The Alabama Supreme Court recently issued a major published decision on circumstances in which a residential borrower can challenge a mortgage foreclosure sale. In Littlefield v. Smith, the court elevated the bona fide purchaser doctrine to central importance, holding that it limits the grounds for borrowers to bring many post-sale challenges if a third party has purchased the property. Lenders and servicers will have new, powerful responses to common defenses in ejectment actions following a foreclosure.
The case began as a typical post-foreclosure ejectment action. The Littlefields defaulted on their home mortgage loan; the lender sent two letters notifying them of its intent to accelerate the loan; the Littlefields failed to cure the default. The lender then continued with foreclosure and sold the property to third-party purchasers, who initiated an ejectment action against the Littlefields after they remained in the property. The Littlefields responded by asserting the foreclosure sale was void and denying that the lender had provided them with notices that complied with the mortgage. They also brought a wrongful foreclosure claim against the lender. The trial court held in favor of the new owners – ruling that the notices sent by the lender complied with the mortgage requirements – and also dismissed the Littlefields’ wrongful foreclosure claim.
On appeal, the Alabama Supreme Court worked to harmonize two prior mortgage cases. A 2012 Court of Civil Appeals case, Campbell v. Bank of America, held that if the property had passed to a bona fide purchaser after the sale, the foreclosure could only be set aside if the sale was actually void (of which only a few defects qualify), not merely voidable. However, five years later, without overturning Campbell, the Alabama Supreme Court had set aside a foreclosure sale on the basis of inadequate notice to the borrowers in Ex Parte Turner. The Littlefields, like many borrowers since Turner, cited Turner to contend that the sale was due to be set aside.
In Littlefield, the Alabama Supreme Court confirmed the general rule in Campbell,holding that the sale of a property to a bona fide purchaser “cuts off” any challenges that merely make the sale “voidable,” not “void.” The court clarified that the holding in Turner did not change that rule, emphasizing that in Turner the property had reverted to the lender, who remained the owner when the complaint was filed. Therefore, the Turner borrower could assert both voidable and void challenges to the foreclosure sale.
Ultimately, the Littlefields fell under the rule in Campbell, not the facts of Turner. Because they challenged the foreclosure sale on the basis that it was merely voidable (for a lack of notice) and the property had been sold to a third-party, bona-fide purchaser, their challenge failed as a matter of law. The Alabama Supreme Court declined to reach the issue of the Littlefields’ wrongful foreclosure because they had forfeited their argument.
Lenders and servicers will find much to like in the Littlefield decision. It is common in Alabama, as in many nonjudicial foreclosure states, that borrowers who have been foreclosed upon will assert challenges to the foreclosure sale after the property has been sold to a third party. In such cases, the bona-fide purchaser doctrine will now limit the arguments available to borrowers in Alabama. Lenders and servicers should note, however, that the Littlefield decision did not hold that the bona-fide purchaser doctrine closed the door to borrowers bringing claims for damages against lenders and servicers (as opposed to making arguments that defeat the ejectment claim). That issue remains an open question.