Legacy v. Cohn

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Legacy Funding LLC v. Edward S. Cohn, Substitute Trustees, Et al., No. 23, September Term 2006, Legacy Funding LLC v. Howard N. Bierman, Substitute Trustees, Et al., No. 25, September Term 2006, & Legacy Funding LLC v. Thomas P. Dore, Substitute Trustees, Et al., No. 26, September Term 2006. Opinion by Wilner, J. FORECLOSURE PURCHASER MAY BE ENTITLED TO A PORTION OF SURPLUS PROCEEDS FROM FORECLOSURE SALE IF HOLDOVER MORTGAGOR INTERFERES WITH PURCHASER S POSSESSION OF THE PROPERTY, BUT NOT UNTIL THE FORECLOSURE PURCHASER IS LAWFULLY ENTITLED TO POSSESSION PURSUANT TO COURT ORDER OR PAYMENT OF THE FULL PURCHASE PRICE AND THE PURCHASER SUBSEQUENTLY MAKES A DEMAND FOR POSSESSION ON THE HOLDOVER MORTGAGOR THAT IS REFUSED. THE FORECLOSURE PURCHASER MAY THEN RECOVER DAMAGES TO COMPENSATE PURCHASER FOR ITS LOSS FROM THE SURPLUS PROCEEDS, WHICH MAY, UNDER APPROPRIATE CIRCUMSTANCES, BE MEASURED BY THE FAIR RENTAL VALUE OF THE PROPERTY. In the Circu it Court for P rince Geo rge s Cou nty IN THE COURT OF APPEALS OF MARYLAND No. 23 September Term, 2006 LEGACY FUNDING LLC v. EDWARD S. COHN, SUBSTITUTE TRUSTEES, ET AL. ______________________________________ No. 25 September Term, 2006 LEGACY FUNDING LLC v. HOWARD N. BIERMAN, SUBSTITUTE TRUSTEES, ET AL. ______________________________________ No. 26 September Term, 2006 LEGACY FUNDING LLC v. THOMAS P. DORE, SUBSTITUTE TRUSTEES, ET AL. ______________________________________ Bell, C.J. Raker Wilner Cathell Harrell Battaglia Greene, JJ. ______________________________________ Opinion by Wilner, J. ______________________________________ Filed: January 9, 2007 We have before us appeals from orders entered by the Circuit Court for Prince George s County in th ree foreclo sure actions . Because the appea ls arise from generally commo n facts and present com mon issue s of law, w e have co nsolidated th em. The b asic issue is whether the Circuit Court erred in denying a purchaser s claim against surplus proceeds for the rental value of the mortgaged property between the date of sale and the time the mortgagor vacated the property. We shall vacate the challenged orders and remand the cases for further proceedings.1 BACKGROUND In each of the cases be fore us, app ellant Lega cy Funding LLC p urchased at a foreclosure sale a parcel of residential property that was occupied by its owner as a residence and that was not rented or otherwise commercially productive. In each case, the sale was ratified by the court, but, when Legacy failed to pay the purchase price and complete settlement in accordance with the terms of sale, the trustees petitioned for leave to resell the property. In each case, Legacy then paid the full purchase price, settled on the property without the need for a resale, and thereafter filed a m otion for possession. In each case, the auditor s report, after accounting for proper expenses, showed a surplus, 1 These cases each involved a deed of trust rather than a common law mortgage, but, althoug h there are so me diffe rences betw een the tw o instrume nts, we hav e generally treated th em the same. See Baker v. Dawson, 216 Md. 478, 493, 141 A.2d 157, 165 (1958); Lebrun v. Prosise, 197 M d. 466, 7 9 A.2d 543 (1 951), Northrop v. Beale, 170 Md. 439, 18 4 A. 90 0 (193 6), cert. denied, 299 U.S. 516, 57 S. Ct. 236, 81 L. Ed. 381, rehearing denied, 299 U.S. 624, 57 S. Ct. 319, 81 L. Ed. 459 (1937). For convenience, we shall sometimes refer to the instruments as mortgages and the debtors as mortgagors. which would ordina rily be paid to the m ortgag or. Upon the filing of Legacy s motions for p ossession, the court entered ord ers awarding possession unless the respective mortgagors showed cause by a certain date why that relief should not be granted. None of the mortgagors offered any such cause. Prior to the dates set in the show cause orders, however, Legacy filed a motion in each case seeking payment from the surplus proceeds of amounts equivalent to the fair rental value of the property, commencing from the date of the sale. The court eventually denied the motions o n the grou nd that, althou gh a purc haser may be entitled to any ren t actually received b y the mortgag or follow ing the fore closure sale, a purchase r was not e ntitled to recover fro m the surp lus proceed s the rental value of prope rty that was no t actually rented. Following ratification of the auditor s reports prepared in conformance with the court s rulings, Legacy appealed and we granted certiorari prior to any proceedings of substance in the Court of Special Appeals.2 DISCUSSION 2 It is not clear from the record whether the surplus proceeds have been paid to the mortgagors or w hether Legacy filed a bon d to preclude their payment. Th e records before us do not s how tha t any such bo nds were filed. Ordin arily, if the procee ds had, in fa ct, been paid to the mortgagor(s) in default of any supersedeas bond, Legacy s appeals might well be moot, in which event we would likely dismiss them. Because the records are not clear on this point, however, and because the mortgagors have not raised the issue of mootness, we shall assume that the cases are not moot. That issue may be explored by the Circuit Court on remand. -2- The ultimate question in these cases is whether Legacy is entitled to recover what essentially would be damages for trespass or wrongful detainer, payable from the surplus proceeds and measured by the rental value of the otherwise unproductive properties. The key to answering that que stion lies in determining whe n the purchaser at a fore closure sale becomes entitled to possession of the mortgaged property. In light of that determina tion, we m ust then dec ide when the purcha ser is entitled to se ek and ob tain damages if the mortgagor prevents or impedes the purchaser from actually obtaining the possession to which it is entitled and whether damages may, in whole or in part, be mea sure d by th e ren tal va lue o f the prop erty. We mo st recently addre ssed the thre shold que stion of entitlem ent to posse ssion in Empire v. Hardy, 386 Md. 628, 873 A.2d 1187 (2005). After reviewing a number of earlier cases dating back to Applega rth v. Russe ll, 25 Md. 317 (1866) and Lannay s Lessee v. Wilson, 30 Md. 536 (1869) and the conflicting statements that appear in some of the cases in that stream (Empire v. Hardy, supra, 386 Md. at 642 , 873 A.2d at 119 5), we m ade c lear t hat th e purcha ser at a fo reclo sure sale is no t actu ally entitled to possession until the purc hase price is p aid and, thro ugh delive ry of a deed o f conveyan ce, legal title passes. We added, however, that, upon ratification of the sale, the purchaser may seek possession of the property and that an equity court, on a case-by-case basis, and upon proper notice, has the discretion, unless the circumstances warrant otherwise, to grant possession. Id. at 650, 873 A.2d at 1200. The effective holding of Empire, and thus the -3- current view of this Court, is that the purchaser becomes entitled to possession only when it has either paid the full purchase price in conformance with the terms of sale and received a conveyanc e of legal title to th e property, or, fo llowing ratif ication of the sale but prior to se ttlement, has re ceived an order for p ossession f rom the co urt. In these cases, Legacy did not seek an order of possession until after it had paid the purchase price, so the question of whether, on the facts of these cases, it would have been appropriate for the cou rt to grant an order for posse ssion prior to that time is not before us.3 We also addressed in Empire the proper procedure to be followed by a purchaser who s eeks ju dicial as sistance in actua lly gaining the pos session to whic h it is entitle d. We noted the argument by Empire that there were alternative methods that could be used a motion in the forec losure cou rt pursuant to Maryland R ule 14-10 2 and a pr oceeding in the District Court pursuant to Maryland Code, § 8-402.4 of the Real Property Article (RP) and we held that any attempt by a purchaser to seek judicial assistance after ratification of the sale but before the purchase price has been paid and settlement has occurred must 3 We do c aution, with out intendin g to detract in a ny way from what w e said in Empire regarding the ability of the foreclosure court to enter an order of possession upon ratification of the sale, that, absent compelling circumstances, circuit courts should be wary of gra nting posse ssion of fo reclosed pr operty to a purc haser wh o has not yet pa id the full purchase price. As these cases came close to illustrating, if the purchaser defaults, the property may have to be resold, and to evict the legal owner in favor of a potentially defaulting purchaser who holds only equitable title strikes us, absent compellin g circums tances, such as putting the purchase r in possessio n when necessary to prevent waste, secure the property, or make legally and imminently required improv emen ts or repa irs, as nei ther equ itable no r pragm atic. -4- be in the Circuit C ourt pu rsuant to Rule 1 4-102 . See Empire v. Hardy, supra, 386 Md. at 634 and 641, 873 A.2d at 1191 and 1195. That, of course, leaves open the prospect of a purchaser seeking relief under RP § 8-402.4 after settlement has occurred, although that did not occ ur in these ca ses; Legac y sought judicia l assistance in th e foreclosu re case in the Circuit C ourt. 4 The Circuit Court granted the motions for possession, but it denied the claims agains t surplus procee ds on th e groun d that the re was no entitl emen t to such dama ges. 4 Legacy s de cision to seek relief in the fo reclosure p roceeding was entirely appropriate. Although a purchaser who, following conveyance of legal title, seeks only an order for possession may do so in the District Court, if the purchaser intends to seek not just possession but a share of any surplus funds as compensation for wrongful detainer, the relief, for very practical reasons, should b e sought in the foreclosu re proceeding pursuant to Rules 14-102 and 14-208. Apart from the fact that a parallel proc eedi ng in the D istric t Court se ekin g anything mo re than m ere p osse ssion is likely a waste of judicial resources and vexatious as to the mortgagor, it would raise a number of practical problems in terms of enforcing a District Court money judgment against surplus proceeds within the ju risdiction of th e Circuit C ourt. Maryland Rule 14-208(a) permits persons claiming an interest in the proceeds of sale to file an application for payme nt of the claim at any time after the sale an d before final ratification of the auditor s account. Rule 14-305 provides for the court, upon ratification of a sale and p ursuant to R ule 2-543 , to refer the m atter to a cour t auditor to state an account. Rule 2 -543 permits the auditor to h old a hearing on co ntested matters and permits parties or claiman ts to file exceptions to the auditor s report. Th e foreclosure rules, in part by incorporating Rule 2-543, thus provide a comprehensive procedure for resolving claims to surplus proceeds in the Circuit Court. A parallel contemporaneous proceeding in the District Court can do little more than compromise the efficiency and cohesi on of th at proce dure, in part by cre ating the prospe ct of inc onsisten t determ inations . We note also that RP § 8-402.4 (f) permits an appeal fro m the Dis trict Court jud gment, raising the additional prospect of not only parallel proceedings in the Circuit Court but of the surplus p roceeds b eing distribute d before th e validity of the D istrict Court jud gment is resolved. -5- The court regarded our holding in Brooks v . Bast, 242 Md. 350, 219 A.2d 85 (1966), as entitling a purchaser to any rents or profits actually received by a mortgagor following the foreclosure sale, but it did not believe that, where no such rents or profits were so received, the purchaser was entitled to the rental value of the property. Legacy contends that Brooks indeed does entitle it to comp ensatio n for re ntal valu e. The Circ uit Court w as correct in c oncluding that Brooks, itself, does no t mandate the kind of relief sought by Legacy in these cases, although, as we shall explain, it was incorrect in extending that conclusion to the point of finding that there was no basis for Legac y s claim. Brooks involved the foreclosure of a mortgage on commercial property containing a motel and restaurant. The proceeds from the sale were not sufficient to pay the mortgage balance, so there was no surplus . The case involved m ostly attacks on th e sale itself, which are of no relevance here. During the proceeding in the Circuit Court, the purchaser made a claim for the rental value of the property dating from the time of sale, a period, as of the date of the motion, of ten mo nths. It is not clear from the Cou rt s Opinion wh ether the motel rooms w ere being rented during that period, but the record extract and briefs in the case indicate that the motel and restaurant remained in operation follow ing the s ale and that the m ortgag ors colle cted an d retaine d those rents an d prof its. The extract does not indicate, however, how much was actually received, either gross or after expe nses. Exp erts called by the p arties made estimates of the incom e that should -6- have been received, based largely on the occupancy rates, room charges, and restaurant operations of other motels. Based on those estimates, experts opined as to the rental value of the motel and restaura nt durin g the 10 -month period , rangin g from $1,370 /month to $1,80 0/mon th. There w as also evid ence that, im mediately follo wing the s ale, the mortg agor offe red to lease the property back from the purchaser for $2,000/month. Among the orders entered by the Circuit Court was one directing the mortgagors to pay to the trustees the sum of $13,700 $1,370/month for the ten-month period and an additional $1,370 for each month thereafter that the mortgagor remained in possession. This seemed to be in the nature of a deficiency judgment and was based on the lowest estimate of rental value. The mortgagors excepted to that order and included in their appeal a complaint about the d enial of their e xception. T hey conced ed the righ t of a purch aser at a mortga ge sale to a fair ren tal betw een the time of purcha se and t he takin g of po ssession , which the Co urt regarded as approp riate under Union Trust Co. v. Biggs, 153 Md. 50, 56, 137 A . 509, 51 2 (192 7), and d isputed only the a moun t ordere d by the c hance llor. See Brooks v. Bast, supra, 242 Md. at 358, 219 A.2d at 88-89. With little discussion, the Court f ound n o error in the cha ncellor s allow ance. Id. Whether that amount was intended as an estimate of the amount of rent and other income a ctually received by the mortga gors or the e conomic rental value o f the prope rty irrespective of what was actually received is not at all clear. The Court simply confirmed -7- the concession that the purchaser had a right to a fair rental between the time of purchase and the taking of possession. The Circuit Court was correct in noting a distinction between Brooks and these cases. In Brooks, the Court was dealing with property that was commercially productive during the period between the sale and the turnover of possession; income was received from the property by the mortgagor. The only problem was that neither side could, or chose to, show how much gross or net income was received, so estimates were made of the incom e that should have bee n received . In holding th at the purch aser was e ntitled to that income, the Court cited Union Trust C o. v. Big gs, supr a, which did not involve any right to rents or other income, but in which the Court stated that after a foreclosure sale, equity regarded the property in the land as in the buyer and that the deed, when ultimately delivered, vests the property in the purchaser from the day of sale. 153 Md. at 56, 137 A . at 512. The connectio n apparen tly was that, if the d eed vested the property in the purchaser retroactively to the date of sale, the purchaser should be entitled to the rents and p rofits back to that time as w ell. We need not consider here whether, in light of Empire, Biggs still suffices to provide a valid underpinning for the conclusions reached in Brooks, because we are not dealing in these cases with property that was, in fact, income-producing. Legacy is not seeking to recover income actually received by the mortgagor from his commercial use of the property fo llowing the sale, but rather damage s based on its alleged inab ility to obtain -8- possession for its own purposes. There is a difference, both as to the elements of the claim a nd the n ature of the relief . There is no indication in Brooks that allowance of the claim for income received by the mortgagors was dependent on findings that the purchasers had demanded possession and were wrongfully denied it; rather, the allowance was based on a concession that the purchaser was automatically entitled to rents and profits accruing from the property after the date of sale. A claim for rental value as damages for wrongf ul detainer in contrast, rests o n a show ing that the cla imant wa s wrong fully precluded from gaining possession and is in the nature of an action for trespass an unauth orized in trusion u pon the posses sory intere st in prop erty of an other. Patapsco Loan Co. v. Hobbs, 129 M d. 9, 15-16, 9 8 A. 239 , 241 (191 6); Balto. & Ohio Railroad Co. v. Boyd, 67 Md . 32, 40, 10 A . 315, 317 (1 887); Mitchell v. Baltimore Sun, 164 Md. App. 497, 50 7, 883 A .2d 100 8, 1014 (2005 ). Compensa tory damages in such an action, other than nomina l damages or recov ery for specific harm done to the property, is measured not by any benefit derived by the defendant from the use of the land but rather to provide the injured party indemnity for his loss, and nothing more. Tome Institute v. Crothers, 87 Md. 569, 588-89, 40 A. 261, 267 (1898). Those damages are usually measured by a reasonable rent for the land wrongfully occupied. Id. at 588, 4 0 A. at 2 67. See also Balto. & Ohio Railroad Co. v. Boyd, supra, 67 Md. at 40, 10 A. at 318. We do not construe those cases as establishing -9- any right to fair rental value. The right is to seek damages for the trespass, damages that may be measured by fair rental value. Although there is little guidance in the caselaw regarding the elements of a nonstatutory wrongful detainer action, we think it is at least implicit that, to establish the basis of such a claim, at least one for anything more than nominal damages, the claimant must show that (1) it was lawfully entitled to possession, (2) it demanded possession follow ing its en titlemen t to do so , and (3) the pos session was w rongf ully denie d. Cf. Rubel-Jones Agency, Inc. v. Jones, 165 F. Supp 652 (W.D. Mo. 1958), construing a Missouri wrongful detainer statute. The earliest time that Legacy was lawfully entitled to demand possession was when it pa id the full pu rchase price and receiv ed deeds to the respec tive propertie s. It is not clear when Legacy actually demanded possession. Its motions for judgment awarding possession state only that the properties were sold at foreclosure to Legacy, that the defendants were the owners of the properties, that Legacy had settled and received trustees deeds to the properties, that Legacy was entitled to possession, and that the defendants had no right to possession. The relief requested was that the defendants or any other occupants show cause why possession should not be delivered to Legacy and that the cou rt order th e defe ndants or occu pants to deliver p ossessio n. The mo tions do no t aver that the m ortgagors o r any other pers ons were still in possession , that if so, any dem and had b een mad e upon the m, or that Le gacy was, in f act, -10- being denied possession. Nor do they seek any damages for wrongfully denying possession. None of the mortgagor-defendants contested Legacy s motions for possession. It was not until Legacy filed its motions for surplus proceeds more than a month after it settled in one case and more than two months after settlement in the other two, that it first complained that the mortgagors had refused to surrender possession, but in none of thos e motio ns did it a llege w hen tha t occurr ed. Because the court denied the motions on the ground that the law did not recognize a right to compensation merely for the denial of possession, Legacy was not given the opportunity to show when it demanded possession and when, if at all, that demand was rejected. Legacy attached to its motions estimates of rental value, but they, too, were not considered by the court. It is evident, however, that damages of this kind are available in appropriate cases, and the motions should not, therefore, have been denied on the ground applied by the co urt. It is also clear that, because the recovery is for injury arising from the wrongful denial of possession, which cannot arise until there has been a wrongful denial of possession, there can be no relation back to any earlier period. Applying a relation back theory in that context would allow damages for an injury before there legally was an injury, which would not only be poor public policy but would likely raise Constitutional questio ns. We thus conclude that: -11- (1) A pur chaser has the right to claim and seek possession upon pa yment of the full purchase price in accordance with the terms of the sale, and, unless the court, in the proper exercise of its discretion, enters an order for possession before then, not until that time. (2) If the purchaser chooses to claim a share of surplus proceeds as compensation for the mo rtgagor s w rongfully prec luding the p urchaser f rom obtain ing the pos session to which it is entitled, that claim should be made in the foreclosure action in conformance with M aryland R ules 14 -102 an d 14-2 08. (3) Such a claim may, in appropriate cases, be measured by the fair rental value of the property accounting from the time that the mortgagor rejected a proper demand for possession. These conclusion s shall lead us to vacate the orde rs entered by the Circuit Court denying appellant s motions for surplus proceeds and remand that aspect of the cases for further proceedings consistent with this Opinion. In the exercise of our discretion under Maryland Rule 8-607, we shall assess costs against appellant, Legacy, which did not prevail in its claim that it was entitled to damages accounting from the date of sale. ORDERS IN NOS. 23, 25, AND 26 DENYING MOTIONS FOR SURPLUS PROCEEDS VACATED; CASES REMANDED TO CIRCUIT COURT FOR PRINCE GEORGE S COUNTY FOR FURTH ER PRO CEEDIN GS CO NSISTEN T WITH THIS OPINION; COSTS TO BE PAID, IN EACH CASE, BY APPELLANT. -12-

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