When A Foreclosure Sale Bidder Defaults – A Primer


15 May, 2008


Mortgage Lender and Servicer Alerts

Too often, it wasn’t easy, and a lender has just slogged through another foreclosure. There were a litany of hurdles to overcome. The borrower was hiding so process service took too long. A large judgment creditor could not be located at all so time consuming publication was required. No one could figure out why, but a private junior mortgagee thought there was a benefit in answering the complaint. There wasn’t. Still, the mortgagee suffered the necessity of a motion for summary judgment.

After summary judgment was finally granted (striking the subordinate mortgagee’s answer) the borrower jumped on the bandwagon and filed a Chapter 13. Although a plan was never filed, it took months to obtain an order dismissing the bankruptcy. Undaunted, the borrower waited a little while and filed another Chapter 13. Dismissal of that engendered the filing of a Chapter 7.

With the stay lifted on that, the action moved to the eve of the sale when the determined borrower (not determined to pay, just to give the mortgagee a hard time) tried an order to show cause claiming (among others) the inevitable lack of service.

Even though ultimately the court was not hornswoggled, there was a brief stay imposed which capped the lender’s tale of woe. When finally the foreclosure sale was held, the lender thought a safe haven had been reached. Sadly, it wasn’t so, because after much spirited bidding with the upset price just reached, the successful bidder proved to be a sly opportunist who couldn’t (or wouldn’t) close the title. What to do?

Although there are no absolute solutions to this most unwelcome scenario, there are ways for lenders and servicers to use knowledge and efficiency to minimize the losses incurred by bid defaults.

Analyze first the case of the immediate bid default – the one that occurs when the sale is struck down and lender’s counsel, the referee and the bidder repair to a convenient location at the court or town hall to sign the terms of sale. Here there are three typical scenarios.

The higher the bid price goes, the less will be any deficiency and, eventually, the greater will be any surplus. Consequently, there is some advantage for a crafty borrower to introduce a shill at the bidding to artificially encourage increased prices. The difficulty arises when the phony pushes too far and is the last bidder to speak. Because he was disingenuous from the outset, default is assured.

Another possibility is the legitimate bidder, who just does not understand the process. Thus, rather than having the obligatory ten percent of the bid in cash, bank or certified check, he brings only a regular check.  Or, if he does have the proper form, the amount is insufficient. His inability to close, too, is therefore certain.

The third circumstance is the genuinely sincere bidder who, for whatever reason, simply changes his mind or gets “cold feet” when the moment comes to actually remit the bid deposit and sign the documents. He just announces his desire to depart and does just that.

There are two answers to the recited scenarios. One is to assure both that the terms of sale empower the referee to assess a bidder’s earnest money during the course of the sale, with lender’s counsel careful to advise the referee of this ability and urge him to employ it. In other words, the referee can ask any bidder to approach him and privately display his checks or cash. In that way, the referee can determine before the bidding is concluded that any particular bidder is authentic and has the ability to pay the ten percent deposit.

Of course, even such foresight cannot avoid the case of the bidder who for whatever reasons decides not to honor his bid. To cover that eventuality, at the conclusion of bidding, lender’s counsel can announce to those assembled that they should remain for a very few minutes. “We are heading inside to sign the terms of sale, but should a problem arise, we will be out here on the steps immediately to begin the bidding anew.” Because even standard terms of sale typically provide for such a procedure, the key is to make the announcement to hold those other bidders in place for the brief time that it would take to discover when the successful bidder is actually in default.

More disconcerting, though, is the situation of the bidder who, while properly submitting the bid deposit and signing the terms of sale, is unable or unwilling to close some thirty days later, or at such adjourned dates as may be granted. Here the lender has three basic options.

One choice is to compel the bidder to complete the sale. While this is a possibility, it has limited practical application. As the officer of the court with whom the “contract” was made, the referee has the power to compel performance. But it is unlikely that he would independently decide to pursue such a case. He may not have the time or expertise to do so and his fee for proceeding would be uncertain since he would have to apply to the court for compensation. Even without these problems, a suit to compel performance could cause considerable delay – just what a a foreclosing plaintiff wishes to avoid. In any event, the defaulting bidder might not have the financial resources to respond to complete the sale even under court compulsion. Hence, this would not be a recommended path.

Another alternative is to seek a court order directing a resale. This method has been used, although it need not be. If, however, the terms of sale where so inartfully drawn that they do not make the defaulting bidder clearly liable for a deficiency, this may be the best manner in which to proceed. Moreover, if the lender were considering reselling the property without court order, but anticipates that the defaulting bidder might move to prevent the resale, the best strategy might be taking the offensive and seeking an order of the court. (It should be noted though that in New York if the plaintiff chooses this option, there is case law holding that failure to obtain an order making the bidder liable for his deficiency will result in a discharge of the bidder’s obligation.)

The alternative that is likely to cause the least delay is to readvertise and resell the property without court order. Properly prepared terms of sale will hold the defaulting bidder liable for any deficiency between the original sale price and the resale price, together with at least the expenses of resale. The defaulting bidder’s liability will be limited to the amount of the bid deposit, but in most instances the deposit should be enough to make the plaintiff whole. Should it prove insufficient, the lender still retains the remedy of pursuing a deficiency judgment against the borrower.

Although the general rule is clearly that the defaulting bidder has no liability beyond the amount of the bid deposit, it is not clear what would result if the terms of sale explicitly provide for greater liability on the part of the defaulting bidder. This is imponderable because, in New York at least, such a provision has never been tested in court. But it is something that should be considered for insertion in all terms of sale. At least it presents the opportunity to pursue such an action if circumstances dictate.

When the time approaches for a post-foreclosure sale closing, the lender should be vigilant in pressing the bidder to close. The moment there is a hint of undue delay or inability to proceed, a lender should work through counsel to insist that the referee consent to a readvertisement of the sale. In that way, either the bidder will be pressured into fulfilling his obligation, or a new sale will take place all the faster, thus reducing the lender’s loss. Given the original facts presented about all the delays in a particular foreclosure case, none of this is a happy situation. But there are ways to diminish the trauma and they are worthy of consideration.

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.