The dust has yet to settle on the landmark decision of High Point Bank & Trust Co. v. Highmark Properties, LLC
, 776 S.E.2d 838 (N.C. 2015). Before delving into the decision that should serve as a harbinger of imminent and drastic mortgage reform, an overview of North Carolina’s anti-deficiency statute is necessary. The anti-deficiency statute was originally enacted to thwart abusive lenders from exercising remedies under mortgages. The statute originally precluded lenders from suing borrowers for deficiencies when the lender purchased the property at a foreclosure sale. To do so, the borrower had to prove that the true value of the foreclosed property equaled that of the outstanding mortgage or that the amount bid was substantially less than the fair market value of the foreclosed property. Although there are many parties involved in the consummation of a mortgage obligation, the anti-deficiency statute focused on just the “makers” of the debt. The “makers” included mortgagors but excluded guarantors. Accordingly, the anti-deficiency statute acted as a defense tool for only the mortgagor, regardless of whether the primary borrower was a party to the litigation.
On September 15, 2015, the North Carolina Supreme Court decided Highmark Properties
and broadened the definition of “makers” in North Carolina’s anti-deficiency statute. No longer are just mortgagors afforded the defense of the anti-deficiency statute. Now, the statute covers guarantors as well. This decision gives a guarantor-defendant a voice in court to contest the amount of the deficiency following the foreclosure of the borrower’s property on the grounds that the sale did not bring fair market value for the property. Even though the decision was commendable in the broadening of the statute to protect those parties who effectively served as a back-stop to a mortgage relationship, the Supreme Court glossed over the effect that the expansion of the anti-deficiency statute would have in the community banking industry.
Community banks will need to reassess their bidding procedures to ensure that the bid at a foreclosure sale will not be deemed to have been substantially less than the true value of the property. While banks have always had to focus on this concept of bidding fair market value, the dynamic has shifted to encompass a larger potential litigant pool. The shift is not that community banks no longer have to consider various holding, marketing, preparation and listing costs. Rather, the shift is in the lender bid price being sufficient to defeat the application of the anti-deficiency statute of a loan guarantor.
A bargained-for guaranty may well be the reason for the consummation of a commercial loan relationship; however, the relationship may be one that community banks will regret down the line. Guarantors have the resources to fully utilize the legal system to limit the financial downside of their obligation. More than ever, community banks will be forced to hire experts and attorneys to help with their bid price at the foreclosure sale. At first glance, the easy answer is to bid the fair market value of the property. This answer gives short shrug to the complexity surrounding lender credit bidding. The correct bid amount involves several considerations that are oftentimes overlooked. For example, if the lender bids too high of an amount at the time of the foreclosure sale, the deficiency may be eliminated. Conversely, if the lender bids too little, the Court may find that the bid was substantially less than the foreclosed property’s value. This determination will result in either the preclusion or reduction of lender’s claim.
The costs associated with determining what fair market value is have historically been significant. Now, these costs will grow exponentially as the potential litigant pool has increased significantly in light of the Highmark Properties
decision. Not atypical to changes in the status quo, these costs must be analyzed and monetized at the inception of the mortgage relationship. Only time will tell how community banks will account for the increase in ambiguity with regard to their bidding procedures. Whether it is the imposition of alternative dispute resolutions to avoid the intricacies of the legal system or reassessment of foreclosure strategies, something is going to have to change to account of the broadening of North Carolina’s anti-deficiency statute.
If you have any questions, please contact our Community Banking Practice Group