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When a borrower’s default results in a foreclosure sale and purchase of the secured property by the mortgagee lender, can a guarantor’s deficiency liability be reduced by the difference between the property’s fair market value and its foreclosure sale price? Prior to last year, this question was answered in North Carolina consistently, and overwhelmingly, in the negative. However, the North Carolina Supreme Court conclusively reversed this line of decisions in High Point Bank and Trust Company v. Highmark Properties, et al., ___S.E.2d___, N.C. Sep. 25, 2015.
Highmark required the Court to construe § 45-21.36, which provides that:
“When any [foreclosure] sale of real estate has been made by a mortgagee . . . , at which the mortgagee, . . . becomes the purchaser and . . . shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor or other maker of any such obligation whose property has been so purchased, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as matter of defense and offset, . . . that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale or that the amount bid was substantially less than its true value, and, upon such showing, to defeat or offset any deficiency judgment against him, either in whole or in part . . .” (Emphasis added).
Basically, § 45-31.26 is used in deficiency collection actions and provides a defendant with a means to minimize its liability. Assuming that the secured lender forecloses on real property and purchases the property at a foreclosure sale for less than the amount due on the underlying note, the foreclosure sale proceeds are applied to the obligation and the resulting deficiency amount remains due and owing. The lender may then commence a collection action to recover judgment for the deficiency. In these instances, § 45-21.36 allows the defendant to show that the property’s fair market value was higher than the lender’s successful foreclosure sale bid amount and offset the different from the amount of any deficiency judgment. In essence, the statute can be used to show that a lender received value from the foreclosure sale in an amount greater than its bid amount such that awarding a judgment for the full deficiency amount would unjustly enrich the lender and result in double recovery.
By its terms, § 45-21.36 is only available to a “mortgagor, trustor or other maker of any such obligation whose property has been so purchased.” Decades of North Carolina Court of Appeals cases have limited this term to mean only persons who possessed an interest in real property.1 Because, in sophisticated transactions, title to the real property is often held by an entity borrower with the individual owners of the entity serving to guaranty the entity’s debt, this line of Court of Appeals cases effectively barred most guarantors from asserting § 45-21.36 as a defense.
The North Carolina Supreme Court in Highmark, following precedents from the 1930s which interpreted a prior statute, reversed the existing line of Court of Appeals cases and conclusively held that § 45-21.36 is available to guarantors regardless of whether they own title to the underlying real property.2 In doing so, the Court reasoned that § 45-21.36 merely provides an equitable means to calculate the underlying indebtedness. Because a guarantor promises to repay the outstanding indebtedness, the guarantor should be able to invoke § 45-21.36 to determine the real amount of the indebtedness. In addition, in reliance upon its casting of § 45-21.36 as a means to calculate indebtedness, the Highmark Court also held that a guarantor’s waiver of its rights pursuant to § 45-21.36 would violate public policy and is unenforceable as a matter of law.
Highmark represents a significant change in guarantor liability under North Carolina law of which lenders, borrowers and guarantor should be keenly aware.
Based throughout the Southeast and Mid-Atlantic and Silicon Valley, Womble Carlyle's Financial Services Litigation Team represents banks, servicers, and other financial service providers in regulatory and compliance matters, residential mortgage litigation, foreclosure disputes, and consumer class actions.
Dirk Lasater provides active, engaged representation to banks and other financial institutions in commercial and consumer finance litigation at both the state and federal levels. Dirk has experience with commercial contract disputes, commercial lending and residential lending claims. He practices in Womble Carlyle’s Charlotte office.
Chad Ewing is a litigator in Womble Carlyle’s Charlotte office with over ten years’ experience representing banks and other financial institutions in a variety of matters in federal and state courts across North Carolina. Chad attempts to understand his client’s goals and use his creativity and experience to help them solve their problems.
1 See First Citizens Bank & Trust v. Martin, 44 N.C. App. 261, 261 S.E.2d 145 (1979); American Foods Inc. v. Goodson Farms, Inc., 50 N.C. App. 591, 275 S.E.2d 184 (1981); Matter of Otter Pond Inv. Group, Ltd. 79 N.C.App. 664, 339 S.E.2d 854 (1986); Borg-Warner Acceptance Corp. v. Johnston, 97 N.C. App. 575, 389 S.E.2d 429 (1990); Raleigh Fed. Sav. Bank v. Goodwin, 99 N.C. App. 761, 394 S.E.2d 294 (1990); and Wells Fargo v. Arlington, 742 S.E.2d 201 (N.C. Ct. App. Mar. 19, 2013).
2 In reaching this conclusion, the court relied on Richmond Mortg. & Loan Corp. v. Wachovia Bank & Tr. Co. 210 N.C. 29, 185 S.E. 482 (1936), aff’d, 300 U.S. 124, 57 S. Ct. 338, 81 L. Ed. 552 (1937) and Virginia Trust co. v. Dunlop, 14 N.C. 196 (1938).