Rosenberg v. Smidt

MOORE, Justice,

with whom RABI-NO WITZ, Chief Justice, joins, dissenting in part.

I dissent from the majority’s conclusion that the Rosenbergs are not Bona Fide Purchasers (BFP). In my view the Rosen-bergs’ status as BFPs bars the Smidts from overturning the foreclosure sale, and limits their remedy to seeking damages from Spendlove, Johnson and/or the trustee, Alaska Title Guaranty Company. Protecting the Rosenbergs’ title to the proper*787ty is compelled by important public policy considerations as well as by the express language of AS 34.20.090(c).

The majority correctly notes that where, as here, a defect in the foreclosure sale makes it merely voidable, the sale to a BFP will completely bar the debtor’s ability to set aside the sale. G. Nelson & D. Whitman, Real Estate Finance Law § 7.20 (2d ed. 1985); Annot., 73 A.L.R. 612, 638 (“It seems well settled that mere defects or irregularities in foreclosure proceedings do not affect the title acquired by a bona fide purchaser at the sale thereunder.”) This makes perfect sense, as grave consequences would result if the rule were otherwise. For example, if innocent purchasers at foreclosure sales had to face the risk that debtors could easily set aside the sales, then it takes little imagination to realize that participation at foreclosure sales would be significantly and unacceptably chilled. As the court stated in In re Alsop, 14 B.R. 982, 987 (Bankr. Alaska 1981), aff'd 22 B.R. 1017 (D. Alaska 1982):

The specter of this uncertainty of title will severely inhibit participation at the foreclosure sale by anyone other than the original creditor, thus depressing bid prices to the general detriment of debtors. [This] would further reduce the willingness of creditors to lend on the security of a deed of trust, to the general detriment of borrowers.

Id. (Citation omitted.)

Furthermore, the innocent purchaser, having absolutely nothing to do with the legal relationship between the trustee and the debtor, should not be forced to bear any loss caused to the debtor by the trustee’s failure to diligently protect the debt- or’s interests.

As between the mortgagor and the purchaser, the former rather than the latter should suffer the loss, because by granting to the mortgagee the right to sell, the mortgagor put it in the mortgagee’s power to work the injury through the execution of that power. •

Dugan v. Manchester Federal Savings & Loan Association, 92 N.H. 44, 23 A.2d 873, 876 (1942). Here, where the injury was caused by the trustee’s failure to discover the debtor’s new address, it should be the debtor, not the innocent purchaser, who should lose title to the property. It is the debtor, not the purchaser, who can most easily notify the trustee of the new ad-_ dress. As between two innocent parties, the loss should fall on the one in the best position to have avoided that loss.

There is no doubt that Alaska follows the universal rule of refusing to set aside a voidable foreclosure sale when title has passed to a BFP. In fact, Alaska goes even further, and even in the absence of a BFP this court will remain very reluctant to set aside a foreclosure sale except in the most unusual circumstances. For example, in McHugh v. Church, 583 P.2d 210 (Alaska 1978), a case not involving purchase by a BFP, this court stated:

While noncompliance with the statutory-provisions regarding foreclosure by the power under a mortgage or trust deed is not to be favored, the remedy of setting aside the sale will be applied only in cases which reach unjust extremes.

583 P.2d 210, 216 (Alaska 1978) (footnote omitted, quoting Semlek v. National Bank of Alaska, 458 P.2d 1003, 1006 (Alaska 1969)). See also Harris v. Alaska Title Guaranty Co., 510 P.2d 501, 505 (Alaska 1973). In other words, in Alaska, a voidable foreclosure sale will never be set aside if a BFP has title, and even where no BFP is involved, the sale will be overturned only if necessary to avoid extreme results. See Note, The Constitutionality of Power of Sale Foreclosure in Alaska, 6 U.C.L.A.— Alaska L.Rev. 90, 112-13 (1976). Because the Rosenbergs are undoubtedly BFPs, I must disagree with the majority’s decision to forfeit the Rosenbergs’ title to the property by setting aside the foreclosure sale.

In the context of foreclosure sales, there are three requirements for BFP status.

If the sale purchaser has paid value and is unrelated to the mortgagee, it would seem that he should take free of voidable defects if: (a) he has no actual knowledge of the defects; (b) he is not on *788reasonable notice from recorded instruments; and (c) the defects are not such that a person attending the sale exercising reasonable care would have been aware of the defect.

G. Nelson & D. Whitman, Real Estate Finance Law § 7.20 at 539 (footnote omitted). As the majority opinion illustrates, the Rosenbergs satisfy all of these requirements. They have paid value and are not related to the mortgagee. They had no actual knowledge of the trustee’s failure to exercise due diligence in determining the Smidts’ new address, and nothing in the recorded instruments put the Rosenbergs on notice of this defect. Finally, the notice defect was not such that attendance at the sale would provide any hint of the defect. As the majority carefully explains, the debtor’s absence from the sale does not put the purchaser on inquiry notice nor require him to investigate or buy a lawsuit.

It is therefore clear that the Rosenbergs are BFPs and entitled to possession of the property. How then does the majority justify setting aside the sale? Curiously, the majority takes AS 34.20.090(c), gives it a bizarre interpretation, and uses it to strip the Rosenbergs of their BFP status. Ironically, this statute, like those found in other states, was specifically designed to enhance the reliability of title purchased by a BFP at a foreclosure sale. G. Nelson & D. Whitman, Real Estate Finance Law, § 7.21 at 552; Note, The Constitutionality of Power of Sale Foreclosure in Alaska, supra at 112, 116.

AS 34.20.090(c) provides: (Emphasis added.) Since the trustee’s deed recited that all notice requirements had been complied with, the statute should have precluded, at the outset, this action by the Smidts against the Rosenbergs. As already discussed, the Rosenbergs are entitled to the property because they are BFPs. For extra protection against unnecessary and costly litigation, and to enhance the reliability of title acquired at a foreclosure sale, our legislature has expressly created a conclusive presumption in favor of the BFP whenever the debtor seeks to overturn the sale on the basis of a notice defect. The Rosenbergs’ status as BFPs, as well as the conclusive presumption created by the statute both point toward the same result: the Rosenbergs are entitled to the property.

A recital of compliance with all requirements of law regarding the mailing or personal delivery of copies of notices of default in the deed executed under a power of sale is prima facie evidence of compliance with the requirements. The recital is conclusive evidence of compliance with the requirements in favor of a bona fide purchaser or encumbrancer for value and without notice.

The majority, however, reasons that because the recitation in the deed did not contain detailed factual statements, the Rosenbergs cannot rely on the statutory presumption and therefore are not BFPs. This, of course, is absurd. Even assuming arguendo that the Rosenbergs are not entitled to the conclusive presumption, this does not defeat their status as BFPs. As discussed above, the Rosenbergs undoubtedly satisfy all three requirements for BFP status; that they may be without the protection of AS 34.20.090(c) does not change that fact. The statute does not define BFP status, but instead offers extra protection to one already qualified as a BFP. Indeed, even if AS 34.20.090(c) never had been enacted, the Rosenbergs still would prevail under the universally accepted rule that a voidable foreclosure sale will not be set aside once title has passed to a BFP.

I must also disagree with the majority’s decision to engraft onto the statute a requirement of detailed factual statements. The statute nowhere contains this requirement, and it is for the legislature, not this court, to add one if it sees fit to do so. While it is true that to create a conclusive presumption in favor of a BFP, some states require recitals of facts,1 other states, like *789Alaska, do not.2 A third variation does not require recitations at all, but provides that the deed itself creates the conclusive presumption in favor of the BFP.3 These variations suggest that there is no one way to balance the rights of creditors and BFPs. Our legislature has struck the balance in such a way that the BFP receives protection from the trustee’s recitals in the deed. It is not for this court to alter the balance struck by this statutory scheme. The majority is unable to cite any authority that suggests this court can add a detailed factual statement requirement to a statute that obviously lacks one.

In Blodgett v. Martsch, 590 P.2d 298, 301 (Utah 1978), the trustee’s deed falsely stated that all statutory requirements for public sale had been satisfied. Utah’s statute, like Alaska’s, does not expressly require factual statements. Nevertheless, the court held that if the purchaser had been a BFP, he would have been completely protected by this conclusory recital. Id. at 303.4

The majority suggests that a trustee will always recite that the law has been complied with, and thus the Rosenbergs’ reliance on that recital is hollow. However, this “hollow reliance” is exactly what the statute authorizes. Moreover, since the trustee may be liable to the debtor in damages if wrong, the trustee has ample incentive to avoid issuing incorrect recitals. The BFP is therefore even further justified in relying on the accuracy of those recitals. Finally, even if the trustee had recited factual details, the majority does not explain what the Rosenbergs should have done to protect themselves. The fact that letters are returned unclaimed does not per se establish a notice defect. To discover the defect the potential purchaser would have to mount a costly and time consuming investigation. Language in the majority opinion illustrates the serious shortcomings of such a requirement:

Ultimately, to ... impose[ ] a duty upon purchasers to investigate the notice given would gut AS 34.20.090(c). No one would ever be a “bona fide purchaser without [inquiry] notice.” By requiring would-be purchasers to “investigate or buy a lawsuit,” such a holding would further increase the costs and delays accompanying deed of trust sales.

Opinion at 784.

In conclusion, I dissent from the majority’s holding that the Rosenbergs are not BFPs. That decision may have far-reaching effects, possibly clouding the titles of numerous BFPs who have acquired property through foreclosure sales, and chilling the bidding at future sales to the detriment of debtors and creditors alike. I would therefore return title in the property to the Rosenbergs and leave the Smidts free to pursue their remedy in damages against Johnson, Spendlove, and/or the trustee.

. Mont.Code.Ann. § 71-1-318 (1985); Or.Rev. Stat. §§ 86.775, 86.780 (1985).

. Cal.Civ.Code § 2924 (West Supp.1986); Nev. Rev.Stat. § 107.030(8) (1985); Utah Code Arm. § 57-1-28 (Supp.1985).

. Ariz.Rev.Stat.Ann. § 33-811 (Supp.1985).

. Other courts likewise have enforced similar conclusive presumption statutes without judicially engrafting requirements that were not included by the legislature. See, e.g., Wolfe v. Lipsy, 163 Cal.App.3d 633, 209 Cal.Rptr. 801, 805 (1985); Triano v. First Am. Title Ins. Co., 13 Ariz. 581, 643 P.2d 26, 28 (App.1982).