[Deed of Trust Foreclosure Sales

Many attorney’s knee jerk response is that deed of trust foreclosure sales don’t get set aside.  This certainly is the general rule.  However, Alaska has a long history of setting aside deed of trust foreclosure sales, even if they are only rare occasions.  Alaska is particularly troubling in that the statute provides for redemption rights only to the extent provided for in the deed of trust.  Because the statute does not require redemption rights the banks don’t allow any redemption rights.  Accordingly, the courts have allowed sales to be set aside.  Due process violation allegations have been made, but the Alaska Supreme Court has not reached the question by finding other reasons to allow the sales to be set aside.  Accordingly, the issue remains open whether a due process claim could be successful.  The following are excerpts taken from various pleadings and briefs filed in cases in Alaska.  Rather than waiting to provide a more cohesive analysis on the topic, I thought I’d make these resources generally available to those that might either use them as a launching point or to engage in debate on the issues.

Alaska Courts set aside Trustee Foreclosure Sales

“Equity Abhors a forfeiture and will seize upon slight circumstances to relieve a party therefrom.” Rosenberg v. Smidt, 727 P.2d 778, 783 (Alaska 1986) citing, Jameson v. Wurtz, 396 P.2d 68 (Alaska 1974).  The remedy of setting aside the sale will be applied in cases which reach unjust extremes.  Rosenberg v. Smidt, 727 P.2d 778, 783 (Alaska 1986) citing Semlek v. National Bank of Alaska, 458 P.2d 1003, 1006 (Alaska 1969).  If the bidders are allowed to claim the property after paying only a small fraction of the value of the property the matter has reached an unjust extreme.   See, e.g., Rosenberg v. Smidt, 727 P.2d 778 (Alaska 1986).

The Alaska Supreme Court has stated that

“. . .defects in the mechanics of the trustee’s exercise of the power to foreclose may render the foreclosure sale voidable.  Generally, mere inadequacy of price is not sufficient by itself to require the inadequacy of the sale price is (1) “so gross as to shock the conscience and raise a presumption of fraud or unfairness,” or (2) is coupled with other irregularities in the sale procedures, then invalidation of the sale may be justified.

Gross inadequacy is measured by reference to the fair market value of the property at the time of the sale.  Fair market value for these purposes has been defined as not the fair “forced sale” value of the real estate, but the price which would result from negotiation and mutual agreement, after ample time to find a purchaser, between a vendor who is willing, but not compelled to sell, and a purchaser who is willing to buy, but not compelled to take a particular piece of real estate.  Baskurt v. Beal, 101 P.2d 1041, 1044 (Alaska 2004).

Furthermore, “. . .a trustee has a duty to take reasonable steps to act impartially and in such a way as “not to sacrifice the debtor’s property.”  Id at 1046.

Alaska Deed of Trust Bidders Do Not Earn BFP Status when on Inquiry Notice of Defenses to Sale or they are Bad Faith Purchasers.

Alaska Stat. 34.90.030 grants bona fide purchasers at a foreclosure sale a conclusive presumption that the provisions for a non-judicial sale were performed if the trustee recites the factual specifics of their compliance with statutory requirements.  The Alaska Supreme Court has applied the statute in Rosenberg v. Smidt, 727 P.2d 778, 784 (Alaska 1986).  In Rosenberg the court stated that to qualify as a BPF the purchasers must be good faith purchasers for value and without notice of any defect.  Id.  Furthermore, a bad faith purchaser or one on inquiry notice does not become a BFP due to the recitations in the Trustee’s deed. Semlek v. National Bank of Alaska, 458 P.2d 1003 (Alaska 1969).

1) Foreclosure Purchaser Inquiry Notice may Defeat BFP Status: 

In addressing the quality of the bidder’s “notice,” the property owner only must show the bidders were on inquiry notice of potential defects in the sale to deprive the Bidders of BPF status.  Modrok v. Marshall, 523 P.2d 172 (Alaska 1974).

“It is a settled rule of property that circumstances, which suggest outstanding equities in third parties, impose a duty upon the purchaser’s to make a reasonable investigation into the existence of a claim.  Given suspicious facts, the status of bona fide purchaser turns upon whether there was a prudent inquiry into their import.”  Modrok v. Marshall, 523 P.2d 172 at 174 (Alaska 1974).

Facts that put bidder on inquiry notice of Defects of sale include:

1)                  Insufficiency of the Sale Price in comparison to the fair market value of the property sold;

2)                  Absence of the Owner at the Sale along with insufficient Trustee recitation of facts regarding the owners actual notice of the sale date.

When the owner is absent from the sale and the trustee’s deed fails to recite factual details in the deed then a bidder is on inquiry notice and is deprived of BFP status.  The court explained that requiring factual recitals tends to assure the requirements of law concerning mailing and delivery are complied with.  In the present case the trustee’s deed identifies the notice of sale which contained a specific sale date which was different than the actual sale date.  The trustee’ deed is completely silent on why the sale was continued or whether any factual steps were taken to apprise the owner of the new sale date.  This lack of any facts addressing this absence of notice to the Owner placed the Bidders on inquiry notice and deprived them of their BFP status.

2) Bad Faith Purchaser Conduct Defeats BFP Status:

A bad faith purchaser or one on inquiry notice does not become a BFP due to the recitations in the Trustee’s deed. Semlek v. National Bank of Alaska, 458 P.2d 1003 (Alaska 1969).  The Plaintiff’s following conduct caused their conduct to be bad faith:

1)            They created a collusive buying group to chill the sale and lower the auction price.

2)            They failed to address make sufficient inquiry into the items in which they were on inquiry notice;

3)            They failed to notify the owner of the sale so that she could timely object to the sale during the free statutory sale cancellation procedure.

Bidders had a duty to not chill the sale and take deliberate steps to lower the auction sale price.  .” Cf. McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978).  The trustee must take “reasonable appropriate steps to avoid sacrifice of the debtor’s property and his interest.  Id.  “The trustee under a deed of trust generally regarded as owing a fiduciary duty to both the trustor and the beneficiary and is required to perform his duties impartially.   McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978).  The trustee must take “reasonable appropriate steps to avoid sacrifice of the debtor’s property and his interest.  Id.  The Bidders were on notice that the borrowers were occupying the house before bidding on the property.

3)                  Possible factual Allegations

1. The Bidders were the only bidders present at the sale.
2. The Bidders created a collusive group to prevent competitive bidding at the sale thereby defeating the objective and purpose of a public sale.
3. The Deed of Trustee attempted sale fails to comply with the Alaska Statutory requirements.
4. The Bidder’s failed to promptly notify the Owners of the sale until after the lapse of A.S. 34.20.080(g) trustee rescission thereby intentionally depriving the Owner or Seller  the opportunity to correct any sale deficiencies.
5. The Bidders were on notice that the deed of trust itself did not include redemption rights.
6. The U.S. Constitutional Rights of due process which include notice and opportunity to be heard as guaranteed under the 14^th Amendment was a matter of public record.
7. The Alaska Constitution Article 1, Section 7 which affords due process rights to Alaska citizens was a matter of public record.
8. The lender and Trustee breached the duty to seasonably advise the obligor on request of the amount in default.  Hagberg v. Alaska Nat’l Bank, 585 P.2d 559 (Alaska 1978).
9. The lender and Trustee converted the owner’s right of reinstatement or satisfaction of the debt by breaching its duty to seasonably advising her of the cure amount or the redemption amount.  Young v. Embley, 143 P3d 936 (Alaska 2006).
10. The Deed of Trust Trustee and lender have a duty to timely communicate the reinstatement and satisfaction amount; and, to be reasonably willing and able to accept a reinstatement or satisfaction from the debtor.   Nystrom v. Buckhorn Homes, 778 P.2d 1115; Alaska 1989).
11. Perhaps the lender and trustee also have a duty to inspect the property, the tax rolls and consider the fair market value of the premises to fulfill its obligation to not forfeit the owner’s equity in the property.  This duty arises under the trustee’s  duty to act impartially to the trustor and beneficiary of the trust by informing the beneficiary of the continued sale date but failing to announce the continuance to the trustor.  These rights arise from the duty to not to sacrifice the debtor’s property for an insufficient amount.  McHugh v. Church, 583 P.2d 210  (Alaska 1978).  I propose the lender and Trustee also has a  duty to notify the trustor of the sale results within the trustee’s ten day timeline to rescind the sale thereby not sacrifice the owner’s equitable rights of redemption.