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Private Sale to Third Party One Day Prior to Sheriff Sale in Pennsylvania

by Louis P. Vitti
Louis P. Vitti & Associates, P.C. - USFN Member (PA)

A recent case in Pennsylvania has had a proper resolution; however, in Merrill Lynch Mortgage Capital v. Steele at 859 A.2d 788, Pa. Super. (2004), the court sets forth reasoning that should be of concern to servicers.  As happens all too often in mortgage foreclosures, a transfer of the real estate occurred the day before the foreclosure sale.  The third party who purchased the subject property the day before the foreclosure sale then filed a petition to set aside the foreclosure sale, which occurred before the deed documenting the previous day’s transfer was recorded, or before the deed from the sheriff was delivered to the servicer. Eventually, the mortgagee (servicer) was paid the payoff amount by the new owner.

 

The court decision lists several of the paragraphs contained in the petition to set aside the sale. One of which alleges fraud because the servicer knew of the foreclosure sale, and did not advise the third party purchaser that the foreclosure sale would be conducted on the day it was to be held.  This finding seems to impute to all servicers that when inquiries are made for payoff figures, the servicer is required to advise that a sheriff’s sale is set and the date on which this will occur.  The court also sets forth that the mortgagee “purchased the property at the sheriff’s sale” and it was imputed with knowledge of the provisions of Pa.R.C.P. 3132, which means it is subject to the risk that “within ten days following purchase that the sale could be set aside.”  The court further held that the third party purchaser who was the appellant from an adverse lower court decision was a bonafide innocent purchaser for value who dealt in good faith because he was never told about the impending foreclosure sale by those with whom he was dealing. 

 

The court further embarrasses the mortgagee by saying that it knew its title to the property was subject to a challenge, whereas the appellant third party purchaser did not.  The court does not address why the servicer is imputed to have this knowledge and the third party servicer is not.  The payoff proceeds were also sent by the appellant third party purchaser to the mortgage creditor before (emphasis is the court’s) the sheriff sale.  It is noteworthy, however, that the court’s opinion indicates that the servicer did not receive these funds, nor apparently even know of their transmittal, prior to the sheriff sale.

 

Because the lender received a payoff, it is unclear why the appeal was taken to the higher court.  It could be that the payoff funds were incomplete.  In any event, if reviewed in its worst light, this case means that at all times when providing payoff figures or dealing with possible third party purchasers, that the pending sheriff sale information (with date) be conveyed to those individuals.  Another step in the never-ending process.

 

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