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Oops! I Meant to Cancel That Sale! – Vacating a Foreclosure Sale

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It can happen to the best of us:

You’re representing the lender in a residential foreclosure action and you obtain summary judgment of foreclosure against the borrowers. Between the date of entry of the judgment and the date of the scheduled foreclosure sale, your client reaches an agreement with the borrowers to reinstate the loan. The borrowers comply with the requirements for reinstatement, but you neglect to cancel the foreclosure sale. The foreclosure sale proceeds as scheduled and a third party submits the prevailing bid.

What do you do? In the past, there was some dispute as to whether or not proof of these facts alone would justify setting aside the sale. However, in Nicholas Arsali v. Chase Home Finance LLC, 38 Fla. L. Weekly S562a (Fla. July 11, 2013), the Florida Supreme Court was presented with this very issue and has clarified that, in this situation, the trial court may set aside the foreclosure sale and dismiss the foreclosure action.

In Arsali, the lender had obtained summary judgment of foreclosure and a foreclosure sale was scheduled. However, the lender and the borrowers reached an agreement to reinstate the loan. The borrowers timely complied with the requirements to reinstate the loan, but the lender’s counsel neglected to have the foreclosure sale canceled. Accordingly, the sale proceeded as scheduled and a third-party purchaser submitted the successful bid. Before the certificate of title was issued, the borrowers timely objected to the sale pursuant to Fla. Stat. §45.031 by filing a motion to vacate sale and certificate of sale. The third-party purchaser was granted leave to intervene and a hearing was held on the borrowers’ motion to vacate. After considering evidence establishing the agreement to reinstate and the borrowers’ compliance with that agreement, the trial court granted the borrowers’ motion, vacated the sale and certificate of sale, ordered that all funds paid by the third-party purchaser be returned, vacated the foreclosure judgment, and dismissed the case. The third-party purchaser then filed a motion for rehearing, which the trial court denied.

The third-party purchaser appealed the trial court’s rulings, but the Fourth District Court of Appeals affirmed, Arsali v. Chase Home Finance, LLC, 79 So.3d 845 (Fla. 4th DCA 2012), receding from its prior opinion in Blue Star Investments, Inc. v. Johnson, 801 So.2d 218 (Fla. 4th DCA 2001). The Fourth District explained that inadequacy of price need not be established in every attempt to set aside a foreclosure sale and that two different tests are to be applied depending on the basis for the request: (1) the test set forth in Moran-Allen Co. v. Brown, 123 So. 561 (Fla. 1929), when grounds other than inadequacy of bid price are presented; and (2) the test set forth in Arlt v. Buchanan, 190 So.2d 575 (Fla. 1966), when inadequacy of bid price is a basis for the request.

The Florida Supreme Court granted review as a pure legal issue of great public importance, rephrasing the Fourth District’s certified question as follows:

DOES INADEQUATE BID PRICE NEED TO BE ALLEGED AND PROVEN IN ORDER TO SET ASIDE A JUDICIAL FORECLOSURE SALE?

The Florida Supreme Court began its analysis by clarifying apparent prior misunderstandings and confirming that the decisions in Brown and Arlt are not in conflict. In doing so, the Supreme Court rejected the analyses of the Fourth District (Arlt), the Second District (Ingorvaia v. Horton, 816 So.2d 1256 (Fla. 2d DCA 2002)), and the Fifth District (Josecite v. Wachovia Mortgage Corp., 97 So.3d 265 (Fla. 5th DCA 2012)), each of which had concluded that Brown and Arlt were in conflict.

The Court then proceeded to discuss that there are no indispensable equitable factors required to set aside a judicial foreclosure sale. The Court noted that an objection to sale must be timely filed as required by Fla. Stat. §45.031 and then discussed the equitable nature of foreclosure proceedings, reemphasizing that:

the trial courts’ use of their equity powers in resolving disputes pertaining to judicial foreclosure sale set aside actions is essential.

The Court advised that a party seeking to set aside a foreclosure sale must:

allege one or more adequate equitable factors and make a proper showing to the trial court that they exist in order to successfully obtain an order that sets aside a judicial foreclosure sale.

The Florida Supreme Court, holding that proof of an inadequate bid price is not required, concluded that the Fourth District properly affirmed the trial court’s decision to vacate the foreclosure sale because: (1) timely objection to the sale had been made; (2) equitable grounds for vacating the foreclosure sale had been established; and (3) all funds paid by the third-party purchaser would be refunded. The Supreme Court’s ruling in Arsali should provide clarity to those who seek to vacate foreclosure sales and some comfort to those who have inadvertently neglected to cancel foreclosure sales when agreements have been made to reinstate loans or permit short sales.

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David Greene is a partner in the Litigation Department of Fox Rothschild LLP. David represents clients in a variety of commercial litigation matters in State and Federal Courts throughout Florida. You can reach David at (561) 804-4441 or dgreene@foxrothschild.com.