E-Alert Case Updates

Court Finds Attorneys’ Fees in Foreclosure Proceedings were Improper

Maddox v. Cohn
Case No. 2777 (Md. Ct. Spec. App. 2011)
by Lindsey N. Lanzendorfer, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

In a recent foreclosure case, the Maryland Court of Special Appeals found that without authorization in a statute, rule, or debt instrument, it was improper for an attorney, who was acting as a trustee, to require a successful third-party bidder to pay an additional attorney’s fee for the review of settlement documents. Judge Zarnoch, writing for the court, explained that the fee was improper because: 1) the specific amount was not specified in the debt instrument, 2) the debt instrument was a deed of trust — a contract between borrower and lender — so it could not authorize a charge to a third-party; and 3) no court reviewed the additional fee amount even though judicial review of compensation is required in foreclosure cases. Despite these findings, the Court ratified the foreclosure sale because the former property owner lacked standing, for the reasons explained below.

After property owner Bonnie Maddox defaulted on her mortgage, Beneficial Mortgage Co. of Maryland (“Beneficial”) filed an Affidavit of Default Notice and Notice of Intent to Foreclose. Maddox owed Beneficial $81,512.32. Beneficial initiated foreclosure proceedings through its trustees: Edward S. Cohen, Esquire, Stephen Goldberg, Esquire, Richard Rogers, Esquire, and Richard Solomon, Esquire. Weekly advertisements appeared in the Salisbury Daily Times for three weeks before the foreclosure sale. These advertisements contained the provision, “Purchaser agrees to pay a fee of $295 to the Sellers’ attorney at the settlement for review of the settlement documents.” At the sale, Beneficial was the highest, and presumably the only, bidder. After the Court issued a notice that the sale would be ratified and confirmed in thirty (30) days, Maddox filed an Exception to the Report of Sale, objecting to the ratification. Maddox argued that the auction was invalid because the attorneys’ fees were not authorized by the debt instrument or by any applicable statute or rule.

Judge Zarnoch first found that Maddox lacked standing to challenge the attorneys’ fees. Typically, this would dismiss the case because a party must have standing to bring a claim before a court can consider the merits of the claim. To have standing, a party must suffer some harm such that the harm can be remedied through litigation. In Maddox’s case, she lacked standing for two reasons. Primarily, the fee was never actually charged since the lender, Beneficial, purchased the property. But even if the fee had been charged, the third-party purchaser, not Maddox, would have had to pay the fee. Thus, to prove she was harmed, Maddox would have to show (1) that another purchaser would have bought her property for more than Maddox owed Beneficial, giving her a surplus, but was deterred by the attorneys’ fees, and (2) the attorneys intended to deter purchasers from bidding on the property. Maddox showed insufficient evidence of these facts. Thus, the Maryland Court of Special Appeals affirmed the ratification of the foreclosure sale.

Despite Maddox’s lack of standing, Judge Zarnoch found that since the circuit court decided the issue of additional attorneys’ fees; the parties briefed and argued the issue; and the issue is of sufficient importance, the intermediate appellate court would state its views on the propriety of additional attorneys’ fees in a foreclosure sale.

Judge Zarnoch first explained the trustee’s role in a foreclosure proceeding. When the debtor of a property conveys the property to a trustee, the relationship is shown through a deed of trust. Then, during foreclosure proceedings, the Court is regarded as the vendor and the trustee is regarded as the Court’s agent. The trustee is compensated for acting as the Court’s agent. If an attorney is acting as the trustee, courts have discretion on whether the attorney will be compensated for his or her role as an attorney and as a trustee. If the Court does allow compensation for both roles, the attorney’s fee must be explicit in the debt instrument and the Court must review the compensation amount.

In the present case, the attorneys’ fees were improper for three (3) reasons: First, the debt instrument provided for “reasonable attorneys’ fees.” This was not specific enough to constitute a stipulation between the parties. To constitute a stipulation between the parties, the debt instrument would need to specify the amount of attorneys’ fees to be paid. Second, the advertisement stated that a third-party purchaser would pay the attorneys’ fees, but the debt instrument in this case was a deed of trust, a document representing a contract between the lender and the borrower, and therefore could not bind a third-party to pay attorneys’ fees. Finally, even though courts are to review the amount of compensation to trustees or persons conducting the sale in a foreclosure proceeding, the attorneys’ fees were only placed in an advertisement and not brought before the court. For the foregoing reasons, the attorneys’ fees were improper. Although no attorneys’ fees were paid in this case, the Court foreshadowed future rulings on this issue.