CentsAbility: Creditors' Rights Law Update
September 25, 2015
A question that continually arose during the foreclosure deficiency actions that were spurred by the recent “Great Recession,” was whether or not a guarantor on a loan could raise the “defense” offered in N.C. Gen. Stat. § 45-21.36. The statute, thought to apply by its reference to the “maker of the obligation” to apply only to the borrower, allows a defense or offset with respect to the winning bid at a foreclosure sale when the property is sold to the lender. In its opinion in High Point Bank and Trust Company v. Highmark Properties, LLC, et al. (8PA14, September 25, 2015) the North Carolina Supreme Court has finally spoken on this point and their answer is “Yes,” guarantors can raise the “equitable method of debt calculation” included as part of N.C. Gen. Stat. § 45-21.36 in a deficiency action.
After the Court of Appeals released its opinion in High Point Bank, many lenders added waiver provisions in their guaranty agreements and notes that required primary debtors and guarantors to waive any rights that they had under N.C. Gen. Stat. § 45-21.36. The Supreme Court's holding sweeps aside those waiver provisions. In addition to holding that guarantor’s can assert the N.C. Gen. Stat. § 45-21.36 defense, the North Carolina Supreme Court went further and also held that the N.C. Gen. Stat. § 45-21.36 defense “is not the type of ‘defense or offset’ which is subject to waiver.” The North Carolina Supreme Court’s basis for this holding in High Point Bank is that waiver of the N.C. Gen. Stat. § 45-21.36 defense would violate public policy because the defense “is an equitable method of debt calculation as opposed to a traditional defense that is subject to waiver” and because “anti-deficiency legislation is so narrowly tailored to address specific instances of the public’s vulnerability to lender overreach.”
The practical application of the statute and the Supreme Court’s ruling in High Point Bank is that a lender, who is the high bidder of property sold at a foreclosure sale, that seeks to recover a deficiency on the debt instrument that was secured by the deed of trust foreclosed upon is now in most cases going to have to be ready to establish in the deficiency action that that the property was not “fairly worth” the amount owing on the debt instrument at the time of the foreclosure sale and that the lender’s bid at the foreclosure sale was not in an amount “substantially less” than the true value of the property at the time of the foreclosure sale. The court’s ruling in High Point Bank interprets the statute to protect the “debtor by calculating the debt in the deficiency action based upon the fair market value of the collateral instead of the amount bid by the creditor at the trustee’s sale.”
It is true that, as a defense, the burden to prove the defense will still fall on the guarantors when N.C. Gen. Stat. § 45-21.36 is raised. However, guarantors can easily make the prima facie case needed to shift the burden to lenders because the North Carolina Court of Appeals has recently found in its opinion in United Community Bank v. Wolfe, et al., 775 S.E.2d 677 (2015) that all a guarantor needs to do to establish such a prima facie case is provide to testimony from the property owner that the property owner thought the property was fairly worth the amount of the debt at the time of the foreclosure sale, or alternatively, testimony as to what the property owner thinks the property was worth at the time of the foreclosure sale. According to the North Carolina Court of Appeals in United Community Bank, this testimony will be sufficient to create a question of material fact no matter what the qualifications of the property owner were in order to give such an opinion on value. Even though the guarantor in most cases is not going to be the property owner, it is reasonable to expect that the guarantor is usually a related party and is going to be in a position where he or she can get the property owner to give the necessary opinions.
Once this prima facie case is made, it is highly unlikely that any Court is going to grant summary judgment. Therefore, it is reasonable to predict that most, if not all, guarantors who are defendants in deficiency judgment actions are going to assert the N.C. Gen. Stat. § 45-21.36 and assert that the amount bid by the lender was not what the property was fairly worth at the time of sale.
The practical effect of the High Point Bank ruling is that deficiency cases could devolve into a trial of appraisal or value opinion experts or even the opinion of the lenders expert vs. the opinion of the property owner who the Appellate Courts have held is competent to state an opinion of value.