In Greentree Series V, Inc. v. C. Larry Hofmeister, Jr., et al., a case of first impression involving a defaulting foreclosure purchaser, the Maryland intermediate appellate court recently determined that, where a foreclosure purchaser fails to close on the sale, the trial court erred by ordering that the deposit be forfeited, if the property is to be resold at the cost and expense of such defaulting purchaser.
Pursuant to Maryland Rule 14-305(g), where a purchaser fails to close on a foreclosure sale, a circuit court may order a resale “at the risk and expense of the purchaser or may take any other appropriate action.” (Emphasis added). According the Court, either the deposit could be forfeited, or the property could be resold at the risk of the defaulting purchaser, but not both. A copy of the opinion is available at http://www.mdcourts.gov/opinions/cosa/2015/1246s13.pdf
Greentree Series V, Inc. (“Greentree”) was the high bidder at a foreclosure action for $172,000, having paid a $33,197 deposit at the time of the auction. In addition to requiring the deposit, the advertisement of sale had provided that the “[b]alance of the purchase price is to be paid in cash within ten (10) days of the final ratification of sale[.] . . . If payment of the balance does not take place within ten days of ratification, the deposit will be forfeited and property will be resold at the risk and expense of the defaulting purchaser.”
After failing to settle on the balance of the purchase price, the trial court entered an order that the property “shall be resold at the risk and expense of” Greentree, and also provided that the “the deposit monies in the amount of $33,197.00 be and are hereby forfeited.” Op. at 3.
At the second foreclosure sale, Greentree was again the high bidder, at $244,000.00, and ultimately followed through with the settlement. Thereafter, the court Auditor proposed that the original deposit should be returned to Greentree. The trial court disagreed, noting that Greentree’s failure to go to settlement on the first sale caused the Trustees to incur additional expenses of $33,379.61, inclusive of interest on the indebtedness, even though the higher sale price still allowed the Trustees to realize $38,620.39 more than they would have if Greentree had closed on the first sale.
Consequently, viewing the failure to settle as indicative of unclean hands, the trial court ordered that, in addition to having the property resold at the risk and expense of the defaulting purchaser, forfeiting the deposit constituted an “appropriate action” under Rule 14-305(g). Greentree appealed, and the Court of Special Appeals of Maryland reversed, narrowing the trial court’s interpretation of Rule 14-305(g).
Before addressing Rule 14-305(g), the Court initially determined that the forfeiture provisions in the advertisement, which also provided for a resale at the risk and expense of the defaulting purchaser, amounted to a penalty, and was not a valid liquidated damages clause that could be enforced.
In Maryland, there are three elements of an enforceable liquidated damages clause: “First, such a clause must provide ‘in clear and unambiguous terms’ for ‘a certain sum’. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.” Op. at 12 (quoting Board of Education of Talbot County v. Heister, 392 Md. 140, 156 (2006) (internal citations and alternations omitted)).
Here, the Court determined that the advertisement of sale did not meet any of these requirements, and the forfeiture provisions therefore amounted to a penalty that was not enforceable. Notably, no “certain sum” could be ascertained at the time of default, because Greentree might be forced to pay more if the resale price was lower than the original, or insufficient to cover the additional interest and cost of resale. See Op. at p. 13.
The Court also rejected the trial court’s determination that Greentree had unclean hands barring recovery of the deposit, explaining that “failure to go to settlement was simply a breach of contract and, for purposes of applying the unclean hands doctrine, a party does not act ‘wrongfully’ simply by breaching a contract.” Op. at 14. Moreover, the Trustees ultimately received interest for the delay, and after expenses, “recover[ed] over $38,000 dollars more than they would have received if there had been no default.” Id.
Regarding Maryland Rule 14-305(g), the Court rejected the trial court’s interpretation that it had discretion to order both that the initial deposit be forfeited and the property be resold at the risk and expense of Greentree. Under that Rule, “[i]f the purchaser defaults, the court, on application and after notice to the purchaser, may order a resale at the risk and expense of the purchaser or may take any other appropriate action.” Md. Rule 14-305(g) (emphasis added).
According to the Court, the Rule is disjunctive in nature in permitting resale at the risk and expense of the purchaser “or” other appropriate action. Thus, the Court held that the trial court “has the power to act only in the alternative.” Op. at 20. “[O]nce the court selects one of two alternative remedies, it is not appropriate to award the second alternative remedy.” Id.
Consequently, the Court determined that, in accordance with the Auditor’s report, the deposit should be returned to Greentree. However, the Court acknowledged that “[n]othing in this opinion should be interpreted as preventing the Trustee or mortgagor, in the event of a default by a foreclosure sale purchaser, from utilizing the deposit to offset any losses occasioned by a resale.” Op. at 21, n. 6.