{"id":31585,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/statutorily-conducted-massachusetts-foreclosure-voided-for-lack.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"statutorily-conducted-massachusetts-foreclosure-voided-for-lack","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/business-operations\/statutorily-conducted-massachusetts-foreclosure-voided-for-lack.html","title":{"rendered":"Statutorily Conducted Massachusetts Foreclosure Voided for Lack of Display Advertising"},"content":{"rendered":"
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n\n

Massachusetts Bankruptcy Court Re-Interprets BFP v. RTC<\/u><\/b>

The United States Supreme Court's 1994 decision in BFP v. Resolution Trust Corp.<\/u>, 128 L. Ed. 2d 556 (1994) ("BFP<\/u>"), appeared to be a clear victory for foreclosing mortgagees. Now, at least in the Commonwealth of Massachusetts, that decision has lost much of its clout. Section 548(a)(2)(A) of the Bankruptcy Code allows the avoidance of a sale of real property at foreclosure if the debtor "received less than a reasonably equivalent value in exchange for such transfer or obligation." Prior to BFP<\/u>, mortgagees adhering strictly to foreclosure statutes were frustrated by courts that nullified sales due to low sale prices. In BFP<\/u>, the Supreme Court interpreted the quoted phrase to mean that the value of foreclosed property is dictated by the foreclosure sale price itself, not the property's fair market value.<\/p>

On October 25, 1996, James F. Queenan, Jr., United States Bankruptcy Judge for the District of Massachusetts, in the matter of Edry v. R. I. Hospital Trust Nat'l Bank<\/u> (In re Edry<\/u>), 1996 WL 622574 (Bankr. D. Mass. 1996) ("Edry<\/u>"), invalidated a foreclosure sale where the successful bid brought only 45% of the fair market value of the property, even though the bid exceeded the full amount owed to the lender. Judge Queenan relied both on the disparity between the property's fair market value and foreclosure sale price, and the failure of the mortgagee to use display advertising. Mortgagees should note that the bank in Edry<\/u> followed the strict letter of Massachusetts foreclosure law, yet was found to have fallen short of Judge Queenan's standards. This article will consider why Edry<\/u> requires mortgagees to do more than merely follow the applicable foreclosure statutes, and will offer some tips on what courts may look for in considering whether the foreclosure sale price is a "reasonably equivalent value" for the property.<\/p>

Notably absent from the Edry<\/u> decision is any reference to BFP<\/u>. However, Judge Queenan seemed to rely on language in BFP<\/u> that recognized the importance of states' interests in foreclosure sales. In writing for the majority in BFP<\/u>, Justice Scalia noted that when a state's "judicially and legislatively crafted rules" governing the foreclosure process are followed, "it is 'black letter' law that mere inadequacy of the foreclosure sale price is no basis for setting the sale aside." 128 L. Ed. 2d at 567. This language seems beneficial to mortgagees that observe the procedural requirements in arranging foreclosure sales, because the validity of the sale no longer depends on how closely the sale price reflects the property's fair market value. However, Justice Scalia's discussion leaves courts with another means to invalidate sales that otherwise meet applicable statutory requirements, because a state's interest encompasses more than mere statutory requirements. Thus, the fair market value test (eliminated in BFP<\/u>) that was previously a thorn in the side of mortgagees was replaced by a new emphasis on state procedures. Edry<\/u> is an example of how this new thorn can affect mortgagees.<\/p>

In light of BFP<\/u>, the Bankruptcy Court in Edry<\/u> could not void the sale solely because the foreclosure price was only 45% of the fair market value. Instead, it did so by relying upon the following facts, in combination with a low sale price: (a) the bank failed to respond to the debtor's attempts to resolve the delinquency; (b) the foreclosure sale was conducted by a paralegal, rather than by an attorney; (c) the bank made no effort to seek the debtor's permission for potential bidders to inspect the inside of the home; (d) the bank made no effort to determine the fair market value of the property; and, most importantly, (e) the bank's law firm specifically instructed the auctioneer not to use display advertising in providing notice of the sale, when that auctioneer used display advertising in 80% of its foreclosures.<\/p>

While Edry<\/u> may be a classic case of "bad facts make bad law," the mortgagee did not consider the case worth appealing. Accordingly, mortgagees in Massachusetts must now do more than merely comply with the basic statutory provisions governing the foreclosure process. BFP<\/u> made the validity of foreclosure sales contingent upon state procedures. Edry<\/u> states that compliance with state procedures encompasses the practices of the geographical area of the property, the purchase price at foreclosure, and the facts of the case.<\/p>

A mortgagee need not be intimately familiar with the foreclosure customs of every community in which it does business. Such a stringent requirement would suppress competition among lenders; however, a prudent mortgagee should consider the following practices when doing business in any community:<\/p>

  • Use a law firm familiar with state and local practices;<\/li>
  • Respond promptly to debtor inquiries, especially regarding reinstatement;<\/li>
  • Be familiar with the property's fair market value, whether through an independent appraisal or otherwise;<\/li>
  • Require that an attorney, not a paralegal, represent you at the sale;<\/li>
  • Use display advertising in any of the following circumstances: (a) the property's fair market value is substantial; (b) the property is commercial property; (c) the mortgagor holds substantial equity in the property; (d) the property is in some way unique, such as waterfront property; or (e) the property holds four (4) or more units.<\/li><\/ul>

    Although no list is comprehensive, the Edry<\/u> decision should prompt mortgagees to take steps to minimize the risk of having sales nullified. Mere compliance with statutory requirements, at least in Judge Queenan's view, is inadequate to ensure that the mortgagor receives a reasonably equivalent value for the property.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

    The United States Supreme Court’s 1994 decision in BFP v. Resolution Trust Corp., 128 L. Ed. 2d 556 (1994) (“BFP”), appeared to be a clear victory for foreclosing mortgagees. Now, at least in the Commonwealth of Massachusetts, that decision has …<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_categories":[6467,6471,6473],"class_list":["post-31585","corporate","type-corporate","status-publish","hentry","corporate_categories-business-operations","corporate_categories-business-operations__property","corporate_categories-business-operations__property__real-property"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate\/31585","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=31585"}],"wp:term":[{"taxonomy":"corporate_categories","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_categories?post=31585"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}