MARY T. COSTELLO A/K/A MARY T. BISHAY vs. SOVEREIGN BANK, FSB, and MERRILL LYNCH CREDIT CORP.

Plaintiff filed her verified complaint on November 8, 2010, pursuant to the provisions of G. L. c. 231A, seeking a declaratory judgment that the sale of property located at 10 Monohansett Road, Nantucket, Massachusetts (“Locus”) to Defendant Merrill Lynch Credit Corp. (“Merrill Lynch”) via a foreclosure deed from Defendant Sovereign Bank, FSB (“Sovereign”) (together, “Defendants”) is void. On the same day, Plaintiff filed a Motion for Lis Pendens, relative to Locus, which this court allowed on November 12, 2010. On November 12, 2010, Sovereign filed a Motion to Dismiss, or in the alternative, a Motion for Summary Judgment, both together with supporting memorandum. Merrill Lynch filed its Answer on December 2, 2010. On December 13, 2010, Plaintiff filed her Opposition to Motion to Dismiss, together with supporting memorandum and Appendix. A case management conference was held on January 26, 2011. At a status conference held on July 14, 2011, the parties agreed that there were material facts at issue and a trial was required. A pre-trial conference was held on September 26, 2011. Plaintiff filed a Motion in Limine to Preclude Evidence Regarding Authority of Bahig Bishay, Trustee, to bid at the Foreclosure Auction on November 22, 2011, and a Motion in Limine to Preclude Testimony of Daniel McLaughlin on December 9, 2011. A trial was held on December 19, 2011, at the Land Court in Boston. At the commencement of the trial, Merrill Lynch filed a Notice of Merger to indicate that it had merged with Bank of America, National Association. At the same time this court DENIED both of Plaintiff’s Motions in Limine. At the close of Plaintiff’s evidence, and again at the close of the trial, both Merrill Lynch and Sovereign made an oral Motion for a Directed Finding, which this court DENIED. On February 8, 2012, Plaintiff filed her post-trial brief. On February 9, 2012, Defendants filed their post-trial brief, at which time this matter was taken under advisement.

Testimony was given by Plaintiff’s witness Bahig Bishay (“Bahig”) (Plaintiff’s husband). Testimony was given by Defendants’ witnesses Sandra Munroe (“Sandra”) (auctioneer), James Monroe (“James”) (auctioneer’s husband and agent of Sovereign’s attorney), and Daniel McLaughlin (“McLaughlin”) (auctioneer expert). Deposition testimony of Richard Holdgate (“Richard”) (representative of Sovereign) was submitted when the witness became unavailable.

Based on the sworn pleadings, the evidence submitted at trial, and the reasonable inferences drawn therefrom, I find the following material facts:

1. Plaintiff, Plaintiff’s family, and related trusts have owned Locus for approximately twenty-five years. [Note 1]

2. The Monohansett Realty Trust (the “Trust”) was established by a Declaration of Trust (the “Declaration”) dated July 29, 2002. Bahig is the Trustee of the Trust. The beneficiaries of the Trust are Bahig and Plaintiff. [Note 2] The Declaration states that “[t]he Trustee shall act at all times prior to termination of the Trust only as directed in writing by all of the beneficiaries and shall have full power and authority in accordance with such directions.” Furthermore, the Declaration states that “[n]o Trustee shall serve as a beneficiary.” At some point in the early 2000s, the Trust held title to Locus and then transferred title to Plaintiff as an individual in June of 2004. Plaintiff gave a mortgage on Locus to Sovereign to secure a loan in the amount of $650,000.

3. Sovereign commenced a foreclosure action relative to Locus in 2009. In June 2009 Plaintiff commenced an action against Sovereign in Norfolk Superior Court (CA No. 09-1007-B), claiming that Sovereign engaged in predatory lending. [Note 3]

4. By letter dated May 13, 2010, Orlans Moran, attorneys for Sovereign, filed with Plaintiff a Notice of Intention to Foreclose and Mortgagee’s Notice of Sale of Real Estate (the “Notice of Sale”). The Notice of Sale stated:

A deposit of FIVE THOUSAND DOLLARS AND 00 CENTS ($5,000.00) in the form of a certified check or bank treasurer’s check will be required to be delivered at or before the time the bid is offered. The successful bidder will be required to execute a Foreclosure Sale Agreement immediately after the close of the bidding. The balance of the purchase price shall be paid within thirty (30) days from the sale date in the form of a certified check, bank treasurer’s check or other check satisfactory to Mortgagee’s attorney. The Mortgagee reserves the right to bid at the sale, to reject any and all bids, to continue the sale and to amend the terms of the sale by written or oral announcement made before or during the foreclosure sale. If the sale is set aside for any reason, the Purchaser at the sale shall be entitled only to a return of the deposit paid. The purchaser shall have no further recourse against the Mortgagor, the Mortgagee or the Mortgagee’s attorney. The description of the premises contained in said mortgage shall control in the event of an error in this publication. TIME WILL BE OF THE ESSENCE. Other terms, if any, to be announced at the sale.

5. The foreclosure sale took place on June 16, 2010. Sandra was the auctioneer. A Certificate of Entry was executed by Richard and Donald Holdgate, stating that James, an agent of Orlans Moran and duly authorized Attorney-In-Fact of Sovereign, made “an open, peaceable and unopposed entry on the premises, described in said mortgage for the purpose, then declared, of foreclosing said mortgage for breach of conditions thereof.”

6. Based on sworn testimony of a number of witnesses at the trial, it appears that Sandra publicly read the full contents of a Foreclosure Auction Agreement (the “Agreement”) prior to the foreclosure sale, which included a section entitled the Conditions of Sale. The Conditions of Sale stated that

The premises are to be conveyed by a good and sufficient Foreclosure deed (the “Foreclosure Deed”) running to Purchaser, subject to matters, if any, set forth or referred to in the Mortgagee’s Notice of Sale of Real Estate and such further matters announced by the Auctioneer at the time of sale, on July 16, 2010 at 2:00 PM (the “Closing date”) at the offices of Orlans Moran PLLC, 45 School Street, Boston, MA 02108, upon payment by Purchaser of the total sum of One Million 00/100 ($1,000,000.00) in bank or certified check, of which FIVE THOUSAND DOLLARS AND 00/100 ($5,000.00) have this day been paid to Orlans Moran PLLC as a deposit to bind the sale, which deposit shall be forfeited to the use of the Mortgagee, in case the Purchaser shall fail to comply with the terms hereof; provided, further, that the Mortgagee, in the event of Purchaser’s default, reserves the right, at its option, to sell the Premises to the second or any prior high bidder, under the same terms and conditions as were offered at the foreclosure auction or to assume any prior bid. A back up bidder will have five (5) days, or such later time as determined by the mortgagee after notification by the Mortgagee, to make the required deposit and sign the required documents.

7. At the foreclosure sale, there were three active qualified bidders: Bahig, a representative of Sovereign and a representative of Merrill Lynch. Bahig was the high bidder in the amount of $1,000,000. Merrill Lynch was the second highest bidder at $995,000. Prior to the foreclosure sale, Plaintiff arranged for a $5,000 cashier’s check to be delivered to Bahig. Bahig tendered the $5,000 cashier’s check, payable to Bahig, as the deposit, and endorsed the check to Orlans Moran, Sovereign’s foreclosure counsel. Bahig and Sandra executed the Agreement at the foreclosure sale, which was witnessed by James. [Note 4]

8. Bahig testified that had he known about the provision related to default sale to the second highest bidder, it would not have changed the process of his bidding at the foreclosure sale.

9. By letter to Orlans Moran dated July 24, 2010, Bahig acknowledged that he had not met the thirty day deadline for producing the purchase price and closing on Locus.

10. Subsequent to Bahig’s default, Sovereign purported to sell Locus to Merrill Lynch, which tendered payment of $995,000 to Sovereign. [Note 5]

11. Bahig testified that Sandra never read the Agreement prior to or during the auction, including the language reserving the Mortgagee’s right to sell the property to the second or any prior high bidder in the event of the purchaser’s default. Conversely, Sandra and James testified Sandra read the Agreement at the auction. Richard’s deposition testimony also states Sandra read the Agreement at the auction.

12. Bahig testified that he saw Sandra record the auction with a handheld recorder. Furthermore, Plaintiff cites the Massachusetts Auctioneers Association (the “Association”) Code of Ethics, which states that members should create and retain an audio/video recording of a foreclosure sale. Defendants deny the auction was recorded. Sandra testified that she did not record the auction, had never recorded an auction for Orlans Moran before, and had recorded fewer than five auctions in her career. Sandra further testified she would have recorded the auction had Orlans Moran requested a recording.

13. Defendants’ expert witness McLaughlin has been an auctioneer in Massachusetts since 1988. McLaughlin is a former officer and current member of the Association. McLaughlin testified that many auctioneers were not members of the Association, he was unfamiliar with the Association’s Code of Ethics until preparing for trial, and that auctions are generally seldom recorded.

14. Both Sandra and McLaughlin testified that it is customary to have a default sale to an auction’s second highest bidder in the event of a high bidder’s default, that it is customary to read the Agreement prior to the foreclosure sale, and that such a reading is waived only at the request of the mortgagee foreclosing on the property.

*******************************

Plaintiff argues that the foreclosure sale to Merrill Lynch, the second highest bidder, is void because Sovereign did not reserve the right to do so. Defendants argue that Sovereign did reserve the right to sell to the second highest bidder, and thus the foreclosure sale to Merrill Lynch is valid. Defendants also argue that Bahig did not have the authority under the Trust to bid at the foreclosure sale and that by the time of the sale, the Trust was no longer in existence. I shall examine both of these issues in turn.

Bahig’s Authority To Bid. [Note 6]

Plaintiff argues that Defendants have no standing to raise the issue of Bahig’s authority as Trustee to bid at the foreclosure sale, since they are not beneficiaries of the Trust. Defendants argue that they have standing to pursue this issue, since they are both impacted by the validity of the first bidder. This court agrees with Defendants that they have standing to raise this issue of Bahig’s authority as Trustee to bid.

Defendants argue that Bahig, as Trustee of the Trust, had no authority to bid at the foreclosure sale for two reasons. First, Defendants argue that the Trust is invalid because it provides that no Trustee shall serve as a beneficiary, and Bahig is both the sole Trustee and a beneficiary.

Defendants also argue that the Declaration provides that “[t]he Trustee shall act at all times prior to termination of the Trust only as directed in writing by all of the beneficiaries and shall have full power and authority in accordance with such directions,” and that Bahig did not have the written authorization of the beneficiaries to bid at the foreclosure sale. Plaintiff acknowledges that the Trustee did not have written authorization to bid, but argues that Bahig had the verbal, or implied, authorization of the beneficiaries to act because he was acting on his own behalf and his wife authorized him to bid at the foreclosure sale by, among other things, arranging for the deposit check to be delivered to him. Bahig also pointed out that the relationship of Trustee and beneficiaries was husband and wife, making it less likely that there would be written authorization to act. [Note 7]

The deposit check was payable to, and endorsed by, Bahig individually. The Agreement was executed by Bahig both individually and as Trustee of the Trust. The letter acknowledging default was executed by Bahig individually. Since it is unclear, based on these facts, as to whether Bahig or the Trust submitted the winning bid, and since it is arguable that Bahig submitted the winning bid individually, the effect of a lack of written authorization for Bahig to act as Trustee may be moot. Moreover, Bahig’s authority to bid as Trustee does not affect the ultimate outcome of this case. As a result, this court shall not rule on Bahig’s authority to bid on Locus on behalf of the Trust. Validity of Foreclosure Sale To Merrill Lynch.

Plaintiff argues that the Notice of Sale did not reserve the right to Sovereign to sell to the second highest bidder in the event of default of the highest bidder. [Note 8] [Note 9] The parties do not dispute that Bahig defaulted in his obligation to tender $1,000,000 within thirty days of the foreclosure sale. The parties also do not dispute that Merrill Lynch was the second highest bidder.

The Notice of Sale did not contain language authorizing Sovereign to sell to the second highest bidder in the event of a default of the highest bidder. The Notice of Sale, however, did allow Sovereign “to amend the terms of the sale by written or oral announcement made before or during the foreclosure sale.” The Notice of Sale also stated that “[t]he successful bidder will be required to execute a Foreclosure Sale Agreement immediately after the close of the bidding.” Bahig and Sandra executed the Agreement immediately after the sale, and the Agreement specifically provided that

the Mortgagee, in the event of Purchaser’s default, reserves the right, at its option, to sell the Premises to the second or any prior high bidder, under the same terms and conditions as were offered at the foreclosure auction or to assume any prior bid. A back up bidder will have five (5) days, or such later time as determined by the mortgagee after notification by the Mortgagee, to make the required deposit and sign the required documents.

The parties do not dispute that Sovereign and Merrill Lynch followed the requirements of the Agreement. [Note 10]

Although Bahig testified that Sandra did not read the terms of the Agreement relative to the second bidder prior to the foreclosure sale, there was testimony from Sandra, James, and Richard all indicating that the full Agreement was read prior to the foreclosure sale. [Note 11] Both Sandra and McLaughlin, Defendants’ expert relative to the auction process, testified that it is customary to have a default sale to the second highest bidder, that it is customary to read the Agreement prior to the foreclosure sale, and that the reading is waived only at the request of the mortgagee foreclosing on the property.

As a result of the foregoing, I find that Sandra publicly read the terms of the Agreement at the foreclosure sale, which included the right to sell Locus to the second highest bidder.

Plaintiff argues that Sandra held a recording device in her left hand during the foreclosure auction, and that she has not produced the recording to prove that she had read the terms of the Agreement prior to the sale. Plaintiff also argues that it is customary practice to record a foreclosure sale. Defendants, however, argue that Sandra did not use any recording device during the foreclosure sale, and that it is not customary practice to do so. Plaintiff cites the Association Code of Ethics, which states that members should create and retain an audio/video recording of a foreclosure sale. Defendants’ expert witness McLaughlin, a former officer of the Association, testified that many auctioneers are not members of the Association, and that in his experience a tiny percentage of auctioneers record foreclosure sales. Sandra also testified that only a tiny percentage of foreclosure auctions that she has held have been recorded (and if they were recorded, the request was from the foreclosing bank). Sovereign did not request the recording of this foreclosure sale. From the evidence, it appears the auction was not recorded, as Orlans Moran did not request a recording, recording auctions is not a common practice for Sandra or for auctioneers generally, and no additional evidence corroborates Plaintiff’s claim.

The evidence strongly suggests that the Agreement was read during the auction, as testified to by Sandra and James. The testimony is corroborated by Richard’s deposition testimony. Plaintiff has no support, besides her husband Bahig’s testimony, that Sandra failed to publicly read Agreement at the auction. Bahig read and signed the Agreement, which allows for the default sale. In the face of contrary evidence, Plaintiff’s assertions are simply not credible. Bahig executed the Agreement and is bound to its terms, including those allowing a sale to the second highest bidder following default.

As a result of the foregoing, I find that the foreclosure sale of Locus to Merrill Lynch was valid.

Judgment to enter accordingly.