Recent Maryland Court of Special Appeals Opinion is Having an Unintended Effect on Certain Ratified Foreclosure Sales

Recently, some Maryland trustees and secured parties have refused to close on ratified foreclosure sales out of concern that the Maryland Court of Special Appeals’ decisions in the consolidated cases Shanahan v. Marvastian and Blackstone v. Sharma, 233 Md. App. 58, 161 A.3d 718 (2017) (collectively referenced herein as Shanahan) would render the judgments on which those sales were based void. Because a petition for writ of certiorari has been filed in Sharma, and we expect that the Court of Appeals will take the case, the trustees and secured parties have sought guidance from the circuit courts regarding how to proceed in cases in which sales have been ratified until the Court of Appeals hands down a decision. While we understand the trustees and secured parties’ requests for guidance, we hope that when faced with motions to stay filed by secured parties and trustees, the circuit courts will recognize that ratified auction sales to bona fide purchasers for value should be permitted to proceed to closing and should not be stayed.

In Shanahan, the Court held that when certain debt purchasers attempt to collect on a debt via a foreclosure action, in order to bring the action, the purchasers must either have a Maryland Collection Agency license or qualify for a statutory exemption. The decision in Shanahan has been further appealed to the Court of Appeals, and the petition for a writ of certiorari is currently pending. We believe that the apprehension supporting these motions to stay foreclosure proceedings is unfounded, as the Shanahan decision involves neither an instance in which a judgment had already been entered nor a bona fide purchaser who had already purchased the foreclosure properties.

Shanahan involved substitute trustees who filed two separate foreclosure suits in Montgomery County on behalf of a statutory trust that had bought the consumer debts on which it was attempting to collect. The Circuit Court for Montgomery County dismissed both actions, holding that the Maryland Collection Agency Licensing Act required the statutory trust to be licensed as a collection agency. The Circuit Court further found that because the statutory trust was not licensed as a collection agency, it was not authorized to file suit in the first place. The Court of Special Appeals affirmed the Circuit Court’s holding and noted that an unlicensed collection agency cannot file suit against a debtor given that Maryland law requires “debt collectors to be licensed.” Of import to the present analysis, in its opinion, the court remarked that a “’judgment entered in favor of an unlicensed debt collector constitutes a void judgment.’” Because Sharma was not a case in which a judgment had already been entered, however, this statement was not essential to the court’s holding. In legal terms, in one of the few remaining Latin phrases still in general use by lawyers and judges, it is obiter dictum, i.e., a court’s incidental expression of opinion and thus of no precedential authority. Nevertheless, this one remark has caused trustees and secured parties to move to stay foreclosure actions even after sales have been ratified. Numerous foreclosure sales have been held up as a result.

In our view, extending Shanahan to cases in which the foreclosure sale has already been ratified and the purchaser is a bona fide purchaser for value offends both the law and common sense. In Poku v. Friedman, 403 Md. 47, 939 A.2d 185 (2008), the Court of Appeals recognized that, “If ratified foreclosure sales could be overturned long after the ratification in the absence of the filing of a supersedeas bond and the granting of a stay, the title to any property where any prior conveyance in the chain of title came out of a mortgage foreclosure sale could be questioned even if the foreclosure sale occurred a year in the past, or ten years, or fifty years.” The Court also noted that all aspects of a transaction for this type of property would be affected, dampening the “general marketability of title to property.” Yet, that is exactly the result that will happen here if the courts allow ratified foreclosure sales to bona fide purchasers for value to be stayed.

Of course, when a foreclosure sale has not yet been ratified, or when the purchaser is not a bona fide purchaser – for example, where the purchaser was the secured party – then there might be a basis to stay the sale. In the vast majority of situations, however, in which bona fide purchasers are the auction buyers, this should not be the case. Any issues related to the secured party’s not being licensed should be resolved between the defendant debtor and the secured party. They should not detrimentally affect a bona fide purchaser’s equitable interest in the purchased property nor its ability to close on its ratified property purchase.