REO Trust 2017-RPL1 v. Short Sale, LLC

majority opinion

THE SUPERIOR COURT OF THE STATE OF DELAWARE

)

REO TRUST 2017-RPL1, )

Plaintiff, )

)

v. ) C.A. NO. N20L-10-029 DJB

)

SHORT SALE, LLC, )

Defendant. )

)

Date Submitted: May 28, 2026

Date Decided: June 26, 2026

ORDER ON REMAND FOLLOWING EVIDENTIARY HEARING

1. By Order dated June 18, 2024, the Delaware Supreme Court remanded

this matter to this Court for an expansion of the record and directed this court to

make additional findings of fact. 1 In its remand Order, the Supreme Court permitted

this Court reconsideration of “any aspect of its decision on which those factual

findings bear.” 2 Before the Supreme Court was Plaintiff REO Trust 2017-RPL1’s

(hereinafter “REO Trust”) appeal of this Court’s August 1, 2023, Opinion. 3 2F

REO Trust 2017-RPL1 v. Short Sale, LLC and FCS Lending, LLC, No. 306, 2023, LeGrow, J. (Jun. 18, 2024) (ORDER).

Id.

REO Trust 2017-RPL1 v. Short Sale, LLC and FCS Lending, LLC, No. 306, 2023, Docket Entry (hereinafter “Case No. 306, 2023 D.I. ”) 1.

Following appeal, Defendant Short Sale, LLC (hereinafter “Short Sale”) and

interested party FCS Lending, LLC (hereinafter “FCS”), jointly cross-appealed. 4 F

2. In accordance with that Order, this Court held a two-part evidentiary

hearing 5 and accepted post-hearing briefing from the parties. 6 The Court’s findings

4F 5F

of fact are set forth below.

Background and Procedural History

3. Relevant to this litigation are three Delaware entities. Plaintiff REO

Trust is a Delaware statutory trust and the junior mortgagee on 313 S. Broom Street,

Wilmington, DE 19805 (hereinafter “the Property”). Defendant Short Sale is a

Delaware limited liability company and the record owner of the Property. FCS is

an interested party to this litigation as the priority mortgage holder on the Property.

4. REO Trust initiated foreclosure proceedings in Superior Court on

October 30, 2020. 7 Following a Sheriff sale on the Property, on May 10, 2021, Short

Sale moved to set aside the sale; FCS, as an interested party, moved to enforce

payment of sale proceeds. 8 REO Trust responded to both motions on May 19,

Case No. 306, 2023 D.I. 6.

REO Trust 2017-RPL1 v. Short Sale, LLC, N20L-10-029 DJB, Docket Item

(hereinafter “D.I.”) D.I. 77 and 82. Given the two cases referenced, citations to the Supreme Court Docket will read: “Case No. 306, 2023 D.I. __” and the Superior Court Docket will read: “D.I. __”.

D.I. 87-89, 94-98, 100.

D.I. 1.

D.I. 13,14.

2021. 9 In its only filing in the initial proceedings, on May 28, 2021, the New Castle

County Sheriff filed a Response in Opposition only to FSC’s Motion to Enforce

Payment. 10 Short Sale and FSC jointly replied in support of both motions on March

17, 2023. 11 Argument was held on October 25, 2022. 12 Due to continued questions

10F 11F

that remained, subsequent argument was held on February 9, 2023. 13 Following the

12F

submission of supplemental submissions, 14 this Court issued its Opinion which

13 F

denied the Motion to Set Aside the Sheriff’s Sale and granted the Motion to Enforce

Payment of the Proceeds on August 2, 2023. 15 14F

4. The following are the facts previously found by this Court in its

Opinion:

In 2018, Roberta Ziefert was the record owner of 313 S. Broom Street,

Wilmington, DE 19805 (hereinafter “the Property”), a townhome

located within the condominium community of Towne Estates. Ziefert

died on August 25, 2018, and at the time of her death, the Property was

subject to two mortgages. FCS Lending, LLC (hereinafter “FCS”) held

the senior mortgage; Plaintiff REO Trust 2017-RPL1 (hereinafter

“Plaintiff” or “REO Trust”) held the junior mortgage. After Ziefert’s

Estate failed to pay condominium fees owed on the Property, Towne

Estates, the homeowners association (hereinafter “HOA”) of the

Property, filed a debt action against Ziefert’s Estate and eventually

obtained a judgment against Ziefert’s Estate in the Justice of the Peace 9

D.I. 17, 18.

D.I. 19.

D.I. 46.

D.I. 40.

D.I. 42.

D.I. 43-46.

D.I. 51, REO Tr. 2017-RPL1 v. Short Sale, LLC, 2023 WL 3774654, at *2 (Del. Super. Ct. June 1, 2023), as amended (Aug. 1, 2023) (internal citations omitted).

Court of Delaware on July 22, 2019. Towne Estates transferred its

judgment to this Court on August 16, 2019, and satisfied the judgment

through a Sheriff’s sale of the Property on December 10, 2019.

Defendant Short Sale, LLC (hereinafter “Short Sale”) purchased the

Property at the Sheriff’s sale.

During the time the HOA pursued its judgment lien, REO Trust filed

its first foreclosure action in this Court on July 26, 2019, through a sci

fa sur writ and listed the Ziefert Estate as the sole defendant. The

Estate, despite being properly noticed, failed to respond and ultimately

REO Trust moved for default judgment on March 24, 2020, a little over

three months after the Property’s sheriff sale on the HOA judgment. On

September 18, 2020, the Prothonotary issued a writ directing the Sheriff

of New Castle County to schedule a second sheriff’s sale of the

Property. REO Trust, however, moved to vacate its judgment over

Ziefert’s Estate and requested a stay of the sheriff’s sale on October 9,

2020, citing the fact that the “property [was] sold by a junior

lienholder.”

Less than a month later, on October 30, 2020, REO Trust filed the

instant foreclosure action, solely naming Short Sale as a defendant.

Despite being served with a copy of the Complaint, Short Sale did not

file an Answer or any responsive pleading. REO Trust moved for

default judgment on January 22, 2021, which this Court granted. The

Prothonotary issued a writ directing the Sheriff of New Castle County

to conduct a sale of the Property, and on April 13, 2021, Short Sale, for

the second time, purchased the Property. Immediately following this

purchase, Short Sale transferred its interest in the Property to FCS. 16

15 F

5. In its decision, the Court found Short Sale’s delayed challenge to the

sale “inexplicable,” yet nonetheless heard the motion given the jurisdictional

challenge raised. 17 Ultimately, a defect in the process was found due to REO Trust

16F

having failed to notice all required parties. Ultimately, however, the sale was not

Id.

REO Tr. 2017-RPL1, 2023 WL 3774654, at *2-3.

set aside, as neither moving party was prejudiced by the defective notice and the

interests of justice did not so require. 18

17F

6. With respect to FCS’s Motion to Enforce the Payment of Proceeds, in

reliance upon the Delaware Supreme Court’s decision in Eastern Savings Bank, FSB

v. CACH, LLC, 19 this Court held, “Delaware's ‘first in time, first in line’ priority

18F

means the first party to record its lien has priority in sale distribution.” 20 Ultimately,

19F

“regardless of who initiates a foreclosure action first, FCS's first priority mortgage

has priority in this sheriff's sale distribution.” 21

20F

7. On appeal, REO Trust contends that this Court’s decision should be

reversed, arguing Short Sale waived its right to challenge the Second Sheriff’s Sale.

REO Trust maintains the Estate was not a necessary party and a defect in the process

occurred. Further, REO Trust argues FSC was not entitled to join in the distribution

of proceeds simply because it possessed a “first priority” mortgage. 22 21F

8. Short Sale and FCS cross-appealed as to the denial of the motion to

vacate the Sheriff’s Sale on the basis that (i) REO Trust’s foreclosure action was

“void ab initio because the Superior Court had no subject matter jurisdiction” due to

REO Tr. 2017-RPL1, 2023 WL 3774654, at *3, 5.

55 A.3d 344 (Del. 2012).

REO Tr. 2017-RPL1, 2023 WL 3774654, at *6.

Id.

Case No. 306, 2023, D.I. 7.

the notice defect; and (ii) the appellees, the Estate, and the public as a whole were

prejudiced by REO Trust’s failure to provide the statutorily required notice. 23 22F

9. In its review of these claims, the Supreme Court remanded the case

back to Superior Court:

…so that the parties may develop the factual record regarding the

circumstances underlying the Second Sheriff’s Sale, the assignment,

and the parties’ interests in the outcome of the proceedings. After

receiving the parties’ evidence, the Superior Court shall make factual

findings and transmit the same to this Court. The Superior Court also

may reconsider any aspect of its decision on which those factual

findings bear. 24

23F

The Supreme Court’s decision to remand was driven by appellees’ inability to

explain, based upon a lack of an evidentiary record as to, “why Short Sale assigned

its interest to FCS and why—as the winning bidder—Short Sale sought to vacate the

Second Sheriff’s Sale based on unfairness or prejudice to the Estate.” 25 The24F

Supreme Court determined that “[t]he legal merits of the parties’ claims on appeal

cannot be resolved until this Court addresses the attendant waiver, standing, and

jurisdictional issues, which may turn on the unusual circumstances under which the

appellees’ motions came before the Superior Court.” 26 The Supreme Court

25F

Case No. 306, 2023, D.I. 11.

Id.

determined that further exploration was warranted to assess their impact on the

issues before it. 27 26F

10. Upon remand, the Court held a status conference with the parties on

August 21, 2024. 28 A period of discovery was permitted by the Court and a date of

27F

February 13, 2025, was given for the evidentiary hearing. 29 28F Due to witness

unavailability, the evidentiary hearing re-scheduled for June 23, 2025. 30 29F The

hearing was ultimately heard on June 30, 2025, due to the Court’s trial obligations

on June 23. 31 The evidentiary hearing concluded on October 31, 2025. 32

30F 31F

11. On June 23, Short Sale and FCS jointly called one witness: Robert

Stella (hereinafter “Stella”); FSC proffered no witnesses. 33 At the conclusion of

32F

Stella’s testimony, REO Trust, for the first time, announced its intention to call a

witness from the Sheriff’s Office, who was not present. 34 Short Sale/FCS opposed

33F

and filed written opposition to REO Trust’s request. 35 Over objection, REO Trust

34F

Id.

D.I. 62.

Id.

D.I. 69-71, 73.

D.I. 74.

D.I. 82.

D.I. 77.

Initially counsel for REO Trust sought to call counsel for the Sheriff’s Office, who was present at the hearing and engaged in the instant litigation. This request was denied. REO Trust then requested leave to call an employee of the Sheriff’s Office, who was not present, on future day. Id.

D.I. 78-80.

was permitted to present the requested testimonial evidence and, on October 31,

2025, the second Evidentiary Hearing was held. 36 35F REO Trust presented the

testimony of the Deputy Sheriff. In rebuttal, Short Sale/FSC re-presented Stella. 37 36F

12. The parties submitted supplemental briefing to address the issues on

remand. On January 6, 2026, the parties, including the New Castle County Sheriff’s

Office, filed cross-briefs in support of their respective positions. 38 On February 3,

37F

2026, cross-responses were filed by REO Trust and Short Sale and FCS, jointly. 39 38F

Reply briefs by all were filed on February 10, 2026. 40 On June 4, 2026, the Court

39F

requested the parties reconvene for further argument on limited issues of law

following remand. 41 All named and interested parties appeared and were heard. 42

4 F 41F

This matter is now ripe for findings on remand.

Legal Standard

13. On remand from the Supreme Court, “the trial court must proceed in

accordance with the mandate and the law of the case as established on appeal.” 43 42F

D.I. 82.

Id.

D.I. 87, 88, 89.

D.I. 94, 96, 96, 97.

D.I. 98, 100. No Reply was filed by the Sheriff’s Office, as it elected to stand on the Opening and Answering briefs previously submitted. D.I. 99.

D.I. 102.

Id.

Bankers Trust Co. v. Bethlehem Steel Corp., 3rd Cir., 761 F.2d 943, 949 (1985) (citing Briggs v. Pennsylvania R.R. Co., 334 U.S. 304, 306, 68 S. Ct. 1039, 1040, 92 L. Ed. 1403 (1948) (internal citations omitted)).

This Court must “implement both the letter and the spirit of the mandate, taking into

account the appellate court's opinion and the circumstances it embraces.” 4443F

Findings of Fact

14. Short Sale and FCS’s sole witness, Stella, provided clarity as to why

Short Sale, who twice bought the Property at Sheriff’s sale, immediately transferred

its second winning bid to FCS and then contested the sale: simply put, Stella is the

managing member of both Short Sale and FSC. 45 44F

15. Stella, a real estate developer for 47 years, is the principal and sole

member of Short Sale, an LLC that owns a series of properties (condominiums) in

Towne Estates Condominiums. 46 Out of the 111 units in Towne Estates, Stella, via

45F

Short Sale, owns 90 units. 47

46F

16. Stella is also the sole member of Financial Consulting Services

Lending, also known as FCS Lending or FCS. Stella owns “38 or 39” different

companies, operating as separate entities, with separate books. 48 Per Stella, it is not

47F

Bankers Trust Co., 761 F.2d at 949 (quoting Piambino v. Bailey, 11th Cir., 757 F.2d 1112, 1119 (internal citations omitted)).

D.I. 77; Tr. of Evidentiary Hr’g (Jun 30, 2025), D.I. 93, pp. 18-20 (hereinafter, D.I. 93) (D.I. 77 is the entry notating the evidentiary hearing was held; D.I. 93 is the transcript of the proceedings. For purposes of citation, the official transcript will be cited to for both the June 30 and October 31, 2025, hearings.)

D.I. 93, p. 19.

Id. at p. 18.

D.I. 93, p. 20.

uncommon for him to assign bids to properties he purchases, and his decision to

assign a bid is dependent upon the situation and advice of counsel. 4948F

17. When the Property went up for sale on the execution of the

condominium’s lien, Short Sale was the sole bidder and purchased the condo for a

very low price in the range of $1,200 - $1,500. 50 At the initial sale, the Property was

49F

sold “subject to [the mortgage] lien[s].” 51 Stella/Short Sale was aware that two

50F

mortgages encumbered the Property in an amount that exceeded the Property’s

value, which he surmised was why there were no other bidders.

18. Following the sale, Stella, on behalf of FCS, approached each mortgage

holder in an attempt to negotiate a buy out of the respective mortgages. While FCS

was successful in buying out the first priority mortgage, it was unable to buy out the

second priority mortgage held by REO Trust. 52 51F

19. Much testimony was given by Stella concerning his bewilderment at

why REO Trust would proceed to a Sheriff sale after acknowledging it held the

second priority mortgage and that the mortgage was worth more than the property. 53 52F

Stella noted that in his 35 years of attending Sheriff sales, he rarely sees a second

Stella, Short Sale, and FCS engaged the same counsel who executed the judgment on the condominium lien against the Property, which led to Short Sale’s ownership. 50

D.I. 93, p. 29.

This fact was not testified to by Stella but rather is found in Paragraph 8 of the initial Complaint in foreclosure. See D.I. 1, ¶8; see also D.I. 13, Ex. D. 52

D.I. 93, p. 29-31.

D.I. 93, pp. 28, 31-37.

priority lender foreclosing on a property. 54 Prior to the sale, Stella engaged in

53F

written communication with counsel for REO Trust. This correspondence,

introduced at the hearing, documents REO Trust’s concession that it held second

priority status, and conceded that upon foreclosure, the first priority lender would be

paid first. 55

20. The sale pursuant to REO Trust’s foreclosure occurred on April 13,

2021. Stella took much time to detail the events of the sale, which was the first sale

since the COVID-19 shut down. Stella did not intend to bid that day but instead

went to observe. The first bid came from REO Trust and was upwards of $90,000.

Surprised at the bid, Stella then decided to bid $1 more, lodging the winning bid. 5655F

Believing he was effectuating a credit bid, Stella was unconcerned at the dollar

amount. As the first priority mortgage holder, he assumed he would be permitted to

credit bid and did so under the belief that the payment would be credited to him as

the owner of both Short Sale and FCS. 57 Following the sale, counsel for Stella wrote

56F

Multiple references were made during the evidentiary hearing and subsequent arguments of counsel as to the respective number of years counsel has been working in this field as support for legal propositions. As explained to counsel, the number of years “experience” is not controlling to the Court. The Court is bound by the law and its application to the facts, and continuous arguments to the Court based merely upon personal experience is not helpful.

This fact is not disputed by REO Trust, who now argues it erroneously made these representations.

D.I. 93, p. 61.

D.I. 93, p. 20.

to REO Trust, copying the Sheriff, requesting acknowledgment that FCS’s mortgage

would be paid first from the proceeds, as it held priority status. Neither REO Trust

nor the Sheriff’s Department responded. 58 57F

21. Shortly after the sale, Stella then assigned Short Sale’s winning bid to

FCS. 59

58F

22. From the start, Stella’s ultimate goal was to purchase the condominium

unit, a self-described strategic decision because Short Sale already owned several

units in the same building. 60 Short Sale’s later transfer of interest in the property to

59F

FCS was a distinction without a difference, as Stella owned both entities and FCS

was the senior lien holder on the property. 61 Stella explained that being able to

60F

obtain a credit bid was determinative. In his mind, if the winner of the bid is the

senior priority lien holder, the bidder obtains a set off for the amounts paid credited

towards the senior position mortgage. 62 61F

23. At the October 31, 2025, evidentiary hearing, REO Trust called Deputy

Sheriff Ronald Fioravanti. 63 The Deputy Sheriff explained the credit bid process, in

which a bidder is permitted to forgo paying the required deposit, and ultimate

Id. at pp. 54-55.

D.I. 87 at ¶ 4, App. Tab 4.

D.I. 93 at p. 18

Id. at p. 77.

D.I. 93, p. 83.

D.I. 82; D.I. 92 (Tr. Of Evidentiary Hr’g (Oct. 31, 2025) at pp. 19-21 (hereinafter “D.I. 92”).

payment on a property, if that bidder was owed money on that same property. 64 63F

Instead of giving the Sheriff money that will ultimately be distributed back to the

bidder, the Sheriff offers a credit in the amount in which the bidder is owed. Credit

bids are typically given to foreclosing plaintiffs who have bid on a property. 65 In

64F

the event that a non-foreclosing first priority lienholder bids on a property, any

amount bid in excess of the foreclosing mortgage that remains can be a credit bid. 66 65F

Specifically, the Deputy Sheriff stated:

QUESTION: Have you ever witnessed a situation where someone --here a person who had a lien on the property going to sale but was not

the foreclosing lender -- was bidding on property?

DEPUTY SHERIFF: I went into our database, and I was able to

identify three cases where the first mortgage holder purchased a

property at sheriff's sale. And in those three cases, the first mortgage

holder paid the 67money that was owed to the party who brought the

66F

action. They paid that. And then any money that exceeded cost and

what was owed to the party who brought the action -- they were allowed

to credit bid the remainder of whatever their high bid was.58

24. Fioravanti, who is familiar with Stella from frequently seeing him at

these sales, recalled Stella having the misconception that he could credit bid on the

date of the sale in question. 68 Much ado was made, initially by Short Sale/FSC

67F

regarding confusion that occurred over Stella’s misconception. It is clear there was

Id. at pp. 20-21.

Id. at pp. 19-21, 33.

Id. at p. 22.

Id.

Id. at pp. 22, 67.

confusion, Stella left the sale assuming he would be allowed to credit bid; he was

not allowed and was called back to the sale. Ultimately, the required deposit was

paid. 69 The Deputy Sheriff testified that the Sheriff’s Office has “no dog in this

68F

fight” and simply wants to ensure they are distributing proceeds according to the

law. 70

25. Following the Deputy Sheriff’s testimony, Stella was recalled. Stella

testified once again to the events that took place given the confusion regarding

whether he could credit bid. 71 70F

Subject Matter Jurisdiction & Waiver

26. This Court permitted Short Sale/FCS’s belated challenge to the sale

procedure, given the jurisdictional challenge raised, despite no good reason being

provided for the failure to raise this claim earlier to avoid the limitations of Superior

Court Rule of Procedure 12. The evidentiary hearing revealed what was suspected

all along: there was no good reason for the delay, especially now knowing that the

owner of Short Sale and FCS are one in the same. However, because of the nature

of the challenge – to this Court’s jurisdiction, the claim, as frustrating as it may be,

must be heard. Superior Court Civil Rule 12(h) states that a challenge to the Court’s

D.I. 92, p. 22, 34; D.I. 93, p. 76.

Id. at p. 66.

Id. at p. 71.

subject matter jurisdiction cannot be waived. Therefore, based upon that premise,

the Court heard the matter.

27. The Court having entertained that challenge in no way condones the

practice of sitting and waiting on a challenge which was able to have been brought

much earlier. The expanded record makes clear the Court’s suspicions that once

FCS realized that it would not be paid, and its post-sale efforts to engage with both

the Sheriff’s Office and REO Trust failed, it considered its options and ultimately

sought to vacate the sale under the guise that a defect in the process stripped Superior

Court of jurisdiction.

28. It is certainly understood and agreed that judicial economy has not been

served by Short Sale and FCS’s belated challenge. Over the last few years of

litigation, much time has been spent by the parties, their counsel and both the

Superior and Supreme Courts on this issue. To this point, the Court wholeheartedly

agrees with and shares in the frustration held by REO Trust.

29. Following the evidentiary hearing, there remains no evidence of

prejudice and vacating the sale on a technical defect would result in the waste of

judicial and government and other resources that REO Trust argued, albeit in the

vein claim of waiver. Further, nothing was presented to suggest that Short Sale or

FCS has standing to challenge this sale on behalf of the Estate. The record is silent

as to how these parties have any relationship, other than the Estate owning a condominium in the development in which Stella was trying to unilaterally acquire.

The interests of justice do not require the Court to vacate the sale of the Property and

that has not changed.

30. What has been waived is the new challenge that Short Sale and FCS

raised in the briefing of this matter: the fact that the sale should be voided if the

proceeds are not distributed to FCS, as a first priority lender. This new argument,

premised on a mistake of fact that led to the purchase – is surely waived as it was

not initially before the Superior Court, was not before the Supreme Court and beyond

the scope of the remand order. A party is deemed to have waived any arguments

not raised in their brief on appeal and “cannot raise anew on remand an issue that it

failed to pursue on appeal.” 72 Accordingly, it will not be considered.

71F

31. Superior Court is appreciative of the opportunity granted by the

Supreme Court to reevaluate its analysis of the issues presented following the

expansion of the record. However, nothing was presented by either party that

suggests the Court should not hear a challenge to subject matter jurisdiction, even in

a foreclosure action where it is quite clear that Superior Court has jurisdiction over

these procedures, as such a challenge cannot be waived. It is clear now, that Stella

is the owner of both Short Sale and FCS, and as a result, REO Trust is correct,

Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003), aff'd, 840 A.2d 641 (Del. 2003).

knowledge of a potential defect can be imputed upon both parties. However, the

fact remains that the challenge to the sale was a claim of jurisdiction. And that is

what the Court entertained, as a jurisdictional challenge cannot be waived.

32. The Court’s entertainment of this challenge here may unfortunately

allow opportunity for nefarious gamesmanship in the future, in that a party can

simply repackage a procedural challenge by raising a jurisdictional challenge.

However, the Rules of Professional Conduct guide and control an attorney’s

obligations with respect to ethically raising claims before a tribunal. The evidentiary

hearing made clear that each side went into this sale with differing expectations.

Whatever the reasons may have been, Short Sale and FCS found a creative way to

challenge the sale upon learning the proceeds might not be distributed in the way in

which it initially assumed.

33. Nonetheless, nothing was developed to lead the Court to believe that

jurisdiction is not proper or that the creative issue raised before the Court was

waived. The Superior Court has jurisdiction over mortgage foreclosures and

properly exercised that jurisdiction when confirming the now contested sale of the

Property. 73

72F

21 Del. C. § 2101.

Standing

34. Finally, REO Trust contends that FCS does not have standing to

challenge the validity of the foreclosure sale because they bought a controversial bid

fully aware of the risks involved. 74 Specifically, REO Trust argues that FCS cannot

73F

seek relief as an interested party when it bought the winning bid from Short Sale

fully aware of the issues that existed, evidenced from the fact that Stella had been

informed by the sheriff after the sale on April 13, 2021, and before the assignment,

that the first mortgage holder would not receive the proceeds from the sale. 75 This

74F

has all been confirmed through the evidence presented on remand.

35. A party who has an interest in the property sold, or in the proceeds of

an execution sale may object to the confirmation of the foreclosure sale. 76 Because

75F

FCS is the senior mortgagee on the Property, they are an interested party, with

standing, to challenge the validity of the foreclosure sale. 77

76F

36. Nothing, however, was presented to show how Short Sale or FCS has

standing to challenge the sale on behalf of the Estate. This has remained steadfast

since the inception of this case.

D.I. 86 at ¶ 12.

D.I. 87 at ¶ 12, D.I. 93 at 78:4-19.

Burge, 648 A.2d at 418 (citing Petition of Adair, Del. Super., 190 A. 105, 107 (Del. Super. 1936) (internal citations omitted)).

Id.

Distribution of Proceeds Clarified

37. When it initially purchased the Property, Short Sale, via Stella, knew it

remained encumbered by two mortgages. In fact, any interested party was aware it

was so encumbered because the Property was specifically sold “subject to” the

mortgages. 78 Mortgages, unlike general liens, are not extinguished upon a Sheriff

77F

Sale, that much is clear. 79 We now know that upon purchasing the Property, Short

78 F

Sale transferred its interest to FCS, who tried to negotiate the purchase of the two

mortgages which encumbered the Property. FCS was only successful in doing so

for the first priority mortgage. For whatever reason, however, FCS was not

successful in purchasing the second priority mortgage from REO Trust.

38. A letter was introduced at the evidentiary hearing which was previously

part of the record below: a letter from REO Trust in which it acknowledged its

second priority status and that as a result, it would collect sale proceeds after FCS. 8079F

CITE. REO Trust, in these proceedings, takes the position that the letter was an

erroneous legal position and it is not bound by its statement. 81 80F

39. Despite this acknowledgement by REO Trust, there is no record

evidence that when it executed its judgment and filed its Complaint seeking sale of

D.I. 13, Def’s Mtn. to Set Aside Sheriff Sale, Ex. D; D.I. 76, Ex. A.

10 Del. C. § 4985.

D.I. 93 at pp. 43-46.

D.I. 102.

the Property, that it was to be sold “subject to” the first priority mortgage held by

FCS. Following the evidentiary hearing, and pursuant to the allowance given by

Supreme Court to revisit its original Opinion, should the record evidence develop

accordingly, the Court will take this opportunity for reflection and clarification of

its original ruling.

40. The evolving decisional law in conjunction with Judge Woolley’s

Treatises in this area of law is anything but clear. 82 In a matter of what appears to

81F

be a matter of first impression in the written form, the issue of distribution of

proceeds when two mortgages encumber a property needs to be clearly decided.

REO Trust and the Sheriff have implored the Court to follow what has been the

previous operation of the New Castle County Sheriff’s Office. REO Trust

repeatedly urged the Court to simply “look to the statute” for clarity, but “the statute”

– 10 Del. C. § 4985 does not speak to the order of distribution with two competing

mortgages.

41. Title 10, Section 4985 states:

Real estate sold by virtue of execution process shall be discharged from

all liens thereon against the defendant, or against one or more of the

The Court wholeheartedly appreciates and agrees with the Superior Court’s sentiment regarding the lack of clarity and archaic language used in the statutes governing this area of law that was expressed in its opinion: CACH, LLC. v. Eastern Savings, FSB, 2011 WL 4730525at *5 (Del. Super. Sept. 30, 2011). It is the Court’s hope that, between this Order and the ultimate finding of the Delaware Supreme Court, that clarity and modern day plain English can be injected into the interpretation of the statute.

defendants, if there is more than one, whose property such real estate

is, except such liens as have been created by mortgage or mortgages

prior to any general liens; and with respect to such, the sale shall be a

discharge to the extent to which the proceeds thereof may be legally

applicable to a judgment or judgments obtained for the debt, to secure

the payment of which the mortgage or mortgages respectively, if there

is more than one, appear to have been given, and the real estate shall

also be discharged from all right of dower and curtesy therein of any

defendant in the execution.

What the statute makes clear is that a mortgage lien is not extinguished upon a sale

of property which occurred due to the execution of a general lien. General liens are

extinguished, mortgage liens are not, and any sold property is still so encumbered.

This statute does not, however, delineate the distribution of proceeds when a second

priority mortgage forecloses in execution of its judgment lien.

42. Section 4985 was interpreted by Judge Woolley in § 1140 of his

Treatise regarding the distribution of proceeds upon the sale of property upon

execution of judgment. Judge Woolley provides an illustration discussing

distribution of proceeds between mortgage liens and general liens. While he does

not discuss this scenario, the example does provides guidance. Judge Woolley states

that when a property is encumbered by both mortgage and general liens, and the

general lien is the executing force, the property remains encumbered by the

mortgage lien and the proceeds are distributed to the general liens in order of priority.

Judge Woolley states that in that scenario, “[t]he first lien being a lien ‘created by

mortgage’ and being prior to a general lien, is within the exception [of Section 4985] and is not discharged by the sale and does not share in the distribution of

proceeds…The land is purchased subject to the mortgage lien and it is discharged

from all liens subsequent to it, whether the proceeds are sufficient to reach and

satisfy all of them or not.” 83 This is consistent with § 4985, and with the history of

82F

this very case.

43. When the Property was first sold due to the condominium’s lien

execution, it was specifically sold subject to the outstanding mortgage liens. This is

consistent with the only developed decisional case law in this area, both Cedar Inn

v. Kings Inn 84 & Eastern Savings, FSB. v. CASH, LLC. 85 The facts of Cedar Inn

83F 84F

are similar to the case at bar, in that the property at issue was encumbered by two

mortgages, along with judgment liens, and the foreclosing party held a second

priority mortgage.

44. Importantly, in Cedar Inn, not only was there an agreement between

the two mortgage holders that Cedar Inn, the second mortgage holder, would

foreclose, but the agreement included that the property would be sold subject to the

first mortgage, held by Delaware Trust Company. This fact was read aloud at the

time of sale, as well. Upon a challenge to the sale by a third party, the Superior

Victor B. Woolley, Practice in Civil Actions and Proceedings in the Law Courts in the State of Delaware, §1140 (1906) (emphasis in original).

Cedar Inn v. King’s Inn, Inc., 269 A.2d 781 (Del. Super. 1970).

Eastern Savings Bank, FSB v. CACH, LLC., 55 A.3d 344 (Del. 2012).

Court turned to Section 1140 of Judge Woolley’s Treatise. Cedar Inn Court held

that Delaware Trust Company was only allowed to participate in the distribution of

proceeds as a general lienholder, as it had secured its mortgage bond with a judgment

bond, which had first in time, first in line priority over all other general liens. In so

finding, the Court denied the motion to set aside the sale. 86

85F

45. In Eastern Savings, the Delaware Supreme Court examined Cedar Inn,

and reaffirmed that 10 Del. C. § 4985 is “first in time, first in line,” pure race

recording statute. 87

86F The facts of Eastern Savings were different than the facts

presented here, in that the two liens in question were a general lien and a mortgage

lien. The general lien had priority, as it was filed prior to the mortgage. The

mortgagor, Eastern Savings, foreclosed. When the Sheriff’s office distributed the

proceeds to Eastern Savings prior to CACH, the holder of the general lien, CACH

sued in the Court of Common Pleas, alleging misappropriation of funds and unjust

enrichment. Eastern moved to dismiss, CACH moved for summary judgment. The

court granted the motion to dismiss and CACH appealed to Superior Court. The

Superior Court reversed, holding pursuant the first in time judgment lien must be

paid before the later mortgage lien, even though the mortgagor was the foreclosing

party. On appeal, the Delaware Supreme Court examined both the order of priority

Cedar Inn, 269 A.2d at 787.

Eastern Savings, 55 A.3d at 349.

in distribution of proceeds, as well as what liens are extinguished upon the sale of

property by execution.

46. Eastern Savings interprets § 4985 as Judge Woolley did: all nonmortgage liens are extinguished upon the sale of property by execution. With respect

to the distribution of proceeds issue, the Eastern Savings Court examined Cedar Inn.

The Court ruled that sale proceeds are distributed according to the first in time, first

in line priority, and ultimately affirmed the Superior Court’s ruling that CACH is to

be paid, given its priority lien status, despite the fact that CACH was not the

foreclosing party. 88 Noting that Cedar Inn did not provide the rule of law it applied

when ruling, the Court turned to Judge Woolley’s Treatise again, and found that

because “[n]o Superior Court judge has ever issued a decision that would directly

contradict Judge Woolley’s interpretation of the applicable statutory law[,]” the only

logical rule of law that Cedar Inn could have applied would be the first in time, first

in line rule of priority in distribution. Therefore, the Superior Court’s judgment was

affirmed and the first filed priority lien was entitled to priority distribution in

proceeds despite not being the executing party. 89 8 F

47. The Superior Court decision that Eastern Savings affirmed noted, that:

[R]equiring proceeds of a foreclosure sale to first satisfy a lien perfected

before the mortgage was recorded is also a fair result. Prior to the

execution of the mortgage a title search is usually performed to

Id.

Id. at 351.

determine if there are any judgments against the property. If such

judgments exist and the bank decides to proceed with its loan, it does

so at its own risk and with full knowledge of the prior judgment. The

bank should not be allowed to ignore or circumvent the prior judgment

simply because it is the party instituting the foreclosure proceedings. 90 89F

Here, not only did REO Trust have an obligation to research its assumed risks, it

affirmatively acknowledged that it was a second priority mortgage holder. 91 In fact,

90F

in the letter introduced at the evidentiary hearing, REO Trust seemingly admits that

its decision to foreclosure was a “business decision.” Specifically, then-counsel for

REO Trust stated:

My client is also aware that there is a senior mortgage on the property.

My client's decision to pursue foreclosure despite this is a business

decision by them, for which I cannot offer any explanation. They have

chosen to foreclose, as is their right. We are aware that the first

mortgage will be paid before our mortgage. My client is not able to

accept any amount other than the total debt due to the equity position. 92 91F

48. Despite having multiple opportunities to present evidence, there was

nothing presented by either party at either evidentiary hearing as to whether the

contested sale of the Property was sold “subject to” the first priority mortgage. This

matters. The Cedar Inn decision was based upon the fact that the Property was sold

subject to the Delaware Trust mortgage, which is why all parties agreed the mortgage

held by Delaware Trust would not partake in the distribution of proceeds.

CACH, LLC. v. Eastern Savings, FSB, 2011 WL 4730525at *5 (Del. Super. Sept. 30, 2011).

D.I. 88, App. A158.

Id.

49. Such a reading is also consistent with the testimony of the Deputy

Sheriff, who noted that in the rare case in which a second priority lender forecloses

and the first priority mortgagor is the purchaser, a credit bid can be issued – it is only

issued, however, once the foreclosing party’s debt is satisfied. Any remaining funds

will go to the first priority mortgage. The Sheriff’s Office has not taken the position

that the first priority mortgage is not to be paid at all. This practice of the Sheriff’s

Office evidences an acknowledgment that the first-priority mortgage should be able

to partake in the distribution of proceeds. In what order of succession is what is

decided here.

50. Importantly, Judge Woolley notes that land purchased upon execution

of a judgment is, “subject to the mortgage lien, and it is discharged from all liens

subsequent to it.” 93 Therefore, unless a sale is noted to be sold subject to the first

92F

mortgage, given that mortgage liens are not discharged from a property upon

execution of sale, the proceeds must be distributed in a first in time, first in line

priority order. Otherwise, lien priority has no benefit.

51. Therefore, after much deliberation and consideration of the respective

positions of the parties, the expanded record, and the limited legal authority on this

issue, the initial decision of Superior Court is amended to clarify that the execution

sale proceeds are to be distributed in order of priority, regardless of the foreclosing

Woolley, § 1140.

party, unless that sale is made subject to any prior mortgage encumbrances. Again,

the Court appreciates the leave given by the Supreme Court for such an amendment

and is confident that the Supreme Court will bring further clarification to this issue.

This conclusion should prove to alleviate any unintended burden on the Sheriff’s

Office, as it is the foreclosing party’s assumed risk and responsibility to ensure that

an execution sale is both properly noticed and properly conditioned for sale, subject

to any applicable priority liens.

IT IS SO ORDERED.

Danielle J. Brennan, Judge

cc: All parties via LEXIS File&Serve Express

REO Trust 2017-RPL1 v. Short Sale, LLC

Authorities cited

Opinion · public domain