Tuesday, November 25, 2014

WV Supremes OK Foreclosed Homeowner's Use Of 'Fair Market Value Defense' When Determining Deficiency Judgment; Court Overrules Its Prior Precedent That Mandated Automatic Use Of Auction Sale Price In Calculation; Ruling Will Lead To Less Lender Windfalls, Lower Post-Foreclosure Liability For Property Owner

From an Opinion Summary from Justia US Law:
  • Defendants defaulted on their obligation to Plaintiff, who had loaned them $200,000 secured by a first deed of trust on real property they owned. Plaintiff subsequently purchased the subject property at a trustee’s sale and then filed the instant lawsuit seeking a deficiency judgment for the unpaid balance of Defendants’ promissory note.

    The circuit court entered summary judgment in favor of Plaintiff and awarded Plaintiff post-judgment interest on this award. Defendants appealed, arguing that the deficiency judgment was too high and should have been adjusted to reflect the fair market value of their property when it was sold at the trust deed sale.

    The Supreme Court reversed, holding that a trust deed grantor may assert, as a defense in a lawsuit seeking a deficiency judgment, that the property was sold for less than its fair market value at the trust deed foreclosure sale.
Source: Justia Opinion Summary - Sostaric v. Marshall (Signed Opinion).

For the court ruling, see Sostaric v. Marshall, No.14-0143 (W.V. November 12, 2014)

Editor's Note: This court ruling provides a handy primer on the statutes and case law governing the calculation of deficiency judgments in foreclosure actions in that the West Virginia Supreme Court examines and considers:
  1. the majority view of other jurisdictions that permit the sale price of foreclosed property to be challenged in a deficiency judgment lawsuit;(1) and
  2. West Virginia's statutory law on trust deed foreclosure sales, as well as its earlier binding precedent in Fayette County. National Bank v. Lilly, 199 W.Va. 349, 484 S.E.2d 232 (1997) which it now overrules.
For stare decisis fans, the opinion also sets forth the basis used by the majority for deviating from its prior precedent, and includes a vigorous dissenting opinion by Chief Justice Robin Jean Davis, who argued against violating prior precedent, explaining why:
  • the case was absent of any compelling justification for doing so, and
  • any change of the prevailing law requires legislative, not judicial, action.


(1) Buried in footnotes 11 and 12 of the ruling is the following collection of statutes that the court describes as the majority rule governing the calculation of post-foreclosure deficiency judgments in other states:
  • Footnote 11:

    Statutes that define the deficiency as the difference between the mortgage obligation and the "fair value" of the foreclosed real estate include the following: Ariz. Rev. Stat. § 33-814 ("fair market value" as of the date of sale); West's Ann. Cal. Code Civ. Proc. §§ 580a ("fair market value" as of date of sale in power of sale foreclosure), 726(b) ("fair value" as of sale date in judicial foreclosure); Colo. Rev. Stat. Ann. § 38-38-106 ("fair market value"); Conn. Gen. Stat. Ann. § 49-14(a) ("actual value" as of date title vested in mortgagee in strict foreclosure); Ga. Code Ann. § 44-14-161 ("true market value" as of sale date); Idaho Code § 6-108 ("reasonable value"); Kan. Stat. Ann. § 60-2415 ("fair value"); Me. Rev. Stat. Ann. tit. 14, § 6324 ("fair market value" at time of sale); Mich. Comp. Laws Ann. § 600.3280 ("true value" at time of sale); Minn. Stat. Ann. § 582.30, subd. 5(a) ("fair market value"); Neb. Rev. Stat. § 76-1013 ("fair market value" as of sale date); Nev. Rev. Stat. §§ 40.455-40.457 ("fair market value" as of sale date); N.J. Rev. Stat. § 2A:50-3 ("fair market value"); N.Y. Real Prop. Acts. § 1371 ("fair and reasonable market value" as of sale date); N.C. Gen. Stat. § 45-21.36 ("true value" as of sale date); N.D. Cent. Code §§ 32-19-06, 32-19-06.1 ("fair value"); Okla. Stat. Ann. tit. 12, § 686 ("fair and reasonable market value" as of sale date); Pa. Stat. Ann. tit. 42, § 8103 ("fair market value"); S.C. Code Ann. § 29-3-700 et seq. ("true value"); S.D. Codified Laws Ann. § 21-47-16 ("fair and reasonable value"); Tex. Prop. Code Ann. § 51.003 ("fair market value" as of sale date); Utah Code Ann. § 57-1-32 ("fair market value"); Wash. Rev. Code Ann. § 61.12.060 ("fair value"); Wis. Stat. Ann. § 846.165 ("fair value").

    Footnote 12:

    In many jurisdictions, the court must conduct a hearing as to value and apply the "fair value" amount in computing a deficiency even though the deficiency defendant fails to request it. See, e.g., Idaho Code Ann. § 6-108; Neb. Rev. Stat. § 76-1013; Nev. Rev. Stat. § 40.457; Okla. Stat. Ann. tit. 12, § 686; Pa. Stat. Ann. tit. 42, § 8103.

    Other states place the burden on the deficiency defendant to raise the "fair value" defense. See, e.g., Kan. Stat. Ann. § 60-2415; Me. Rev. Stat. Ann. tit. 14, § 6324; Mich. Comp. Laws Ann. § 600.3280; N.C. Gen. Stat. § 45-21.36; N.J. Rev. Stat. § 2A:50-3; and Tex. Prop. Code Ann. § 51.003.
Buried in Footnotes 16 and 17 of the ruling, the court finds support for allowing a foreclosure defendant to assert a fair market value defense by including excerpts of a dissenting opinion in a Missouri case (a state which does not permit the fair market value defense), in which the dissenting judge makes a compelling (albeit unsuccessful) argument in favor of a foreclosed property owner getting credit for the full fair market value of the property foreclosed as an offset to the loan obligation when calculating the deficiency:
  • Footnote 16:

    The Missouri Supreme Court considered this issue and, like Lilly, followed the minority rule that does not permit a deficiency defendant to assert a fair market value challenge following a foreclosure sale. Missouri Chief Justice Richard B. Teitelman dissented to the court's ruling and discussed why denying a deficiency defendant the opportunity to present a fair market value challenge is inconsistent with the general purpose underlying a damage award:

    The purpose of a damage award is to make the injured party whole without creating a windfall. Accordingly, in nearly every context in which a party sustains damage to or the loss of a property or business interest, Missouri law measures damages by reference to fair market value. Yet in the foreclosure context, Missouri law ignores the fair market value of the foreclosed property and, instead, measures the lender's damages with reference to the foreclosure sale price. Rather than making the injured party whole, this anomaly in the law of damages, in many cases, will require the defaulting party to subsidize a substantial windfall to the lender. Aside from the fact that this anomaly long has been a part of Missouri law, there is no other compelling reason for continued adherence to a measure of damages that too often enriches one party at the expense of another. Consequently, I would hold that damages in a deficiency action should be measured by reference to the fair market value of the foreclosed property.

    First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216, 224-25 (Mo., 2012) (C.J. Teitelman, dissenting).

    Footnote 17:

    In response to a bank's argument that allowing a defendant to present a fair market value challenge in a deficiency judgment proceeding could negatively affect banking institutions, one court noted:

    First Bank argues that changing to the fair market value approach will place all the risk in the foreclosure process onto the lender. This argument is not persuasive. By focusing only on the foreclosure process, First Bank deflects consideration of the risk management techniques available to lenders when the loan is made. A lender compensates for risk by charging an interest rate that is set both by the financial markets and by the lender's assessment of the borrower's creditworthiness. The lender also manages risk by appraising the fair market value of the property to ensure that the loan is adequately secured. Changing to a fair market value approach certainly would lessen the lender's chance of a large windfall and would mean only that First Bank, like the borrower, is losing or gaining money based on fair market value of property. The risk of loss is part of the risk of lending. That risk of loss should not be borne solely by the borrower and then amplified by measuring the deficiency by reference to the foreclosure sale price.
First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216, at 228 fn. 5 (Mo., 2012) (C.J. Teitelman, dissenting).

Contained in the footnotes of the ruling in First Bank v. Fischer & Frichtel, Inc., is a useful collection of statutes and case law of other states on the issue of post-foreclosure deficiency judgments.

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