Lender’s Mistake At Foreclosure Sale Not Basis To Set It Aside

A recent case tell us something that is not new, but it is important enough to emphasize the point here.  [See U.S. Bank National Association v. Testa, 140 A.D.3d 855, 33 N.Y.S.3d 387 (2d Dept. 2016)].

This is especially meaningful because the mistake is not uncommon – it happens, and why it happens is understandable.  (That does make it any less serious, however.)  The issue, the problem, is incorrect bidding instructions given to the foreclosing party’s counsel.  That was the circumstance in the new case.  There can be an error on counsel’s part, or it could just be a miscommunication.  A slip of the pen or keystroke is a human failing that perhaps cannot be avoided.

In any event, here, the winning bid by a third party was $208,133.69 (on a property the plaintiff asserted was worth $399,999.00).  But for reliance on incorrect bidding instruction, plaintiff’s attorney would have bid considerably more at the sale; it certainly would not have let the property go for that inadequate sum.

Can the plaintiff overturn the sale on that basis?  No, ruled the court, relying upon extensive authority “[T]he unilateral mistake of the plaintiff’s counsel does not provide a sufficient basis for setting aside the foreclosure sale.”

In seeking to vacate the sale, knowing what the plaintiff tried to rely upon will underscore why the hope to succeed typically will be dashed.

First, a court does indeed have the equitable power to use its discretion to set aside a foreclosure sale where there is evidence of fraud, collusion, mistake or misconduct.  But if such events are not present, the mere inadequacy of price is not a sufficient basis to vacate a sale – unless the price is so inadequate as to shock to court’s conscience.  In the new case, the foreclosing plaintiff was not able to establish any fraud, collusion, mistake or misconduct in connection with the foreclosure sale.  After all, it was only the unilateral mistake of the plaintiff and that cannot provide a ground to overturn a sale.

Regarding the purchase price, it is understood that the fair market value of mortgage property will be greater than the winning bid.  Here, even though the market value may have been, as the plaintiff urged, $399,999.00, and the winning bid was $208,133.69, this later sum was 52% of the value.  Such a sales price is not so inadequate to shock the conscience of the court.  So, while the foreclosing plaintiff had perhaps a few legal grounds to make an argument, it was nowhere near enough.

The lesson is clear although perhaps not always avoidable.  Exceptional care in assuring that correct bidding instructions are conveyed to the plaintiff’s representative at the sale is essential.  Of course, the representative must follow those directions.  If there is some failure of this effort, and the price bid is too low, it will most often not be a ground to then attack the sale.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.