Readers of my case alerts may remember a July 2015 alert about the troubling North Carolina Court of Appeals decision in United Community Bank v. Wolfe, which made it a lot harder for lenders to obtain a post-foreclosure deficiency judgment. (For a refresher, you can read that old case alert here.)
Well, the wheels of justice have slowly turned and on May 5, 2017 (almost two years after the Court of Appeals’ ruling), the North Carolina Supreme Court issued its opinion and unanimously reversed the Court of Appeals. Those cheers you hear are lenders celebrating this Cinco de Mayo present.
A Refresher on the Facts
United Community Bank (“UCB”) lent $350,000 to borrowers for the purchase of real property. When the borrowers defaulted, the collateral property was sold at a foreclosure sale in August 2013. UCB was the high bidder for $275,000, leaving a deficiency balance. A few months after the foreclosure sale, UCB sued on the note to collect the deficiency. The borrowers contested on the ground that UCB did not pay enough for the property at the foreclosure sale, and borrowers were therefore relieved of any liability for the alleged deficiency. The trial court granted summary judgment for UCB and entered a deficiency judgment for all remaining principal, interest and attorneys’ fees, plus the costs of the action (a total of $57,737.74). The borrowers appealed and the Court of Appeals reversed and remanded for trial. The Supreme Court reversed the Court of Appeals, thus reinstating the judgment for UCB.
N.C.G.S. § 45-21.36 permits a borrower or property owner whose property has been purchased by the lender at foreclosure sale to raise as a defense in a deficiency action that the property was worth more than the amount bid by the lender. If the borrower proves this defense, the deficiency amount can be reduced in part or entirely eliminated. Since the vast majority of foreclosure sales end with the lender taking title to the property and with a deficiency owed on the note, a defense asserted under N.C.G.S. § 45-21.36 comes up a lot.
The key inquiry for the § 45-21.36 defense is how the parties demonstrate the “true value” of the property at the time of the foreclosure sale. For the lender, that should be easy as it will have a recent appraisal to justify its foreclosure bid. For the borrower, that could involve obtaining a separate appraisal or relying on recent tax value or comparable sales.
The Court of Appeals’ decision allowed the 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. In essence, it allowed the borrowers to just submit an affidavit saying “I think the property was worth more than the lender bid” and through that simple statement avoid summary judgment and require a trial.
Not so fast, said the Supreme Court. If a borrower wants to create a genuine issue of fact about the “true value” of the property, then the borrower needs to come forward with more evidence than just the borrower’s opinion. “[M]erely reciting the statutory language or asserting an unsubstantiated opinion regarding the foreclosed property’s value is insufficient,” the justices wrote. Since the borrowers in the case did not present any hard facts or evidence about the “true value” of the property, there was no issue of fact created and summary judgment for the lender was proper.
This ruling is a nice victory for lenders, but it still leaves open a good bit of room for interpretation in the lower courts as to what evidence a borrower needs to present to avoid summary judgment in a deficiency action. In other words, is it enough if a borrower attaches comps to an affidavit, or will the borrower have to obtain their own appraisal? This level of detail will play out at the trial level, but for now, lenders can celebrate that borrowers have to at least do a little more than just offer their own unsupported opinion about property value.