Following a foreclosure sale the general rule is that the amount of the debt is reduced by the net proceeds realized from the sale, setting the deficiency amount the foreclosing creditor may seek to recover.  N.C.G.S. § 45-21.31(a)(4).  However, when the foreclosing creditor is the successful high bidder at the foreclosure sale this general rule is abrogated by N.C.G.S. §45-21.36, which provides the debtor with two alternative defenses.  Branch Banking & Trust Co. v. Smith, 769 S.E.2d 638, 640 (N.C. Ct. App., 2015).  Either the deficiency is eliminated if it is shown “that the collateral was fairly worth the amount of the entire debt”, or the deficiency may be reduced “by way of offset” where it is shown the creditor’s high bid was “substantially less” than the actual value of the collateral.  Id.

In reversing summary judgment for the creditor, the North Carolina Court of Appeals in United Community Bank v. Wolfe, 775 S.E.2d (N.C.App. 2015) observed that in opposing the motion, the debtors “relied on their own joint affidavit, stating that it was “made on [Defendants’] personal knowledge” and that Defendants “verily believe [ ] that the [property] was at the time of the [foreclosure] sale fairly worth the amount of the debt it secured.” Wolfe, at 2.  The value of the collateral, in a deficiency action, is generally a material fact.  Id, at 2, citing Raleigh Fed. Sav. Bank v. Godwin, 99 N.C.App. 761, 763, 394 S.E.2d 294, 296 (1990).  Since the “Supreme Court has repeatedly held that the owner’s opinion of value is competent to prove the property’s value”, Wolfe, citing Dep’t of Transp. V. M.M. Fowler, Inc., 361 N.C. 1, 6, 637 S.E.2d 885, 890 (2006), and the owner is presumed competent to give his opinion of the value of his property, id, at 2, citing North Carolina State Highway Comm’n v. Helderman, 285 N.C. 645, 652, 207 S.E.2d 720, 725 (1974), the affidavit raises a genuine issue of material fact so as to prevent the entry of summary judgment. 

The lesson here is that a foreclosing creditor contemplating a post-foreclosure deficiency action against a solvent borrower may want to make additional efforts to encourage a third-party sale, for example by broadening the advertising of the sale, or – where permissible - adjusting its sale bid.  This may avoid the uncertainty and expense of a trial in the deficiency action.

Published by Hutchens Law Firm on June 15, 2016