortgage sale, unless the price is so inadequate as to 'shock the conscience of the court' or raise a presumption of fraud or irregularity. Silver Spring Development Corp. v. Guertler, 257 Md. 291, 297, 262 A.2d 749 (1970); Habib v. Mitchell, 257 Md. 29, 35, 261 A.2d 744 (1970); Waring v. Guy, 248 Md. 544, 549, 237 A.2d 763 (1968). (Emphasis added).

Furthermore, the mere suspicion that the property, if offered during another season of the year would bring a better price, is also not justification for ordering a resale of property. Garitee v. Popplein, 73 Md. 322, 20 A. 1070 (1891).¹²

Put somewhat differently in Hunter v. Highland Land Co., 123 Md. 644, 91 A. 697 (1914), a resale is not ordered merely as an "experiment" to see what might happen.

In Garland v. Hill, 277 Md. 710, 712, 357 A.2d 374, 375 (1976), the court summarized the rules:

The rule of our cases is that the mere inadequacy of the purchase price at a mortgage foreclosure sale is not enough to prevent the ratification of the sale, Habib v. Mitchell, 257 Md. 29, 35, 261 A.2d 744, 746 -47 (1970); Silver Spring Development Corp. v. Guertler, 257 Md. 291, 297, 262 A.2d 749, 753 (1970); Ed Jacobsen, Jr., Inc. v. Chapline, 253 Md. 70, 73-74, 251 A.2d 604, 605-06 (1969); Butler v. Daum, 245 Md. 447, 452, 226 A.2d 261, 263-64 (1967); Ten Hills Co. v. Ten Hills Corp., 176 Md. 444, 449, 5 A.2d 830, 832 (1939), unless it is so grossly inadequate as to shock the conscience of the court, Arban v. Rogers, 262 Md. 738, 740, 279 A.2d 457, 459 (1971); Southern Maryland Oil, Inc. v. Kaminetz, 260 Md. 443, 454, 272 A.2d 641, 647 (1971), 55 Am. Jur. 2d Mortgages § 673 at 623 (1971). (Emphasis added).

A long series of cases, such as Butler v. Daum, 245 Md. 447, 226 A.2d 261 (1967), have concluded that a sale should not be set aside unless the price is so insignificant as to "shock the conscience" of the court and the facts must be absolutely compelling to such a point that constructive fraud might even be implied. In...