Watch Out When Buying at a Foreclosure Sale

Buyer Beware – Purchasing at a Foreclosure Sale in Oregon is Risky – Types of Deeds and Warranties

Outback Properties, LLC v. Johnson,--- P.3d ---- (2009), January 21, 2009

Plaintiff purchased real property in a trustee's sale which was still subject to a lien because the trustee had not given the necessary notice to the lienholder. Plaintiff sued the trustee for negligence and breach of contract. The trial court granted summary judgment in favor of defendant. Plaintiff appealed.

No Negligence

The court held the trustee was not liable for negligence because a trustee owes no duty to the purchaser at a trustee’s sale. The trustee’s only duty is to the beneficiary.

Under ORS 86.742(1), if the trustee fails to give notice and the omitted lienholder did not have actual notice, “such omitted person shall have the same rights possessed by the holder of a junior lien or interest who was omitted as a party defendant in a judicial foreclosure proceeding * * *.” The omitted lienholder has five years from the date of the trustee's sale to redeem the property or commence an action against the trustee. ORS 86.742(6). An omitted lienholder may recover damages from the trustee if the lienholder can prove, among other things, that “[t]he omitted person could and would have cured the default under ORS 86.753.” ORS 86.742(2)(c).

The trustee had no address for omitted lienholder and “made a decision to not investigate the matter further,” reasoning that, “if the foreclosure actually went through, * * * the problem could be corrected with an omitted lienholder proceeding.” Plaintiff purchased the property at the sale. About one week later, defendant executed and delivered to plaintiff a trustee's deed, which plaintiff had drafted. As required by ORS 86.755(4), the trustee's deed stated, in part:

“NOW THEREFORE, in consideration of the said sum so paid by [plaintiff] in cash, the receipt whereof is acknowledged, and by the authority vested in said Trustee by the laws of the State of Oregon and by said Trust Deed, the Trustee does hereby convey unto [plaintiff] all interest which the grantor has or had the power to convey at the time of grantor's execution of said Trust Deed, together with any interest the said grantor or his successors in interest acquired after the execution of said Trust Deed for the previously described property * * *.”

According to the court, liability in negligence for purely economic harm requires the existence of some duty beyond the ordinary duty to use reasonable care. Loosli v. City of Salem, 345 Or 303, 308, 193 P3d 623 (2008).

No Contract

The plaintiff claimed that the trustee’s deed was a contract. The court found that the deed is a conveyance that contained no covenants. If there had been warranties or other covenants in the deed a contract could arise under specific circumstances.

In ORS 93.140, the Oregon legislature limited the circumstances in which a covenant of title may be implied in the transfer of land. Yepsen v. Burgess, 269 Or 635, 637, 525 P.2d 1019 (1974). ORS 93.140 provides, “No covenant shall be implied in any conveyance of real estate, whether it contains special covenants or not, except as provided by ORS 93.850 to 93.870.” Construing ORS 93.140, the Supreme Court explained that the term “covenants,” when used in connection with the conveyance of land, “ordinarily refers to the quality of title, such as the modern covenants of warranty, quiet enjoyment, seisin and against encumbrances, or the ancient covenants of right to convey and for further assurance.” Yepsen, 269 Or at 637 (omitted).

Under ORS 93.140, therefore, a conveyance does not imply a covenant against encumbrances, except as provided in ORS 93.850 to 93.870. Those sections provide permissible forms for warranty deeds, special warranty deeds, bargain and sale deeds, and quitclaim deeds. They differentiate between conveying property and providing a warranty or covenant. For example, in a warranty deed, a grantor “conveys and warrants” property “free of encumbrances” except as set forth in the deed. ORS 93.850(1). The effect of a warranty deed is to “convey the entire interest in the described property,” ORS 93.850(2)(a), and to include a covenant that “the property is free from encumbrances except as specifically set forth on the deed,” ORS 93.850(2)(c)(B). By contrast, a bargain and sale deed provides only that a grantor “conveys” property. ORS 93.860(1). Such a deed “shall convey the entire interest in the described property,” ORS 93.860(2)(a), but “shall not operate to provide any covenants of title in the grantee and the successors of the grantee,” ORS 93.860(3). See also Winters v. County of Clatsop, 210 Or.App. 417, 422, 150 P3d 1104 (2007) (“The essential purpose of a bargain and sale deed is to convey whatever title the seller has, without providing a warranty on the seller's part of the nature or quality of that title.”).

A purchaser of foreclosed property in Oregon needs to have fully investigated title prior to the sale.