In an attempting to unwind/undo/void an abusive or fraudulent real estate transaction (ie. foreclosure rescue sale leasebacks, fraudulent inducement in the execution of a deed, forgeries, other real estate swindles), one of the initial determinations generally to be made (particularly when one seeks to restore title to property in the name of the scammed homeowner) is whether the contract, deed, or mortgage placed on the property contemporaneously with the scam (or at some point thereafter) is absolutely/wholly void (ie. void ab initio), or whether it is merely voidable. Further, in the case of a contract, deed, or contemporaneous/subsequent mortgage that is merely voidable, whether that instrument can be cancelled will turn on whether the grantee or lender qualifies as a bona fide purchaser or bona fide encumbrancer.
A June, 2010 ruling by the Maryland Court of Appeals (the state's highest court) in the context of a sale leaseback foreclosure rescue ripoff addressed the void vs. voidable question, and the implications to a bona fide purchaser, in the following excerpt (beginning at page 25 of the ruling, bold text is my emphasis not in the original text; text of court footnotes omitted):
- The distinction between a transaction being deemed void and voidable is clearly an important one. A void contract “is not a contract at all,” Restatement (Second) of Contracts §7 cmt. a (1981), and all parties, present and future, would be equally allowed to avoid the contract. See United States for the Use of the Trane Co. v. Bond, 322 Md. 170, 179-80, 586 A.2d 734, 738 (1991); Monumental Building Ass’n v. Herman, 33 Md. 128, 132 (1870); Harding v. Ja Laur Corp., 20 Md. App. 209, 214, 315 A.2d 132, 135 (1974) (“A deed obtained through fraud, deceit or trickery is voidable as between the parties thereto, but not as to a bona fide purchaser. A forged deed, on the other hand, is void ab initio.”).
- A voidable contract, on the other hand, is “one where one or more parties thereto have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance.” Restatement (Second) of Contracts § 7 (1981); see Coopersmith v. Isherwood, 219 Md. 455, 461, 150 A.2d 243, 247 (1959) (adopting Restatement of Contracts § 13 (1932), precursor to § 7).
- We have long recognized that contracts obtained by fraud are not absolutely void, but are “voidable at the election of the parties affected by the fraud” and “binding until properly avoided.” Urner v. Sollenberger, 89 Md. 316, 332, 334, 43 A. 810, 811-12 (1899); see also Iseli v. Clapp, 254 Md. 664, 669-72, 255 A.2d 315, 318-19 (1969) (holding that a foreclosure rescue scam victim’s deed was voidable, but not as against innocent third parties); Hoffman v. Seth, 207 Md. 234, 239, 114 A.2d 58, 60 (1955) (stating that an agreement or conveyance procured by a false representation of a material fact is voidable, but not void); Wicklein v. Kidd, 149 Md. 412, 424-25, 131 A. 780, 784-85 (1926).15
- The distinction between a void contract and a voidable one is especially important in situations involving deeds; once a deed is considered void ab initio or of no legal effect, there are lasting consequences to everyone in the subsequent chain of title. As a result, we have been circumspect at common law16 in finding a deed void ab initio and have limited our rulings regarding voidness to circumstances that go to the face of the deed, e.g., forgery. See Maskell v. Hill, 189 Md. 327, 335, 55 A.2d 842, 845 (1947) (holding that a forged deed is a nullity); see also Harding, 20 Md. App. at 214, 315 A.2d at 135 (“A forged deed . . . is void ab initio.”). In Harding, our intermediate appellate court discussed how a forged deed, void from inception, does not protect bona fide purchasers:
[T]here can be no bona fide holder of title under a forged deed. A forged deed, unlike one procured by fraud, deceit or trickery is void from its inception. The distinction between a deed obtained by fraud and one that has been forged is readily apparent. In a fraudulent deed an innocent purchaser is protected because the fraud practiced upon the signatory to such a deed is brought into play, at least in part, by some act or omission on the part of the person whom the fraud is perpetrated. He has helped in some degree to set into motion the very fraud about which he later complains. A forged deed, on the other hand, does not necessarily involve any action on the part of the person against whom the forgery is committed. So that if a person has two deeds presented to him, and he thinks he is signing one but in actuality, because of fraud, deceit or trickery he signs the other, a bona fide purchaser, without notice is protected. On the other hand, if a person is presented with a deed, and he signs that deed but the deed is thereafter altered e.g. through a change in the description or affixing the signature page to another deed, that is forgery and a subsequent purchaser takes no title.
Id. at 215, 315 A.2d at 136.
- With respect to alleged violations of statutes, we have recognized that not all contracts that transgress in that regard are necessarily void, but are dependent upon legislative intent. See Beard v. American Agency Life Ins. Co., 314 Md. 235, 254-55, 550 A.2d 677,686-87 (1988); DeReggi Constr. Co. v. Mate, 130 Md. App. 648, 663-65, 747 A.2d 743, 751-52 (2000) (holding that a violation of the Consumer Protection Act will not render a contract unenforceable without proof of injury or damage). As we recognized in Lester v. Howard Bank, 33 Md. 558, 564 (1871), we examine the statute as a whole:
“[B]efore the rule can be applied in any case of a statute prohibiting or enjoining things to be done, with a prohibition and a penalty only for doing a thing which it forbids, . . . the statute must be examined as a whole to find out whether or not the makers of it meant that a contract in contravention of it should be void, or that it was not so to be. In other words, whatever may be the structure of the statute in respect to prohibition and penalty, or penalty alone, that is not to be taken as granted that the Legislature meant that contracts in contravention of it were to be void, in the sense that they were
not to be enforced in a court of justice.”
Id., quoting Harris v. Runnels, 53 U.S. 79, 84, 13 L. Ed. 901, 903 (1851).
- Hudson v. Maryland State Housing Co., 207 Md. 320, 114 A.2d 421 (1955) and Romm v. Flax, 340 Md. 690, 668 A.2d 1 (1995) are particularly instructive in determining whether failure to comply with a statutory provision renders a deed voidable or void.
For more of the court ruling, see Julian v. Buonassissi, 414 Md. 641; 997 A.2d 104 (Md. 2010).
By the way, the bottom line in this case was that the court:
- Found the contract (and therefore the deed) used in pulling off the scam was merely voidable, and not void ab initio upon proof of violations of the Maryland Protection of Homeowners in Foreclosure Act,
- Found that the foreclosure rescue scam victim's failure to file a supersedeas bond to stay the ratification by the trial court of the foreclosure sale of property in which she had been in the chain of title, did not moot an appeal where the purchaser at the sale does not qualify for protection as a bona fide purchaser, and
- Remanded the case back to the trial court to determine whether the assignee of an original mortgagee, who bought at the foreclosure sale, had notice of the alleged defect surrounding the foreclosure rescue scam prior to the foreclosure sale.
See The Maryland Daily Record: Foreclosure appeal revived by Maryland Court of Appeals despite failure to post bond for some (easier-to-read) background on this ruling.
Go here for more on void and voidable deeds. DeedVoidVoidable