Monday, September 10, 2012

Washington High Court: Irregularities In Following Statute Invalidates Foreclosure Sale; Experienced 3rd Party Winning Bidder At Auction Not A BFP

A May, 2012 ruling by the Washington State Supreme Court affirmed an intermediate appeals court ruling finding that:

  1. A trustee's sale under a non-judicial foreclosure proceeding taking place beyond the 120 days permitted by state law (RCW 61.24.040(6)) warrants invalidating the sale,

  2. Under the circumstances of this case, the homeowner/borrower did not waive the right to bring a postsale challenge for failing to utilize the presale remedies under RCW 61.24.130, and

  3. Without actually distinguishing/determining whether the sale was absolutely void, or merely voidable (it appears that the state Supreme Court was never asked to decide whether the sale was absolutely void, or merely voidable; the high court apparently just implicitly assumed that the foreclosure sale was voidable - calling it "invalid"),(1) the third party buyer at the foreclosure sale was not a bona fide purchaser ("BFP") and accordingly, was not entitled to receive title to the property on account of his winning bid.
Specifically, with regard to the status of the third party winning bidder at the foreclosure sale as a bona fide purchaser, the court made the following analysis:
  • ¶ 23 Despite the trustee's failure to strictly comply with the statutory requirements and in addition to the waiver argument, Dickinson contends he is a BFP and should receive title. While the trial court concluded that Dickinson was a BFP, the Court of Appeals disagreed. We agree with the Court of Appeals.

    ¶ 24
    Under RCW 61.24.040(7), the deed's "recital shall be prima facie evidence of [statutory] compliance and conclusive evidence thereof in favor of bona fide purchasers."[9] Whether Dickinson was a BFP is factual and legal inquiry.

    A BFP is one who purchases property without actual or constructive knowledge of another's claim of right to, or equity in, the property, and who pays valuable consideration

    But if the purchaser has knowledge or information
    that would cause an ordinarily prudent person to inquire further, and if such inquiry, reasonably diligently pursued, would lead to discovery of title defects or of equitable rights of others regarding the property, then the purchaser has constructive knowledge of everything the inquiry would have revealed.

    Thus, in considering whether a person is a BFP, we ask (1)
    whether the surrounding events created a duty of inquiry, and if so, (2) whether the purchaser satisfied that duty. In this determination, we consider the purchaser's knowledge and experience with real estate. Miebach v. Colasurdo, 102 Wash.2d 170, 175-76, 685 P.2d 1074 (1984).

    ¶ 25
    The facts pertaining to Dickinson's status are undisputed. We give, as did the Court of Appeals, substantial weight to Dickinson's real estate experience. Dickinson has extensive experience with nonjudicial foreclosure sales, purchasing 9 of his 13 properties at such sales. He familiarized himself with foreclosure law and knew enough about the process to obtain the notice of trustee's sale from a title company.

    ¶ 26 Dickinson had within his knowledge sufficient facts to put an experienced real estate purchaser, such as himself, on inquiry notice. He had a copy of the notice of trustee's sale, which listed the amount in arrears as only $1,228.03, suggesting Tecca had substantial equity in the property. CP at 530.

    Dickinson contacted Tecca, who refused to sell him the property and insisted the sale would not happen. Dickinson kept track of the numerous continuances and was surprised that the property was finally up for sale, five months after the date listed in the notice. The number of continuances, however, chilled the bidding process, contributing to the grossly inadequate purchase price.

    Although four or five bidders showed up to the original sale, only Dickinson and another bidder showed up at the actual sale. Dickinson was prepared to bid up to $450,000 for the property, showing he knew the property was worth at least that much. The substantial equity coupled with the minor default amount, Tecca's intention to keep the property, and the numerous continuances created a duty of inquiry, which Dickinson failed to satisfy.

    Given that he had already contacted Tecca once, Dickinson could have contacted Tecca again to determine whether default had been cured. Had Dickinson made a reasonably diligent inquiry, he could have discovered that the numerous continuances were tied to payments under the Forbearance Agreement.

    Because real estate investment was his livelihood, Dickinson should have taken more care with this purchase in order to claim BFP protection
    . We agree with the Court of Appeals and hold that Dickinson was not a BFP.
For the ruling, see Albice v. Premier Mortg. Servs., 174 Wn.2d 560, 276 P. 3d 1277 (Wn. May 24, 2012).

(1) Note that if the court had been asked to determine whether the sale was absolutely void, or merely voidable, and had it concluded that it was the former, it would have been unneccessary to determine a winning bidder's BFP status - one who would otherwise qualify as a BFP will never prevail if the foreclosure sale is found to be absolutely void.

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