Y’all. (I’m in the South so it’s OK to say “y’all” even in a legal update). 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.

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 Law

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 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 fair market 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 used to involve obtaining a separate appraisal or relying on recent tax value or comparable sales.

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.

The Moral

Lest my readers start to lose hope on ever again collecting a deficiency judgment in North Carolina absent a jury trial, do not despair. There are ways to entirely eliminate the § 45-21.36 defense altogether (e.g. judicial foreclosure, suing on the note before foreclosing on the collateral, etc.) Lenders simply need to have an upfront discussion with counsel about strategy if they think there will be a large deficiency they want to pursue. A little bit of planning can go a long way, y’all.

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Questions regarding this case update or financial services litigation can be addressed to Will Esser at willesser@parkerpoe.com / 704-372-9000. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.