Lender’s Credit Bid is Not Evidence of Fair Market Value


[authors: Richard H. Herold and Benjamin W. Reeves]

In MidFirst Bank v. Chase, 640 Ariz. Adv. Rep. 9, __ P.3d __ (App. 2012), the Arizona Court of Appeals recently held that the amount of a successful credit bid at a trustee’s sale does not constitute admissible evidence of “fair market value” of the foreclosed property for the purposes of Ariz. Rev. Stat. (A.R.S.) § 33-814(A). In other words, the opinion requires a lender to introduce evidence of “fair market value” as part of its prima facie case in a deficiency action, even if the debtor does not request a “fair market value” hearing under A.R.S. § 33-814(A). As a result of this decision, lenders will generally be required to obtain an appraisal or broker's price opinion to ensure they have admissible evidence of the fair market value of the collateral.

The facts of the case describe a rather ordinary fact pattern. In 2008, the secured lender loaned $1,620,000 to a borrower. The loan was secured by a deed of trust recorded against real property, and was guaranteed by two individuals – Mike and Linda Chase (the “guarantors”). The borrower and guarantors defaulted and the lender exercised its right to conduct a trustee’s sale of its real property collateral.

The secured lender was the successful bidder at the trustee’s sale with a credit bid of $486,000. Even after applying the credit bid to the then outstanding balance of the loan, the secured lender was left with a deficiency of $1,325,044.09. The lender moved for summary judgment against the borrower and guarantors for the full deficiency amount based solely on its credit bid. The guarantors argued that summary judgment was not appropriate, because they alleged that the “fair market value” of the real property serving as collateral was greater than the debt. The guarantors did not support their assertion with any evidence and never filed an application for a “fair market value” hearing under A.R.S. § 33-814(A). The trial court rejected the guarantors’ defense, finding that “[n]o reasonable juror could find for the Chases on the issue of fair market value based upon the record presented.” Thus, the trial court granted summary judgment for the secured lender. The guarantors timely appealed and the Court of Appeals reversed.

The Court of Appeals began its analysis by noting that the lender, as the party moving for summary judgment, bore the burden of proving the absence of a genuine issue of material fact. Conversely, the guarantors, as the parties resisting summary judgment, did not need to come forward with evidence to establish a disputed issue of fact unless and until the lender satisfied its initial burden. The Court of Appeals analyzed the language of A.R.S. § 33-814(A) to determine that the lender, as the moving party, failed to satisfy its initial burden.

The Court of Appeals examined the language of the statute, noting that the purpose of the statute is to prohibit creditors from obtaining a windfall by buying property at a trustee’s sale for less than the fair market value of the property. Through this lens, the Court reviewed the following section of the statute:

[T]he deficiency judgment shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale, as determined by the court less the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee’s sale, whichever is higher.

Based on this provision and on the purpose of the statute, the Court of Appeals concluded that “the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded.”

After concluding that the statute requires a determination of “fair market value” before a deficiency judgment can be issued, the Court of Appeals then analyzed whether credit bids could constitute evidence of “fair market value.” The Court of Appeals concluded that credit bids are not evidence of “fair market value.” The statute defines “fair market value” as follows:

For the purposes of this subsection, “fair market value” means the most probable price, as of the date of the execution sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.

Because a trustee’s sale is not made “free of compulsion” (i.e., not willingly), the Court of Appeals, citing Dewey v. Arnold, 159 Ariz. 65, 70, 764 P.2d 1124, 1129 (App. 1988), concluded that the purchase price at the trustee’s sale cannot constitute evidence of “fair market value.” As the Court of Appeals concluded that the guarantors were statutorily entitled to a determination of fair market value while the secured lender only introduced evidence of the credit bid, the trial court’s award of summary judgment was reversed.

The implication of the MidFirst decision is that a secured lender must introduce evidence of “fair market value” in every deficiency action – regardless of whether the borrower requests a “fair market value” hearing under A.R.S. § 33-814(A) or contests the amount of the credit bid. Notably, MidFirst conflicts to some degree with the holding in Life Investors Co. of Am. v. Horizon Resources Bethany, Ltd., 182 Ariz. 529, 898 P.2d 478 (App. 1995), in which the Court of Appeals previously held that A.R.S. § 33-814(A) places the burden to produce evidence of “fair market value” squarely on the debtor.

Nevertheless, where loans are secured by real property, lenders must be aware of MidFirst and, generally speaking, should obtain an appraisal or broker's price opinion in support of their credit bid to ensure they have admissible evidence of the collateral’s fair market value to establish the deficiency due and owing after the trustee’s sale.

A copy of the opinion can be obtained through this link.

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