RECENT DEVELOPMENT: BATES v. COHN. By: Gary Stapleton

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1 Member, National Conference of Law Reviews UNIVERSITY OF BALTIMORE LAW FORUM VOLUME 41 Spring 2011 NUMBER TWO RECENT DEVELOPMENT: BATES v. COHN By: Gary Stapleton

2 BATES V. COHN: ONCE A FORECLOSURE SALE OCCURS, A DEBTOR MAY NO LONGER RAISE DEFENSE CLAIMS INCLUDING A LENDER S FAILURE TO COMPLY WITH LOSS MITIGATION REQUIREMENTS; ONLY PROCEDURAL IRREGULARITIES MAY BE RAISED AS POST-SALE EXCEPTIONS. The Court of Appeals of Maryland held that known and ripe defenses to the conduct of a foreclosure sale must be asserted prior to the sale, through an injunctive action, and cannot be raised in post-sale exceptions. Bates v. Cohn, 417 Md. 309, 9 A.3d 846 (2010). A debtor may claim exceptions after a foreclosure sale only to allege procedural irregularities or to challenge a statement of indebtedness. Id. at 327, 9 A.3d at 857. Sonja D. Bates ( Bates ) purchased her home in Gaithersburg, Maryland in February 1999, with a loan from GMAC Mortgage LLC ( GMAC ). In October 2007, after Bates defaulted on her mortgage payments and never brought her account current, Bates received multiple default notices from GMAC informing her that she needed to take immediate action. GMAC referred Bates s account to Cohn, Goldberg & Deutsch, LLC ( Cohn ), a Maryland foreclosure firm. Cohn mailed a certified Notice of Intent to Foreclose in January 2009, urging Bates to contact a Loss Mitigation Manager. Cohn then filed an order to Docket Foreclosure of Residential Property in the Circuit Court for Montgomery County in March. Between April and May of 2009, Bates made two attempts to receive a loan modification. GMAC denied both requests for modification because Bates s total monthly expenses exceeded her monthly income. On June 3, 2009, the property was sold at auction to a bona fide purchaser. Following the sale, Bates sought relief in the Circuit Court for Montgomery County. During an exceptions hearing pursuant to Maryland Rule (d), Bates claimed that GMAC failed to comply with federal loss mitigation requirements stipulated to in her deed of trust. GMAC countered that Bates may only assert claims regarding procedural irregularities in the sale. The circuit court agreed with GMAC and 1

3 found no support for Bates s contention that failure to adhere to loss mitigation requirements may be raised post-sale. Bates appealed to the Court of Special Appeals of Maryland. Before arguments could be heard, the Court of Appeals of Maryland issued a writ of certiorari. The sole issue on appeal was whether the trial court erred in precluding a homeowner from raising a lender s failure to adhere to loss mitigation requirements in a deed of trust as an exception to a foreclosure sale. The Court of Appeals of Maryland began by discussing the framework for challenging a foreclosure action both before and after a sale occurs. Bates, 417 Md. at , 9 A.3d at The court pointed to Maryland Rule , which gives the defaulted borrower the option to seek an injunction before the sale. Id. at 318, 9 A.3d at 852 (citing Md. R ). The court reviewed three committee notes accompanying revisions to the Maryland Rules, finding that loss mitigation claims are a homeowner s defense to an allegedly improper foreclosure sale. Bates, 417 Md. at , 9 A.3d at The court explained that such defense claims must be brought before the sale to effectuate their purpose of blocking a lender s right to foreclose. Id. at 319, n.9, 9 A.3d at 853, n.9. The court emphasized that once the sale occurs, the debtor may no longer raise defenses to stay the foreclosure, but must file exceptions to the sale itself. Id. The court emphasized this point by reviewing Wells Fargo Home Mortgage, Inc. v. Neal, in which a homeowner raised a number of claims including a lender s failure to adhere to loss mitigation requirements. Id. at 321, 9 A.3d at 854 (citing Wells Fargo Home Mortgage, Inc. v. Neal, 398 Md. 705, 922 A.2d 538 (2007)). In Wells Fargo, however, the homeowner raised those claims prior to the sale and the court made clear that a pre-sale injunctive action was the appropriate procedure to raise such claims. Bates, 417 Md. at , 9 A.3d at 854 (citing Wells Fargo, 398 Md. at 711, 922 A.2d at 541). The court next looked to Maryland Rule , which circumscribes post-foreclosure sale proceedings and sets forth the procedure for raising exceptions. Bates, 417 Md. at , 9 A.3d at 2

4 853 (citing Md. R (a)-(g)). The court then discussed Greenbriar v. Brooks, in which the Court of Appeals of Maryland held that once the foreclosure sale occurs, the debtor may only challenge procedural irregularities or the statement of indebtedness by filing exceptions. Bates, 417 Md. at 321, 9 A.3d at (citing Greenbriar v. Brooks, 387 Md. 683, 878 A.2d 528 (2005)). Having established the legal backdrop, the court turned its attention to Bates s contention that the court had broad equity powers to hear any objections to the foreclosure action pre-sale as well as postsale. Bates, 417 Md. at 324, 9 A.3d at 855. Bates relied on a series of cases in support of her argument that the court has broad equity powers during the exceptions phase; however, the court held these cases inapplicable due to key changes in the language of Rule Id. at , 9 A.3d at 856 (citing Albert v. Hamilton, 76 Md. 304, 25 A. 341 (1982); Wilson Bros. v. Cooey, 251 Md. 350, 247 A.2d 395 (1968)). The Court of Appeals of Maryland found that the modern version of the rule contains a key restriction that exceptions must set forth the alleged irregularity with particularity. Bates, 417 Md. at 326, 9 A.3d at 856 (citing Md. R (d)(1) (emphasis in original)). The court determined that irregularity was clarified in Greenbriar to mean only challenges to procedural irregularities in the sale itself. Id. at 367, 9 A.3d at 857. The court therefore reaffirmed its holdings in Greebriar and Wells Fargo by rejecting Bates s assertion that the court has unbridled discretion to hear any claims pre-sale or post-sale, and cautioned that Rule does not allow for any and all pre-sale objections to be filed as exceptions. Id. at , 9 A.3d at The court also looked to Maryland Rule and concluded that Bates s specific claim, that the lender failed to comply with loss mitigation requirements, went to the lender s right to foreclose. Bates at , 9 A.3d at 858 (citing Md. R ). The court noted that participation in a loss mitigation program is mandatory, with plenty of incentives for lenders to comply. Id. at 317 n.5, 9 A.3d 851 n.5. The court also noted that lenders obligations to participate are lifted when repeated attempts to contact the borrower yield no response. Id. Because Bates had acknowledged receipt of 3

5 the notices before the trial court, the court did not consider the merits of Bates s claim. Id. at 328 n.14, 9 A.3d at 858 n.14. Furthermore, the court declined to consider whether a homeowner may challenge the underlying validity of a deed by alleging fraud during post-sale exceptions. Id. at , 9 A.3d at The claim in Bierman v. Hunter was that a loan was the product of fraud, and the Court of Special Appeals of Maryland held that there was a distinction between challenging the underlying mortgage by claiming fraud and admitting liability for the default while alleging some other defect. Bates, 417 Md. at , 9 A.3d at 855 (citing Bierman v. Hunter, 190 Md. App. 250, 254, 988 A.2d 530, 533 (2010)). The Court of Appeals of Maryland has not reviewed that holding and did not consider it in the case at issue, as Bates brought forth no allegation of fraud. Bates, 417 Md. at , 9 A.3d at 856. The Court of Appeals of Maryland clearly articulated the pre-sale and post-sale framework for the foreclosure process by balancing the interests of lenders, borrowers, and third-party purchasers of foreclosed properties. By reaffirming Greenbriar, the court narrowed the grounds for filing post-sale exceptions, restricting the grounds upon which a debtor could retroactively overturn a sale. The court did not consider Bierman and left open the possibility for debtors to raise post-sale claims against lenders that his or her title was incapable of passing due to fraud or some misleading act. Therefore, attorneys for homeowners must follow the court s pre-sale and post-sale structure carefully or risk waiving otherwise legitimate defenses to a foreclosure sale. 4

UNREPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND. No September Term, 2016 CAROL G. SULLIVAN, ET VIR. MARK S. DEVAN, ET AL.

Circuit Court for Baltimore County Case No. 03-C-12-012422 FC UNREPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 821 September Term, 2016 CAROL G. SULLIVAN, ET VIR. v. MARK S. DEVAN, ET AL. Eyler,