Alert October 02, 2012

Maryland Court of Appeals Rules Foreclosing Lender Cannot Be Bona Fide Purchaser Where It Has Constructive Notice

A Maryland intermediate level appellate court held that a lender could not avail itself of the protections of a bona fide purchaser, which protects a person’s interest in property that the person purchases without notice of prior equities, when the lender was on constructive notice of an action affecting title to the real property at the time the lender acquired its lien. Here, the borrower obtained a loan on property that, while deeded to him, was the subject of an ongoing action by his deceased mother’s estate, which was seeking to impose a constructive trust on the property. The borrower ceased making loan payments once the constructive trust was imposed. The lender filed a foreclosure action, and the estate representative filed a motion to stay and dismiss the foreclosure action alleging that the lender’s lien was invalid. The lower court denied the motion to stay and dismiss, finding that the lender’s actual notice and bad faith were disputed material facts. On appeal, the Court held that the action pending at the time of the loan served as constructive notice under the doctrine of lis pendens, which precluded the lender from the protection of a bona fide purchaser. As a result, the Court reversed and remanded the case with instructions to dismiss the foreclosure action.