The North Carolina Supreme Court recently handed down the final word in a dispute over whether guarantors get the benefit of the state’s anti-deficiency statute after the lender bids on and buys the real property at a foreclosure sale. And that word is that the guarantors can use the anti-deficiency statute, whether or not the primary borrower is a party to the lawsuit against the guarantors on the deficiency. The case, High Point Bank and Trust Company v. Highmark Properties, LLC, Mitchell Blevins, Cynthia Blevins, Charles Williams, and Janice Williams, was decided on September 25, 2015.
    
The facts in the Highmark case reflect a common commercial loan structure. Highmark Properties is a commercial real estate development firm that had two loans with High Point Bank, each secured by the land and buildings involved in the projects and owned by Highmark. As the members of the Highmark LLC, Blevinses and the Williamses personally guaranteed the loans. The loans went bad, and the Bank sued Highmark and the guarantors on the loans. Afterward, the Bank foreclosed on the properties and was the high bidder at each sale. After crediting the amount bid by the Bank, one loan had a deficiency balance of $3,500,000, and the other loan had a deficiency of $1,300,000. The Bank dismissed the lawsuit against Highmark (the primary borrower) and sought the entry of a judgment against the guarantors for the deficiency balances.

Like many states, North Carolina has an anti-deficiency statute that gives what has been referred to commonly as a “defense” to borrowers when the amount bid by the lender at the foreclosure sale is below the “true value” of the property (NCGS § 45-21.36). The statute allows the borrower to get a reduction in the deficiency to the extent that the court or jury determines that the lender’s bid was too low, compared to the fair market value of the property. The jury in the Highmark case found that the amounts bid by the bank on the properties were well below fair market value, resulting in the complete elimination of one of the deficiencies and the reduction of the other to approximately $300,000.  

The question in this case was whether the statute covered not only the primary borrower (Highmark, in this case), but also the guarantors. A related issue was whether any benefit that the guarantors received under the statute was direct or depended upon whether the primary borrower was a party to the action.

In determining that the guarantors could use the anti-deficiency statute directly (even if the primary borrower was not a party to the litigation), the Supreme Court affirmed its earlier rulings interpreting the statute’s provision concerning the parties who can make use of the statute. The Court continues to treat the statute’s language – “mortgagor, trustor, or other maker of any such obligation” – expansively to include guarantors. The Court relied in part on the history of the anti-deficiency legislation, which was passed during the height of the depression to give relief to oppressed borrowers.

The Court also rejected an argument that the guarantors had waived their “defense” in the litigation through the release language of the underlying notes and deeds of trust. The Court held that the statute does not constitute a “defense,” but instead sets out “an equitable method of calculating the indebtedness.”

Thus, the anti-deficiency statute remains a critical (arguably, more critical) element in the final collection of deficiency balances by lenders from their only remaining source of payment – the guarantors. It is expected that the Highmark decision, coupled with other recent decisions from the North Carolina Court of Appeals, will result in the assertion of the anti-deficiency statute by guarantors in virtually every lawsuit filed to collect a post-foreclosure deficiency. The decision also should force lenders to focus on the fair market value of the real property before the foreclosure proceeding and collection lawsuit begin. With the assurance that the anti-deficiency statute will be invoked by guarantors in a post-Highmark world, the lender’s foreclosure and collection strategy should be considered carefully to avoid unhappy and expensive outcomes from subsequent litigation.

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