Failure To File Motion Within 90 Days Of Deed Delivery Consummating NY Foreclosure Sale Sinks Lender's Move To Score Deficiency Judgment

A recent ruling by a New York intermediate appellate court serves as a reminder that, in New York, where the proceeds of the foreclosure sale fail to cover the entire amount due on the loan, a foreclosing mortgage lender will be deemed to be legally "out of luck" in any attempt to obtain a deficiency judgment against those liable on the loan if it fails to file a motion for a deficiency judgment "within ninety days after the date of the consummation of the sale by the delivery of the proper deed of conveyance to the purchaser", as one recent lender sadly discovered.(1)

The lender's desperate attempt to salvage the situation with the argument that the '90-day meter' should not begin to run until the referee's (foreclosure) deed could, under state law, legally be recorded fell on unpersuaded judicial ears.(2)(3)

For the ruling, see Cicero v Aspen Hills II, LLC, 2011 NY Slip Op 05153 (NY Sup. Ct. App. Div. 3rd Dept. June 16, 2011).

(1) Contrast the 90-day time period in New York with the five year time period in Florida (with an additional 20 years to collect). See Time in which the plaintiff must apply for a deficiency judgment in a Florida foreclosure case. Check state law for the applicable time frame in your state.

(2) From the ruling:

• Pursuant to the RPAPL, "the mortgagee in a mortgage foreclosure action [may] recover a deficiency judgment for the difference between the amount of indebtedness on the mortgage and either the auction price at the foreclosure sale or the fair market value of the property, whichever is higher" (BTC Mtge. Invs. Trust 1997-SI v Altamont Farms, 284 AD2d 849, 849-850 [2001]; see RPAPL 1371 [2]).
  
  The statute requires, however, that a motion for a deficiency judgment be made "within ninety days after the date of the consummation of the sale by the delivery of the proper deed of conveyance to the purchaser" (RPAPL 1371 [2]).
  
  The 90-day period is a provision in the nature of a statute of limitations, thus "[f]ailure by plaintiff to serve notice within the 90-day period is a complete bar to the entry of a deficiency judgment" (Amsterdam Sav. Bank v Amsterdam Pharm. Dev. Corp., 106 AD2d 797, 797 [1984]).
  
  Here, no dispute exists that the appointed referee delivered the deed to plaintiff on November 23, 2009, or that there was any deficiency in the deed itself. Plaintiff was required, therefore, to file the motion by February 21, 2010 — 90 days from delivery of the deed — and, accordingly, Supreme Court properly held that plaintiff's March 25, 2010 motion was untimely (see Citicorp Mtge. v Strong, 227 AD2d 818, 820-821 [1996]; National Bank of Sussex County v Betar, 207 AD2d 610, 612 [1994]).
  
  Plaintiff asserts, instead, that the 90-day period did not begin to run until the expert's appraisals of the mortgaged properties were delivered to plaintiff on January 13, 2010. Specifically, because the deed could not be recorded in New York State until two tax forms were completed — the TP-584 and the RP-5217 — which could not be executed until the fair market value was derived from the appraisals, plaintiff argues that consummation of the sale, and the commencement of the 90-day period, did not occur until the appraisals were delivered.
  
  We disagree. Both our statutory and common laws dictate that transfer of real property occurs at the delivery of a properly executed deed, rather than when the deed is recorded (see Real Property Law § 244; Manhattan Life Ins. Co. v Continental Ins. Cos., 33 NY2d 370, 372 [1974]; Janian v Barnes, 284 AD2d 717, 718 [2001]).
  
  Plaintiff's attempt to read the clear reference to "delivery of the proper deed of conveyance" in RPAPL 1371(2) to require something more than the delivery of the properly executed deed to commence the limitations period is not persuasive (see Citicorp Mtge. v Strong, 227 AD2d at 820-821; Savings Bank of Utica v 561-575 Delaware Ave., 201 AD2d 946, 946 [1994]; Crossland Sav. v Patton, 182 AD2d 496, 496 [1992], lv denied 80 NY2d 755 [1992]).

(3) This ruling should serve as a reminder to foreclosed homeowners in New York (and elsewhere) that the unpaid balance on a foreclosed loan cannot be collected (either by the lender, some zombie debt buyer who may have swooped in and bought the crappy paper for 'pennies on the dollar', or any other scavenger) unless and until:

• a motion requesting a hearing for the granting of a deficiency judgment is filed with the court within the proper time period,
• a judge holds the hearing (with all parties receiving proper notice thereof), and
• a judge grants the deficiency judgment, determining exactly what the deficiency amount is (typically, and as set forth in Cicero v Aspen Hills II, LLC, it is "the difference between the amount of indebtedness on the mortgage and either the auction price at the foreclosure sale or the fair market value of the property, whichever is higher").

A word of caution to foreclosed homeowners: beware of zombie debt buyers and other vultures that gobble up these unpaid deficiency debts from foreclosing lenders (see e.g. Short Sellers, Foreclosed Borrowers May Be In For Big Surprise As Collection Firms Scramble To Buy Up Unpaid Loan Deficiencies), and who then attempt to collect on them without first having obtained a deficiency judgment. Keep in mind that, not only are they not allowed to do this, but if they do, they are giving you a good case for a lawsuit against them for violation the federal Fair Debt Collection Practices Act, as well as any applicable state law.

See Fla. Appeals Court Nabs Sneaky F'closing Lender In Attempt To Improperly Go After Foreclosed Property Owner's Personal Assets To Satisfy Unpaid Debt for an example of one foreclosing lender who almost got away with duping a snoozing trial judge into signing a court order allowing for the collection of an unpaid post-foreclosure sale debt where the lender did not first obtain a deficiency judgment in the court that granted the foreclosure.

Trafficking In Deficiency Judgments An Upcoming Cottage Industry Being Seen On The Horizon?

The following excerpt buried in a recent story in the Sarasota Herald Tribune serves as a caution to financially-strapped homeowners and 'strategic defaulters' thinking of walking away from their underwater homes and investment property:

• Florida is gliding quietly into a new and potentially painful part of the boom-bust cycle, where stacked-up "deficiency judgments" for unpaid condo fees and unsatisfied mortgages could come back to haunt past owners. Many of them thought they had escaped further costs when they handed their home over to their lender.



• When a lender sells a foreclosed home for less than the mortgage, the difference -- or "deficiency" -- is typically registered in the court proceedings as being owed by the original borrower, but it is seldom paid.



• The same thing can happen with unpaid condo or homeowner fees. Either as part of the bank foreclosure or through a separate foreclosure action, the homeowner or condo association can ask the court for a deficiency judgment.



• In either case, even if these debt instruments gather dust for years, they remain valid and are accruing interest at the rate of 6 percent to 18 percent per year.

***

• [In Florida, t]here is a five-year period from the end of a case judgment to establish a deficiency judgment.(1) Then that judgment lasts for 10 years and it can be renewed for another 10 years. "You can even sue at the end and get more time, so there is all the time in the world to collect on these things,"(2) Soto said. "Yet there is this pervasive rumor that you can somehow walk away from your house and never have to worry about it again. And it is simply not true."(3)

For more, see Foreclosure fees haunt homeowner associations.

(1) See Time in which the plaintiff must apply for a deficiency judgment in a Florida foreclosure case.

(2) See Burshan v. Nat'l Union Fire Ins. Co., 805 So.2d 835 (Fla. 4th DCA 2001):

• The "main purpose of an action on a judgment is to obtain a new judgment which will facilitate the ultimate goal of securing satisfaction of the original cause of action." Adams v. Adams, 691 So.2d 10, 11 (Fla. 4th DCA 1997).
  
  If a limitations period has almost run on a judgment, a judgment creditor "can start the limitation period anew by bringing an action on the judgment to obtain a new judgment." 47 AM.JUR.2D Judgments § 945 (1995); accord Adams, 691 So.2d at 11 (quoting Koerber v. Middlesex College, 136 Vt. 4, 383 A.2d 1054, 1057 (1978)). A party may not relitigate the merits of the original cause of action in an action on a judgment. See Klee v. Cola, 401 So.2d 871, 872 (Fla. 4th DCA 1981).

(3) There is also a pervasive belief (and seemingly persuasive argument) that a judgment creditor can just sit on its claim, without making any attempt to collect on the money owed, wait for the debtor to get financially back on his feet, and then go after him for the unpaid debt, all the while accumulating additional judgment interest on the amount owed.

Specifically in Florida (and elsewhere, I'm sure), a "foot-dragging" creditor intentionally twiddling its thumbs in such a case may be found to to have "slept on its rights" and, consequently, leave itself vulnerable to a laches defense, as some presumably flabbergasted creditors in Florida have mournfully discovered, even though the 20-year period had yet to expire. See:

• Winter v. Allstate Mortg. Corp., 303 So. 2d 399 (Fla. App. 3d DCA. 1974):
  
  Of course, a party ordinarily has twenty years in which to enforce a judgment in Florida. However, when undue delays are exercised without sufficient reason, it has been held that equitable defenes may be raised which may cut off the right to satisfy a judgment. Orr v. Allen-Hanford, Inc., Fla.1946, 158 Fla. 34, 27 So.2d 823; Blackburn v. Venice Inlet Co., Fla.1949, 38 So.2d 43.
  
  In the instant case, no effort was undertaken by the original judgment creditor, Brown, to satisfy his judgment, and it was not until eight years later that the appellee brought this action which informed the appellants for the first time of the existence of the judgment.
  
  It is also apparent that appellee's motive in purchasing the judgment was to assist it in acquiring the appellants' property at a reduced price. To permit foreclosure on a relatively valuable piece of property to satisfy the comparatively meager sum due because of the judgment would be inequitable under the circumstances of this case.
  
  Therefore, for the reasons stated, the judgment appealed is reversed and the cause is remanded with directions to enter judgment in favor of the appellants.
• Blackburn v. Venice Inlet Co., Fla.1949, 38 So.2d 43:
  
  In the case of Orr v. Allen-Hanford, Inc., 158 Fla. 34, 27 So.2d 823, we held that a creditor may satisfy his judgment within twenty years, but when undue delays are exercised without sufficient reasons shown therefor, equitable defenses become available that may cut off the right to satisfy the judgment.

See also, NH Couple Beats Back Debt Scavenger's Attempt To Collect On Zombie Debt From Old Foreclosed Mortgage:

• The judge also agreed with Wright's argument, under a legal doctrine known as a "Laches" defense, that Cadle had waited to try to collect the debt so that interest and late fees would pile up. The original loan deficiency on the Lessards' note was about $14,000, but Cadle was trying to collect nearly $30,000 by the time the lawsuit was filed.

Fla. Appeals Court Nabs Sneaky F'closing Lender In Attempt To Improperly Go After Foreclosed Property Owner's Personal Assets To Satisfy Unpaid Debt

According to a recent ruling by Florida's 3rd District Court of Appeal, an otherwise-successful foreclosing mortgage lender was nabbed in its attempt (probably through its legal counsel) to dupe an ostensibly snoozing trial judge into signing an improperly-worded proposed judgment by sneaking a few extra words into the judgment that enabled it, after a foreclosure sale had already taken place, to go after the foreclosed property owner's personal assets to satisfy the remaining unpaid balance on the home loan without first obtaining a deficiency judgment, a process the lender apparently sought to surreptitiously circumvent.

The ruling is short and to the point, and appears below in its entirety (including the court's footnote):

• The final judgment of mortgage foreclosure on appeal unauthorizedly and contrary to Form 1.996, promulgated by the Florida Supreme Court for such actions, provides "for let execution issue," upon the amounts due on the underlying debt. As in American General Finance, Inc. v. Graves, 621 So. 2d 585 (Fla. 5th DCA 1993),(1) those words are stricken from the judgment under review, which is otherwise affirmed.
  
  The effect and purpose of this ruling is to prevent the circumvention of the process required to establish the right to a deficiency judgment, which prominently includes a valuation of the mortgaged property. See Century Group, Inc. v. Premier Fin. Servs. East, L.P., 724 So. 2d 661 (Fla. 2d DCA 1999).
  
  In other words, we disapprove any effort — including those already undertaken by the appellee in this case — to reach the personal assets of the mortgagor until, unless, and only to the extent that a deficiency judgment is rendered after an appropriate exercise of the trial court's discretion in accordance with applicable principles of law and equity. See Wilson v. Adams & Fusselle, Inc., 467 So. 2d 345, 346 (Fla. 2d DCA 1985), and cases cited therein; see also Fulton v. R. K. Cooper Constr. Co., 208 So. 2d 863 (Fla. 3d DCA 1967), writ dismissed, 216 So. 2d 11 (Fla. 1968).
  
  Moreover, the trial court must also consider the claim that the appellee specifically waived the right to a deficiency in the proceedings below, in which case no such judgment may be entered. See Taylor v. Kenco Chem. & Mfg. Corp., 465 So. 2d 581, 584 (Fla. 1st DCA 1985); Capital Bank v. Needle, 596 So. 2d 1134, 1136 (Fla. 4th DCA 1992).
  
  Affirmed in part, reversed in part and remanded in part.
  
  Not final until disposition of timely filed motion for rehearing.

(1) American General Finance, Inc., 621 So. 2d at 585, states in its entirety:

• We delete the words "for which let execution issue" from the final judgment of mortgage foreclosure which is otherwise affirmed as modified.
  
  AFFIRMED as modified.

For the ruling, see Farah v. Iberia Bank, No. 3D09-2524 (Fla. 3d DCA, October 6, 2010).

See Abstract Appeal: Second District: Adopting Proposed Judgments Verbatim for an observation on the not-uncommon occurrence of trial judges signing proposed judgments, prepared by counsel for a victorious litigant, without making any changes thereto.

Note: This ruling serves as a reminder that, at least in Florida, after a foreclosure sale has taken place, the lender has no business trying to hit up the foreclosed homeowner for the unsatisfied portion of the loan balance without first going through the aggravation of heading back to court and obtaining a deficiency judgment (which necessarily requires some judicial determination of the property value to determine exactly how much the lender is entitled to collect from the homeowner).

Keep in mind that, in the event the unsatisfied balance on the foreclosed loan ends up in the hands of some scavenger "zombie debt" buyer for collection (who then pursues the foreclosed homeowner without first obtaining a deficiency judgment), such collection attempts could constitute a violation of the Federal Fair Debt Collection Practices Act.

Fla. Appeals Ct. Nixes Prevailing Party Legal Fee Award In Foreclosure Defense; Failure To Include Request In Pleading Sinks Recovery Attempt

A major screw-up by a foreclosure defense attorney seeking recovery of prevailing party attorneys fees pursuant to section 57.105(7), Florida Statutes(1) on behalf of a client in a defense of a mortgage foreclosure action was at the heart of a recent decision by a Florida appeals court.

An abbreviated, somewhat 'butchered' summary of the facts follows:

1. Lender filed a mortgage foreclosure action against defendants.


2. Defendants filed their answer.


3. The answer did not contain a claim for attorneys' fees.


4. Subsequently, Defendant filed a supplemental answer to correct a scrivener's error but again failed to raise a claim for attorneys' fees.


5. Court grants foreclosure judgment, and lender ultimately takes title to property at a foreclosure sale.


6. Lender then filed a motion for deficiency judgment against defendants.


7. The hearing was scheduled for February 10, 2009, and began as scheduled. However, due to insufficient time to present all evidence, the hearing was continued to February 18, 2009.


8. Five days before the scheduled continuation of the evidentiary hearing, counsel for defendants filed an emergency motion to withdraw and to continue the hearing. The trial court granted the motion, and the hearing was continued to March 19, 2009.


9. New counsel for defendants filed a notice of appearance on March 12, 2009.


10. On March 13, 2009, only seven days before the final hearing on lender's motion for deficiency judgment (and after obviously realizing the screw-up by the original foreclosure defense attorney in failing to raise a claim for attorneys' fees in the defendant's answer to the foreclosure complaint), defendants filed a notice of intent to seek attorneys' fees and costs ("Notice of Intent").


11. Following completion of the evidentiary hearing, the trial court entered final judgment denying lender's motion for deficiency judgment.


12. Defendants subsequently filed a motion for attorneys' fees and costs, claiming entitlement to attorneys' fees and costs for both the foreclosure and deficiency judgment proceedings pursuant to portions of the subject loan documents as well as the reciprocal fees provisions of section 57.105.


13. Lender filed a response to the motion, objecting to defendant's entitlement on multiple bases.


14. Following the hearing on the fee motion, the trial court awarded $44,667.50 in attorneys' fees to defendants on account of the work of the foreclosure defense attorneys. The fee award reflected time spent by all of the attorneys involved in defendant's defense throughout the deficiency judgment proceedings only, and acknowledge no entitlement for time spent on account of the unsuccessful defense of the foreclosure proceedings.

In reversing the trial judge's $44K+ attorney fee award to the foreclosure defense attorneys, the appeals court, citing multiple authorities, simply said that the fee request must be included in a 'pleading' (Complaints, answers, and counterclaims are 'pleadings' pursuant to Rule 1.100(a) of the Florida Rules of Civil Procedure), and said that including the attorney fee claim in the "Notice of Intent" did not satisfy the 'pleading' requirement, because the "Notice of Intent" is not a pleading.(2)

This ruling should serve:

• as a handy reminder for attorneys representing homeowners in foreclosure of what to do (and just as importantly, what not to do) when addressing the issue of recovering attorneys fees paid by their clients from the losing bankster in a successful defense,(3) and
• as valuable information for homeowners successful in fending off foreclosure regarding their rights to recover, from the losing bankster, any fees paid or payable to the attorney representing them in a foreclosure action.

For the ruling, see BMR Funding, LLC. v. DDR Corporation, 2D10-2284 (Fla. App. 2d DCA, June 3, 2011) (Editor's Note: This ruling was subsequently withdrawn, and a new opinion was issued here, with a change contained in the text of one paragraph only).

(1) See Fla. Appeals Court: Homeowner Entitled To Nail Bank For Prevailing Party Legal Fees After Lender Voluntarily Dismissed F'closure Case w/out Prejudice.

(2) The appeals court ruled as follows in applying Florida law to the facts of this case (bold text is my emphasis):

• Because DDR and Dunn did not claim entitlement to attorneys' fees and costs in any pleading, as defined by Florida Rule of Civil Procedure 1.100(a), the trial court erred in granting DDR and Dunn's motion for attorneys' fees and costs. In Stockman v. Downs, 573 So. 2d 835 (Fla. 1991), the supreme court held that a claim for attorneys' fees must be pleaded, regardless of whether the claim is based on contract or statute. Id. at 837. This pleading requirement was subsequently clarified in Green v. Sun Harbor Homeowners' Ass'n, 730 So. 2d 1261 (Fla. 1998):
  
  This Court's use of the phrase "must be pled" [in Stockman] is to be construed in accord with the Florida Rules of Civil Procedure. Complaints, answers, and counterclaims are pleadings pursuant to Florida Rule of Civil Procedure 1.100(a). A motion to dismiss is not a pleading. Stockman is to be read to hold that the failure to set forth a claim for attorney fees in a complaint, answer, or counterclaim, if filed, constitutes a waiver.
  
  Id. at 1263 (emphasis added).
  
  Subsequently, in Precision Tune Auto Care, Inc. v. Radcliffe, 815 So. 2d 708 (Fla. 4th DCA 2002), the Fourth District reversed an attorneys' fee award where the claimant failed to plead entitlement to fees. Applying the supreme court's ruling in Green, the court stated: "We assume that the supreme court meant what it said and said what it meant in Green. The plaintiffs here were required to set forth their claim for attorney's fees in a pleading." Id. at 712.
  
  In this case, DDR and Dunn urge this court to find that their "Notice of Intent" satisfied the pleading requirement. In its entirety, the notice states:
  
  Defendants, DDR Corporation and Carol J. Dunn, by and through their undersigned attorneys, hereby provide notice that, if they prevail with respect to Plaintiff's efforts to obtain a deficiency judgment, Defendants intend to seek the recovery of their attorneys' fees and costs from Plaintiff pursuant to the express terms of the subject Guaranty and the operation of the reciprocal fee provision of F.S. 57.105.
  
  We agree with BMR that the Notice of Intent is not a pleading. Having filed two answers to the amended complaint, DDR and Dunn had multiple opportunities to plead a claim for attorneys' fees. Thus, DDR and Dunn failed to raise entitlement to attorneys' fees in any pleading, as defined by Stockman and Green, and any claim they may have had was waived. See Sardon Found. v. New Horizons Serv. Dogs, Inc., 852 So. 2d 416, 421 (Fla. 5th DCA 2003).
  
  Further, pursuant to Stockman and Green, the purpose of the pleading requirement is notice. By pleading entitlement to attorneys' fees, the claimant puts the opposing party on notice, thereby preventing unfair surprise. Sardon Found., 852 So. 2d at 421. "The existence or nonexistence of a claim for attorney's fees may often affect the decision whether to pursue, dismiss or settle a claim. For these reasons, a party may not recover attorney's fees unless he has put the issue into play by filing a pleading seeking fees." Id.
  
  Here, not only did DDR and Dunn fail to plead entitlement, their "Notice of Intent" failed to satisfy the purpose behind the pleading requirement. The issue of DDR and Dunn's entitlement to attorneys' fees was not raised until the final hearing on BMR's motion for deficiency judgment was well underway and the foreclosure proceedings were complete. Not only was BMR deprived of any meaningful opportunity to consider whether to proceed with the deficiency judgment in light of possibly being assessed attorneys' fees, it was never put on notice of a potential claim for attorneys' fees during the pendency of the foreclosure action.
  
  Finally, DDR and Dunn urge this court to apply the exception to the pleading requirement recognized by the court in Stockman. "Where a party has notice that an opponent claims entitlement to attorney's fees, and by its conduct recognizes or acquiesces to that claim or otherwise fails to object to the failure to plead entitlement, that party waives any objection to the failure to plead a claim for attorney's fees."
  
  Stockman, 573 So. 2d at 838 (citing Brown v. Gardens by the Sea S. Condo. Ass'n, 424 So. 2d 181 (Fla. 4th DCA 1983); Mainlands of Tamarac by Gulf Unit No. Four Ass'n v. Morris, 388 So. 2d 226 (Fla. 2d DCA 1980)).
  
  DDR and Dunn argue that BMR failed to object to their "Notice of Intent" on the basis that such notice was not a pleading; however, the record conclusively establishes otherwise. BMR's written response to the "Notice of Intent," as well as its argument at the fee entitlement hearing, clearly relied upon the pleading requirement and Stockman in objecting to DDR and Dunn's entitlement to fees. BMR did not "recognize[ ] or acquiesce[ ] to that claim" for attorneys' fees. Stockman, 573 So. 2d at 838.
  
  Accordingly, the final judgment awarding attorneys' fees to DDR and Dunn is reversed.

(3) See Pleading Requirements for a Claim for Attorneys' Fees for an old (July/August, 2000) article in The Florida Bar Journal that may be of some value in providing guidance to lawyers in requesting court-ordered, prevailing party attorneys fees from losing defendants (ie. lenders, servicers, etc.).

NC Appeals Court: Foreclosed Property Owner's Affidavit Expressing Subjective Belief Of Collateral Value May Be Enough To Stiff-Arm Bankster Seeking To Score Deficiency Judgment

From a client alert from North Carolina law firm Parker Poe:

• It shouldn’t be that hard to get a deficiency judgment in North Carolina. To start with, unlike some other states, North Carolina does not have a “one-action” rule and allows lenders to recover deficiencies on almost all commercial and residential loans. And the facts are typically straightforward for suit– the lender acquired the property at a public foreclosure sale and now the borrower owes the remaining balance of the debt. It should be simple to get a judgment, right?
  
  Not so fast, says the North Carolina Court of Appeals. In a decision issued on July 7, 2015 (United Community Bank v. Wolfe), the Court handed borrowers with North Carolina loans a powerful tool to ensure that, absent advance planning, lenders will almost always have to go through a full jury trial in order to obtain a deficiency judgment. And that thought can be a mighty strong deterrent for a lender pursuing an otherwise collectible deficiency.
  
  
  ***
  
  What’s unique about the UCB decision is that it allows borrowers to avoid the lender’s summary judgment motion based on nothing more than a borrower’s subjective belief about the value of the property.
  
  The UCB court analyzed a long line of North Carolina decisions which held that an owner of real estate is presumed to be competent to give an opinion as to the value of the property. Those cases led the court to accept the borrower’s affidavit as sufficient to overcome summary judgment, even though the affidavit said nothing more than that borrower “believes the property was at the time of the foreclosure sale worth the amount of the debt it secured.” Period. End of story.
  
  Providing that one sentence biased opinion (with no other evidence of value at all) is now sufficient for a borrower to avoid summary judgment and ensure a jury trial. Lenders better get used to reading that sentence because it’s about to become standard in every borrower affidavit contesting summary judgment in a deficiency action.

For an analysis of the facts and the applicable law, see It Just Got Harder to Get a Deficiency Judgment in North Carolina.

For the court ruling, see United Community Bank v. Wolfe, No. COA14-1309 (N.C. App. July 7, 2015).

Asset-Heavy Mortgage Guarantors & Co-Signers Beware: No "One-Action" Rule In Sunshine State; Foreclosure Judgment-Holding Lenders In Florida Can Opt To Snatch Your Personal Assets Before Setting Date For Public Sale Of Loan Collateral

From the Florida Banking Law Blog:

• In a typical foreclosure action in Florida, a creditor forecloses the real property first, the court determines the fair market value of the property as of the date of the foreclosure sale (usually through a deficiency hearing under Fla. Stat. §702.06), and then the creditor pursues a money judgment under a breach of note or breach of guaranty count.
  
  The borrowers and guarantors are entitled to a setoff equal to the fair market value of the collateral, which determines the amount of the deficiency judgment.
  
  However, creditors sometimes find themselves in a situation where they do not want to, or perhaps are unable to, foreclose the property (e.g. there are potential environmental liabilities associated with the collateral, the collateral is subject to an automatic bankruptcy stay, or the collateral is simply undesirable).
  
  It may also be the case that the guarantors have assets that a creditor would like to pursue immediately, and the creditor does not want to wait for a foreclosure sale.

***

• [W]here a foreclosure sale has not yet been set, there is nothing to preclude a Plaintiff in Florida from pursuing its legal remedy first, and then if the judgment is unsatisfied, pursuing the equitable remedy of foreclosure second.(1)
  
  
  In [a] recent case, Royal Palm Corporate Center Ass’n, Ltd. v. PNC Bank, NA, [89 So.3d 923] (Fla. 4th DCA 2012), the court expressly declined to set a foreclosure sale date so that the Plaintiff could first pursue, and execute upon, its money judgment before foreclosing the property and before setting a deficiency hearing under Fla. Stat. §702.06.
  
  In order to ensure that the plaintiff did not receive double recovery, the plaintiff certified to the court that the money judgment had not been satisfied, after which it could elect to foreclose the property.
  
  Royal Palm illustrates that a creditor does not have to set a foreclosure sale before obtaining and executing upon a money judgment against borrowers and guarantors. This is particularly true where the creditor holds an absolute guaranty.
  
  Since the ability to execute a judgment is of paramount importance, particularly where defendants are solvent, this case is an important tool for creditors to consider as they evaluate their options in the foreclosure context.

For more, see Creditors Who Want to Execute on a Money Judgment Need Not Foreclose First.

To contrast the apparent rule in Florida that allows a stiffed mortgage lender to seek multiple remedies simultaneously with the rule in California and Michigan that prohibits this, see

• California Foreclosures & The 'One Action Rule' - Violators Could Lose Their Lien On Real Estate,
  .............................................................
• Michigan Appeals Court To Stiffed Lenders: 'One Action' Rule Means What It Says - Only One Action At A Time In Cases Involving Foreclosure.

(1) Regarding a mortgagee's right to pursue multiple remedies simultaneously, the Florida appeals court stated:

• It has long been the common law that, to collect money owed on a note, a mortgagee may pursue its legal and equitable remedies simultaneously, until the debt is satisfied. In the early case of Booth v. Booth (1742) Eng. & Wales Chancery, 2 Atk. 242 (3d. ed. 1754), the plaintiff brought an action against the defendant for the accounting of an estate owned by the plaintiff's brother, for which estate the defendant had been the guardian and on which he had obtained a mortgage. Id. at 242-43. The defendant brought the action of ejectment for possession of the estate[2] and, at the same time, an action "to foreclose the equity of redemption."[3] Id. The plaintiff sought a stay of the defendant's ejectment action because of his concurrent foreclosure proceedings. Id. Lord Chancellor Hardwicke wrote, "Though the defendant is foreclosing the equity of redemption here, yet he is not precluded from bringing an ejectment at law at the same time, unless there is something very particular to take it out of the common case."[4] Id. at 243. But because whether the mortgage was already satisfied was in dispute, "it is not quite so clear as the common case," and the chancellor stayed the ejectment. Id.
  
  More than 200 years later, the supreme court of New Mexico articulated the complete rule, its rationale, and the minority view:
  
  Under the traditional common law rule, upon default by the mortgagor, a mortgagee has independent remedies which he or she may pursue. The mortgagee may sue either on the note or foreclose on the mortgage, and may pursue all remedies "at the same time or consequently." As long as there is no double recovery on the debt, the mortgagee may pursue either or both remedies. Absent a statute to the contrary, "state courts have uniformly held that holders of notes secured by a deed of trust can both sue the maker or guarantor and foreclose on the property regardless of which action they pursue first."
  
  The distinction between the two remedies is found in the historic view that a foreclosure action is purely quasi in rem, affording relief only against the secured property, and a suit on a bond or note is in personam.[[5]] A judgment of foreclosure applies only to the property secured by the mortgage, and does not impose any personal liability on the mortgagor. If the foreclosure of the mortgaged property fails to satisfy the debt secured by the mortgage, the creditor may then pursue an action on the underlying note.
  
  Some jurisdictions have adopted legislation providing for a "one action" rule that requires a mortgagee to file only one lawsuit in which he or she pursues all remedies for a debt that is secured by a mortgage. One of the purposes of such statutes is to protect the mortgagor from multiple lawsuits since the mortgagee's separate causes of action, even though theoretically distinct, are closely connected and should be decided in one suit.
  
  Kepler v. Slade, 119 N.M. 802, 896 P.2d 482, 484-85 (1995) (footnote omitted) (citations omitted).
  
  The traditional common law rule is the majority rule in the United States; it has been recognized by the Supreme Court of the United States on at least three occasions.[6] As the Kepler court noted, the jurisdictions that do not follow the rule have statutes that require a mortgagee to file only one suit for all of his remedies (the "one-action rule"), or consecutively.[7]
  
  Florida is in the majority. Less than a year after Florida became a state, the Supreme Court noted this tenet of the common law without any disagreement in Manley v. Union Bank of Florida, 1 Fla. 160 (Fla.1846). There, a mortgagee argued "that a mortgagee has, at common law, three remedies, all of which he may pursue at the same time, viz: that he may bring suit at law, upon the bond or note secured by the mortgage; institute an action of ejectment, to put himself in possession of the rents and profits of the estate; and file a bill in Chancery, to foreclose the mortgage." Id. at 214. To this, the Court responded, "All this is very true." Id. Even if the Supreme Court had not approved the rule, it would have been the common law of this state by operation of statute.[8]
  
  We have found no Florida statute, and none has been called to our attention, that would prevent a mortgagee from pursuing legal and equitable remedies at the same time.
  
  The statute concerning deficiencies, section 702.06, Florida Statutes (2008), is more limited in nature than the statutes in the minority of states. Although the reporters of the Restatement seem to believe that section 702.06 is something of a one-action rule, see Restatement (Third) of Property (Mortgages) § 8.2 cmt. b (1997), neither its language nor its history or purpose support that reading.
  
  Section 702.06 binds a plaintiff to a deficiency decree once the plaintiff sets the deficiency process in motion, but expressly provides that "the complainant shall also have the right to sue at common law to recover such deficiency," except against an original mortgagor when the mortgage was for the purchase price of the subject property, the original mortgagee buys the property at the foreclosure sale, and the original mortgagee obtains a deficiency decree against the original mortgagor.[9] Not only has PNC not yet started the deficiency process, but the mortgages here were not for the purchase price of the subject properties. If PNC certifies non-satisfaction of the money judgments, it will be bound to the deficiency process and only if the trial courts do not adjudicate the merits of a deficiency will PNC be able to bring separate law actions on the foreclosure judgments for the deficiency.
  
  With regard to the statute's history, the legislature enacted what is now section 702.06, which took the place of an old equity rule of like effect, to grant a court the power to enter deficiency decrees; "[b]efore the adoption of [the equity rule] in 1873 ... no deficiency was authorized in equity courts, and the only remedy for a balance due was a suit at law."[10] See Letchworth v. Koon, 99 Fla. 451, 127 So. 321, 322 (1930). Section 702.06's grant of such power was designed to "relieve the parties from the expense and vexation of two suits, one equitable and one legal," and to allow "the whole controversy [to] be adjusted in one suit." Edwards, 130 So. at 59 (emphasis added). This is what PNC has done.
  
  It appears we have not seen these remedies pursued at the same time in the same action because, before 1967, a suit at law on a note and a suit in equity to foreclose a mortgage proceeded in separate courts. In 1967, Florida adopted rules of civil procedure which gave circuit courts jurisdiction to hear cases in which counts at law and counts in equity could be set forth in the same complaint as alternative grounds for relief. In re Fla. Rules of Civil Procedure 1967 Revision, 187 So.2d 598, 600 (Fla.1966); Fla. R. Civ. P. 1.040, 1.110(g). In fact, Rule 1.110(g) provides that claims may be "stated in the alternative," "regardless of consistency and whether based on legal or equitable grounds or both."
  
  As alluded to by the Kepler court, the reason that an action at law on a note may be pursued simultaneously with the equitable remedy of foreclosure is that the two remedies are not inconsistent. Junction Bit & Tool Co. v. Village Apartments, Inc., 262 So.2d 659, 660 (Fla. 1972). "[P]ursuit of one without satisfaction is not a bar to the other." Klondike, Inc. v. Blair, 211 So.2d 41, 43 (Fla. 4th DCA 1968), approved, Junction Bit, 262 So.2d at 660; see also Gottschamer v. August, Thompson, Sherr, Clark & Shafer, P.C., 438 So.2d 408 (Fla. 2d DCA 1983) (an action on a note and an action to foreclose on a mortgage are not inconsistent remedies).
  
  Klondike is distinguishable but instructive. In Klondike, the plaintiffs first obtained a judgment on the note, did not cause execution to issue, and never received any payments; over a year after the issuance of the final judgment on the note, the plaintiff sued in foreclosure.[11] 211 So.2d at 41. We reversed a summary judgment in favor of the defendant, holding that the doctrine of election of remedies did not apply because the remedies were not inconsistent. Id. Unlike the plaintiff in Klondike, PNC did not bring separate actions on the notes before pursuing foreclosure. But, the principle articulated in Klondike is broad enough to apply here.
  
  In light of the common law, the merger of equity and law courts, and the consistency of the remedies, the instant suit at law on the note and guaranties was properly joined with the mortgage foreclosure. Nothing precluded PNC from pursuing its legal remedy first;[12] if the judgment is unsatisfied, the court has retained the ability to set a foreclosure sale. That sequence — money judgments first, foreclosures second — approximates the procedure upheld by this Court in Klondike and the supreme court in Junction Bit & Tool Co., and it is consistent with the principle that an unsatisfied money judgment is no bar to a later foreclosure.
  
  Defendants rely heavily on Farah v. Iberia Bank, 47 So.3d 850 (Fla. 3d DCA 2010), to argue that PNC was limited to the deficiency process if it sought to obtain judgments beyond foreclosure. However, Farah is factually distinguishable. Though the opinion is light on facts,[13] it appears that the Farah final judgment contained both a money judgment and a foreclosure judgment; the money judgment ordered that "execution issue," and the foreclosure judgment set a sale of the property. Thus, the Farah final judgment simultaneously allowed the plaintiff to execute on the money judgment and foreclose on the subject property, which is impermissible. The third district struck the language "for which let execution issue" from the money judgment and allowed the foreclosure to proceed.
  
  Unlike the Farah final judgment, the judgments here did not both issue an immediately executable money judgment and initiate the foreclosure process by setting a sale of the property.
  
  Rather, the judgments set up the procedure contemplated by Klondike and Junction Bit, allowing pursuit of the legal remedies and permitting the initiation of the foreclosure sale process only after PNC certified that the money judgment had not been satisfied. This structure assures that, while PNC was able to pursue both remedies, it will not get a double recovery.

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.

-------------------------------------

FOOTNOTE

(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.

Florida Appeals Court Nixes Bank's Foreclosure Deficiency Judgment; Amount To Be Based On Property Value On Sale Date, Not Six Months Later

The Florida Banking Law Blog reports:

• Most of you may know that, in Florida, the standard by which a deficiency is determined in a foreclosure case is the difference between the amount owed to the lender and the fair market value of the mortgage property as of the date of the foreclosure sale. This has been well established by case law over the years.
  
  In practice, the fair market value is typically established by presenting testimony from a real estate appraiser who is recognized by the court as an expert in property appraisal. Often, the lender has ordered the appraisal in connection with its evaluation of the property and before it takes the asset into ORE.
  
  In these instances, there are times when the appraisal report is dated as of a date other than that of the foreclosure sale date. What impact can this have on a subsequent motion for deficiency? A recent appellate decision by the Second District Court of Appeals addressed this question.
  
  In this case, decided in April of this year, the Court reviewed a $2.6 million dollar deficiency judgment entered by the trial court based in part on an appraisal dated some six months after the foreclosure sale date.
  
  It appears that the borrower’s trial counsel must have raised the issue that the value was not determined as of the foreclosure sale date. In response, the lender’s attorney offered only the argument that the values could not have changed much in the five month time from the foreclosure sale date to the appraisal date.
  
  The appellate court reversed the decision, finding that this was merely a conclusory statement that was not supported by the evidence. The case was remanded for further proceedings which means more cost and delay for that lender.(1)
  
  The lesson here is a basic one. You need to present evidence of fair value as of the date of the foreclosure sale or risk an unfavorable ruling, either at trial or on appeal. The best way is to make sure that the appraiser you are using as an expert has valued the property at the foreclosure sale date and that the resulting report reflects that.(2)

Source: The Importance of Having the Correct Appraisal Evidence When Seeking Deficiency.

For the ruling, see Empire Developers Group, LLC v. Liberty Bank, Case No. 2D11-1410 (Fla. App. 2d DCA, April 13, 2012).

(1) In reversing the trial court, the Florida appeals court enunciated the state law applicable in this case as follows:

• "[T]he correct formula to calculate a deficiency judgment is the total debt, as secured by the final judgment of foreclosure, minus the fair market value of the property, as determined by the court." Morgan v. Kelly, 642 So. 2d 1117, 1117 (Fla. 3d DCA 1994). "[T]he party seeking a deficiency judgment has the burden of proving that the fair market value of the property foreclosed upon was less than the total mortgage debt owed." Estepa v. Jordan, 678 So. 2d 876, 878 (Fla. 5th DCA 1996) (citing Coral Gables Fed. Sav. & Loan Ass'n v. Whitewater Enters., Inc., 614 So. 2d 682 (Fla. 5th DCA 1993)). And "[t]he critical date the fair market value of the real estate must be established for such purpose is the date of the foreclosure sale." Estepa, 678 So. 2d at 878 (emphasis added) (citing Cmty. Bank of Homestead v. Valois, 570 So. 2d 300, 301 n.1 (Fla. 3d DCA 1990)).

(2) To add insult to injury, the appeals court threw in this tidbit:

• We also note that the trial court erred in awarding Liberty Bank interest on the entire debt from the date of the final judgment of foreclosure through the date of the deficiency hearing. See Estepa, 678 So. 2d at 878 ("A secured party is not entitled to statutory interest on the entire foreclosure judgment following the date of the foreclosure sale.").
  
  Accordingly, on remand, "statutory interest may only be awarded against the remaining debt" from the date of the foreclosure sale. Shaw v. Charter Bank, 576 So. 2d 907, 909 (Fla. 1st DCA 1991).

Arizona Appeals Court Rejects Banksters' Use Of Credit Bid As Sole Basis In Calculating Debt Deficiency Owed By Foreclosed Property Owners, Guarantors

From a client alert from the law firm Snell & Wilmer:

• 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).(1)
  
  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.(2) The guarantors timely appealed and the Court of Appeals reversed.(3)

For more, see Lender’s Credit Bid is Not Evidence of Fair Market Value.

For the ruling, see MidFirst Bank v. Chase, 640 Ariz. Adv. Rep. 9, __ P.3d __ (App. 2012).

(1) Ariz. Rev. Stat. (A.R.S.) § 33-814(A) is the Arizona state law that governs deficiency judgments. According to the Arizona appeals court:

• The primary purpose of the statute is to "prohibit a creditor from seeking a windfall by buying property at a trustee's sale for less than fair market value." First Interstate Bank of Ariz., N.A. v. Tatum & Bell Ctr. Assoc., 170 Ariz. 99, 103, 821 P.2d 1384, 1388 (App. 1991). Because of the nature of a trustee's sale, the statute does not contemplate that the purchase price will necessarily reflect the fair market value of the property. Dewey v. Arnold, 159 Ariz. 65, 70, 764 P.2d 1124, 1129 (App. 1988).
  
  For this reason, the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded. A.R.S. § 33-814(A). The court is directed then to subtract from the amount owed the higher of the sales price or the fair market value.

(2) To add insult to injury, the trial court also granted the foreclosing bank's request for attorneys' fees of $80,550.91.

(3) For earlier posts relating to foreclosing lenders' attempts to score deficiency judgments from foreclosed property owners, see

• Failure To File Motion Within 90 Days Of Deed Delivery Consummating NY Foreclosure Sale Sinks Lender's Move To Score Deficiency Judgment,
• Missouri High Court: F'closure Deficiency Damages Calculation To Be Based On Deflated Auction Sale Price, Despite Property's Higher Fair Market Value,
• Fla. Appeals Court Nabs Sneaky F'closing Lender In Attempt To Improperly Go After Foreclosed Property Owner's Personal Assets To Satisfy Unpaid Debt,
• Implied Duty Of Good Faith, Fair Dealing & The Collection Of Deficiency Judgments In Foreclosure Actions,
• Wisconsin Appeals Court OKs Debt Recovery Approach For Foreclosing Lender Holding Two Mortgages On Same Property, Despite Waiving Deficiency Rights.

Deficiency Judgments, Statutes Of Limitations, Collection Period Extensions, Lien Renewals & Other Pleasant Thoughts For Now-Foreclosed Ex-Homeowners

The Washington Post reports:

• Lenders are filing new motions in old foreclosure lawsuits and hiring debt collectors to pursue leftover debt, plus court fees, attorneys’ fees and tens of thousands in interest that had been accruing for years.
  
  It’s an aftershock of the foreclosure crisis, and most homeowners don’t know it’s coming.
  
  “When people take out a loan, they generally think the home is the security for the loan,” said Alys Cohen, an attorney in the Washington office of the National Consumer Law Center. When they no longer have that home, “people don’t expect that debt to follow them,” she said.
  
  It’s all part of a legal process known as a “deficiency judgment,” which is allowed in the District and 40 of 50 states, including Maryland and Virginia. Since the start of the mortgage meltdown of 2008, at least 400 Maryland homeowners have been pursued in court, according to a Washington Post analysis of state court data. In the first four months of this year, 57 new court actions have been filed against homeowners — on pace to exceed last year’s total of 120.

***

• Suing people immediately after foreclosure was problematic. For one thing, lenders usually could not get more money out of already broke homeowners. But, if lenders waited a few years, some forecast that people would have money again once the economy recovered.
  
  The irony is not lost on Evan Goitein, a Bethesda-based foreclosure attorney.
  
  “There is very little to be gained from the bank’s perspective to be suing people for the money at this point,” Goitein said. “While deficiency judgments are not really a problem right now, I can see it being a big problem in the future. So seven years from now when my client has recovered from his foreclosure, he’s got a job again, he’s saved up enough money . . . [from the bank’s perspective], that would be a great time for the bank to try to sue them.”

***

• States have different statutes of limitation on how long they allow lenders to pursue deficiency judgments, ranging from 30 days to 20 years. In Kansas, a deficiency judgment must be sought at the time of foreclosure. If a judge feels the bid at foreclosure sale isn’t “fair value,” the judge can deny or reduce the judgment.
  
  In Maryland, it’s three years. However, there’s a little-known exemption for most mortgage documents that gives debt collectors 12 years to sue homeowners, plus another 12 years to collect the debt and on top of that a one-time renewal of 12 years for a total of 36 years.
  
  “That’s 36 years that lenders have to go after people,” said [Maryland bankruptcy attorney Tate] Russack, whose firm has taken on 80 bankruptcy cases in the past four months, all of which involve deficiency judgments.

***

• Already-foreclosed homeowners won’t know that they’re being targeted until they receive the court notice. In many cases, it is hard to even know who owns the debt until the notice arrives. Often times, the entity pursuing the debt is not the original lender, because that debt can be sold by the homeowner’s lender to someone on the secondary debt market for pennies on the dollar. Most of the deficiency cases that Goitein said he sees involve smaller banks.

***

• The wave of deficiency judgments had a prologue in Texas.
  
  During the 1980s in Houston, the bottom went out of the oil market, with the price dropping to about $15 a barrel. Homes that had been assessed at $200,000 couldn’t be sold for $100,000. More than 200,000 people lost their jobs and could not pay their mortgages.
  
  The lenders foreclosed on the homes and then pursued the homeowners for the outstanding balance.
  
  Once a judgment was granted, debt collectors had 10 years to collect, according to the Texas statute at the time, and another 10 years if the debt collector petitioned the court to renew the judgment. “It was an absolute disaster,” [retired professor at the University of Houston Law Center John] Mixon said.
  
  In response to the situation, the state passed laws increasing consumer protections in deficiency cases. “It’s less an event in Texas today than it was back then,” Mixon said. “But Texas still provides the object lesson of what could happen.”
  
  But for the moment, efforts to pursue deficiency judgments are ramping up rather than winding down.

For the story, see Lenders seek court actions against homeowners years after foreclosure.

Florida Appeals Courts Continue (Seemingly Never-Ending) Clean-Up/Reversals Of Trial Judge Screw-Ups Involving Rulings Unfavorable To Homeowners In Foreclosure Cases

The following case notes are taken from recent client alerts from the Florida law firm Carlton Fields Jorden Burt:

• Foreclosure/Standing: plaintiff failed to establish by competent, substantial evidence it was owner and holder of note at time complaint filed by failing to establish that endorsement had been placed on note prior to filing of complaint. – Fiorito v. JP Morgan Chase Bank, National Association, as purchaser of the Washington Mutual Bank, f/k/a Washington Mutual Bank, P.A., No. 4D13-2813 (Fla. 4th  DCA August 26, 2015) (reversed and remanded)
  .
• Foreclosure/Standing: lender failed to establish standing to enforce note, and therefore, entry of final judgment of foreclosure was improper – Lamb v. Nationstar Mortg., LLC, Case No. 4D13-3125 (Fla. 4th DCA Aug. 19, 2015) (reversed and remanded for entry of involuntary dismissal)
  .
• Foreclosure/Standing: plaintiff [lender] failed to establish standing because no evidence was introduced showing note was transferred to plaintiff prior to commencement of lawsuit and pooling and servicing agreement was insufficient to establish standing – Perez v. Deutsche Nat’l Trust Co., as Trustee, Case No. 4D13-4812 (Fla. 4th DCA Aug. 19, 2015) (reversed and remanded with instructions to enter involuntary dismissal)
  .
• Foreclosure/Business Records: trial court erred in entering final judgment of foreclosure because plaintiff’s employee’s testimony regarding standing was based on business records that were never introduced into evidence – Cardona v. Nationstar Mortg. LLC, Case No. 4D14-1609 (Fla. 4th DCA Aug. 19, 2015) (reversed and remanded for new trial)
  .
• Foreclosure/Summary Judgment: material issues of fact regarding whether certain properties were meant to secure two mortgages precluded entry of summary judgment in lender’s favor – Fowler v. TD Bank, N.A., etc., Case No. 5D14-4134 (Fla. 5th DCA Aug. 21, 2015) (affirmed in part, reversed in part, and remanded)
  .
• Foreclosure/Standing: judgment of foreclosure in favor of lender reversed when lender failed to prove standing to enforce and foreclose mortgage before the action was filed – Tomlinson and Crump v GMAC, Case No. 2D13-6030 (Fla. 2nd DCA September 2, 2015) (foreclosure judgment reversed)
  .
• Foreclosure/Deficiency: deficiency judgment in favor of an alleged assignee, who purportedly received assignment of right to pursue deficiency post foreclosure, was improper where alleged assignee failed to present any evidence of the assignment – Barry and Ruff v Vantium Capital, Inc, Case No. 2D14-3200 (Fla. 2nd DCA September 4, 2015) (deficiency judgment revered).

Sources: Real property, financial services & title insurance update: weeks ending August 21 & 28, 2015; and Real Property, Financial Services & Title Insurance Update: Week Ending September 4, 2015.

Indiana Appeals Court To Notorious Foreclosure Judgment-Buying Vulture: Since Bank Already Forfeited Right To Collect Deficiency Funds Before It Assigned You The Judgment, Garnishment Of Ex-Homeowner's Paycheck Was Improper, So Stop Squeezing Him & Give Him Back The Money You Already Took!

From a recent client alert from the law firm Bradley Arant Boult Cummings LLP:

• The Indiana Court of Appeals recently held that creditors must move for an in personam remedy in the original foreclosure judgment or forfeit their right to collect deficiency funds.
  
  In Elliott v. Dyck O’Neal, the bank foreclosed upon a borrower’s residence, and sought judgment against the borrowers for the full amount of the outstanding balance in the complaint. The motion for default judgment, and accompanying order, however, only sought an order in rem for the outstanding debt—omitting any mention of an in personam remedy.
  
  The judgment was eventually assigned to a third party creditor, who sought to collect the deficiency balance through wage garnishment. The Indiana court held that the judgment creditor was not entitled to collect any deficiency from the borrower due to the failure to seek proper relief in the judgment.
  
  More significantly for those seeking to recover deficiency funds, the court also held that the third party creditor was required to refund all monies it had collected from the borrower related to the deficiency—as the judgment order did not allow for collection against the borrower personally.

Source: Indiana Court Weighs in Deficiency Judgments.

Foreclosed NC Property Owners Successfully Use Their Own Joint Affidavit To Stiff-Arm Bankster's Summary Judgment Motion In Post-Foreclosure Deficiency Judgment Action

From a client alert from the Hutchens Law Firm (North Carolina):

• Following a foreclosure sale the general rule is that the amount of the debt is reduced by the net proceeds realized from the sale, setting the deficiency amount the foreclosing creditor may seek to recover. N.C.G.S. § 45-21.31(a)(4). However, when the foreclosing creditor is the successful high bidder at the foreclosure sale this general rule is abrogated by N.C.G.S. §45-21.36, which provides the debtor with two alternative defenses. Branch Banking & Trust Co. v. Smith, 769 S.E.2d 638, 640 (N.C. Ct. App., 2015). Either the deficiency is eliminated if it is shown “that the collateral was fairly worth the amount of the entire debt”, or the deficiency may be reduced “by way of offset” where it is shown the creditor’s high bid was “substantially less” than the actual value of the collateral. Id.
  
  In reversing summary judgment for the creditor, the North Carolina Court of Appeals in United Community Bank v. Wolfe, 2015 WL 4081940 (N.C. Ct. App., July 7, 2015) observed that in opposing the motion, the debtors “relied on their own joint affidavit, stating that it was “made on [Defendants’] personal knowledge” and that Defendants “verily believe [ ] that the [property] was at the time of the [foreclosure] sale fairly worth the amount of the debt it secured.” Wolfe, at 2. The value of the collateral, in a deficiency action, is generally a material fact. Id, at 2, citing Raleigh Fed. Sav. Bank v. Godwin, 99 N.C.App. 761, 763, 394 S.E.2d 294, 296 (1990).
  
  Since the “Supreme Court has repeatedly held that the owner’s opinion of value is competent to prove the property’s value”, Wolfe, citing Dep’t of Transp. v. M.M. Fowler, Inc., 361 N.C. 1, 6, 637 S.E.2d 885, 890 (2006), and the owner is presumed competent to give his opinion of the value of his property, id, at 2, citing North Carolina State Highway Comm’n v. Helderman, 285 N.C. 645, 652, 207 S.E.2d 720, 725 (1974), the affidavit raises a genuine issue of material fact so as to prevent the entry of summary judgment.
  
  The lesson here is that a foreclosing creditor contemplating a post-foreclosure deficiency action against a solvent borrower may want to make additional efforts to encourage a third-party sale, for example by broadening the advertising of the sale, or – where permissible - adjusting its sale bid. This may avoid the uncertainty and expense of a trial in the deficiency action.

Source: Borrower’s opinion of value deprives lender of summary judgment in deficiency action in North Carolina.

Go here for earlier posts dealing with deficiency judgments after a foreclosure sale.