Law Updates

Court of Special Appeals Limits Defaulting Purchaser’s Foreclosure Sale Liability

Simard v. Burson, No. 1302 (Court of Special Appeals of Maryland, Feb. 25, 2011) | View pdf

( March 3, 2011) Colleen K. O’Brien. For more information, contact Paul Farquharson

This was a case of first impression in Maryland where the Court decided the extent of the liability of a defaulting purchaser at a foreclosure sale. The resolution of this case involved the application of Md. Rule 14-305(g) and general contract law principles.

In this case, Mr. Simard purchased a foreclosure property for $192,000, but ultimately failed to go to settlement. The trial court ordered a resale, where a second purchaser bought the property for $163,000, but also failed to settle. At that point, a second resale was ordered, where the property finally sold and settled for $130,000.

The trial court directed the first defaulting purchaser, Mr. Simard, to pay the difference between the original sale price of $192,000 and the ultimate sale price of $130,000, as breach of contract damages. The trial court’s rationale was that Mr. Simard was liable for the difference in price under a consequential damages theory. Mr. Simard argued that he should only be liable for the difference between the original sale price and the first resale price of $163,000. The Court of Special Appeals agreed with Mr. Simard, and reversed and remanded the case.

The Court construed Md. Rule 14-305(g), which addresses the judicial foreclosure sale procedure. The Court held that under this statute, a defaulting purchaser is not liable for shortages arising from all subsequent resales; he is only liable for a shortage arising from the first resale in response to his default. Further, the record in this case indicated, and the Court agreed, that the second resale was at the risk and expense of the second defaulter, not Mr. Simard.

To the appellate court, the trial court erred when it ruled that Mr. Simard was responsible for the entire price difference under Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854), which is the seminal case involving the forseeability of consequential damages resulting from breach of contract. Although the default on the first resale and the subsequent lower purchase price at the second resale may have been “foreseeable,” the Court’s inquiry did not end there. The Court looked to whether Mr. Simard’s breach actually caused the damages arising from the second purchaser’s default, and concluded that it did not. Therefore, the Court held that under general contract principles, the consequential damages arising out of a default by a foreclosure sale purchaser did not include damages arising from subsequent defaulting purchasers.