Tough News for Lenders - Major NC Supreme Court Decision on Collection of Post-Foreclosure Deficiencies

by Parker Poe Adams & Bernstein LLP
Contact

Fall is football time. And as every football fan knows, not every player on the line of scrimmage is an eligible receiver. Imagine how dramatically it would change the game if the entire offensive line were eligible to catch forward passes. 

Well, on Friday (9/28/15), the NC Supreme Court made a change which is every bit as dramatic and signals a brave new world for lenders seeking to recover on post-foreclosure deficiencies. In High Point Bank & Trust Co. v. Highmark Properties, LLC, the Court instituted a major change to the lender/guarantor relationship. The Court overruled at least 35 years of Court of Appeals decisions in holding that guarantors can seek an offset of the deficiency amount by contesting the fair market value of the property sold at foreclosure. Lenders beware! That offensive tackle just got a whole new section in the playbook. 

The Facts

High Point Bank (“Bank”) made two loans ($4.7 million and $1.75 million) secured by real estate owned by a real estate development company. The loans were guaranteed by the principals of the borrower. When the loans went into default, Bank filed a lawsuit against the borrowers and guarantors and simultaneously instituted power of sale foreclosure proceedings. Bank was the only bidder at the foreclosure sales, paying $2,578,000 for one property and $720,000 for the other. 

Bank then filed a motion for summary judgment seeking to recover the deficiencies from the guarantors. Bank argued that guarantors were not entitled to raise any defense based upon the fair market value of the collateral properties, but the trial court disagreed and held that a jury needed to decide the value of the properties. At trial, the jury concluded that Bank bid far less than the fair market value of the properties, and therefore, the deficiency amount owed by guarantors was significantly reduced. Thus, instead of being able to collect a deficiency in excess of $1.5 million, the trial court held that Bank could only collect just over $300,000. The Court of Appeals and NC Supreme Court affirmed. 

The Law

N.C.G.S. § 45-21.36 permits a person whose property has been purchased by the lender at foreclosure sale to assert that the property was worth more than the amount bid by the lender. If a jury finds that lender bid less than fair market value, the deficiency amount can be reduced or eliminated. Since most foreclosure sales end with the lender taking title to the property and a deficiency owed, N.C.G.S. § 45-21.36 comes up a lot.

Since at least 1979, the North Carolina Court of Appeals held that N.C.G.S. § 45-21.36 did not apply to guarantors and was limited “to those persons who held a property interest in the mortgaged property.” This distinction became crucial for lenders since it meant pursuing a post-foreclosure deficiency judgment against a guarantor was often much easier than pursuing that same judgment against a borrower. In High Point, the North Carolina Supreme Court rejected those 35 years of decisions from the Court of Appeals, and held that because N.C.G.S. § 45-21.36 was passed in 1933 as part of depression era laws designed to protect debtors, it must be construed “more broadly.” 

Noticeably, the Supreme Court also held that:

(a) N.C.G.S. § 45-21.36 is not really a defense but “an equitable method of calculating the indebtedness;” and

(b) the protections of the statute are “not subject to waiver.”

The Moral

It’s hard to overstate the major effect that the High Point decision will have for lenders trying to collect post-foreclosure deficiencies. Among those lessons are these:

(1) N.C.G.S. § 45-21.36 will now be raised in every post-foreclosure deficiency case in which the lender takes title, whether the action is against borrowers or guarantors. 

(2) The Court’s characterization of the statute as an unwaivable method of calculating the indebtedness (rather than a standard defense) indicates that a defendant does not need to raise it as an affirmative defense (on which the defendant bears the burden of proof) but that the lender must address it as part of its burden at trial. 

(3) Jury trials in post-foreclosure deficiency actions will become the norm as (a) jury trial waivers are unenforceable in NC and (b) the question of value of real estate is almost always a question of material fact not subject to determination at the summary judgment level. 

So, what’s a lender to do? On the front end, lenders should give more thought to the value of arbitration provisions in their loan documents. There are certainly risks to arbitration (e.g. the lack of appeal), but the process is generally faster and less cumbersome than a jury trial. On the back end, lenders should consider options to avoid the provisions of N.C.G.S. § 45-21.36 entirely. Those options include (a) obtaining a judgment on the note/guaranty prior to foreclosing on the collateral (since the statute only kicks in when dealing with a post-foreclosure deficiency); and (b) pursuing a judicial foreclosure rather than a power-of-sale foreclosure (since the statute only applies to cases involving the latter). 

So for all you lenders out there, this is your heads-up: The rules have changed and new players have become eligible. Talk with your counsel now to rewrite the playbook so you are not left flat-footed. 

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.

© Parker Poe Adams & Bernstein LLP | Attorney Advertising

Written by:

Parker Poe Adams & Bernstein LLP
Contact
more
less

Parker Poe Adams & Bernstein LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.