Waiving Statutory Foreclosure Provisions


The recently issued opinion of the Colorado Court of Appeals, in Armed Forces Bank v. Hicks, 2014 COA 74. No. 13CA0875 (June 5, 2014), is significant for commercial real estate lenders.

In Hicks, the Bank was the successful bidder at a foreclosure sale under its deed of trust that secured the Bank's loan to its borrower. The Bank's bid resulted in a deficiency claim against the guarantors of the loan in the approximate amount of $6,100,000.00. The borrower had previously filed for bankruptcy protection.

The guarantors asserted a number of defenses in the deficiency action, including a defense under Section 38-38-106(6) (the "Statute") of the Colorado real estate foreclosure statute. The Statute requires the foreclosing lender to bid at least its "good faith estimate of the fair market value of the property being sold," less the amount of unpaid real estate taxes, all amounts secured by liens against the property that are prior to the lien being foreclosed, and the reasonable costs and expenses of holding, marketing, and selling the property, net of any income received. A foreclosing lender is not required to bid more than the debt owed to it by the borrower. Under the Statute, the failure of a foreclosing lender to bid the amount required by the Statute does not affect the validity of the foreclosure sale "but may be raised as a defense by any person sued on a deficiency."

The guarantors in Hicks argued that (1) compliance with the Statute was mandatory, (2) the protections of the Statute could not be contractually waived in advance, and (3) public policy precluded the waiver contained in their guaranties of the statutory defense.

The Hicks court determined that:

  1. Based upon the structure of the entire foreclosure statute, and the specific language of the Statute, which provides that failure of the lender to bid its good faith estimate of the fair market value of the property "may be raised as a defense by any person sued on a deficiency" (emphasis supplied), the Hicks court determined the defense under the Statute was waivable;
  2. Further, the Hicks court held that a waiver of the protections of the Statute does not violate public policy because there was no allegation that the lender was in an "unfairly superior bargaining position, or that the lender overreached in bargaining for the waiver"; and
  3. The Hicks court held that the waiver language in the guarantee, which included the guarantors' express waiver of all of their defenses against the lender "other than actual payment and performance of the indebtedness," was effective to waive the defense of the guarantors based upon the Statute.                                  

In light of the Hicks case, lenders should review and, if indicated, revise the waiver language contained in their commercial guarantee forms to assure that the waiver provisions, if any, comport with the language that the Hicks court found to be effective for waiver. Consideration should be given to adding waiver language to the lender's promissory note since the defense under the Statute is available to "any person sued on a deficiency." Clearly, the legislature intended that the statutory defense to be available to both the primary obligors under the promissory note, and to the guarantors of the promissory note.

The facts of the Hicks case limit its application to commercial loans. Although not stated as a requirement to any of the holdings by the Hicks court, the facts in this case also suggest that the waiver language should be conspicuous. The court also noted that there was no allegation that the Bank's bid violated the implied duty of good faith, which under Colorado law applies to the performance by the parties of their contractual rights and obligations.

Generally, the implied covenant of good faith and fair dealing may not be waived. The Colorado Uniform Commercial Code ("UCC"), provides that the "obligations of good faith . . . reasonableness . . . prescribed by [the UCC] . . . may not be disclaimed by agreement." C.R.S. Section 4-1-302(b). However, the very next sentence of that section of the UCC provides that "[t]he parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if the standards are not manifestly unreasonable." Both the UCC and the Hicks decision give deference to the parties' freedom to contract. Any attempt to limit the implied covenant of good faith should include standards by which good faith and fair dealing are measured.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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