Ruling Eases Lenders’ Path to Deficiency Judgments in NC

Winning a deficiency judgment following foreclosure may become less costly for lenders following a May 5 ruling by the North Carolina Supreme Court in United Community Bank v. Wolfe. Reversing a previous ruling by the Court of Appeals, the Supreme Court held that a borrower may not defeat summary judgment simply by filing a sworn statement that the property’s value is equal to the indebtedness secured by the mortgage.

Over the years, North Carolina has placed a number of constraints on traditional rules that allowed lenders to sue borrowers for leftover indebtedness not discharged by the proceeds of a foreclosure sale (i.e., the “deficiency”). One such statute, N.C.G.S. § 45-21.36, gives the borrower an offset against the deficiency when the lender is the high bidder at the foreclosure sale and buys the property at a discount from the property’s “true value.” Thus, if a lender forecloses on a $500,000 mortgage and buys the property for $250,000 at the foreclosure sale, but the property’s true value is $400,000, the lender should only be able to obtain a deficiency judgment for the $100,000 difference between the debt and the true value.

In Wolfe, the bank loaned $350,000 to purchase property in Transylvania County, North Carolina in 2008, shortly before the collapse of the real estate market. In exchange the borrowers, Thomas and Barbara Wolfe, signed a deed of trust giving the bank the right to sell the property if the Wolfes failed to pay back the loan. The Wolfes subsequently defaulted on their payments. The bank foreclosed and, following a public sale, bought the property after making a bid of $275,000, which matched an appraisal obtained by the bank. The bank then put the property on the market and ultimately sold it for $205,000. Afterward, the bank brought suit to collect the deficiency. The trial court awarded summary judgment for the bank, in spite of an affidavit filed by the Wolfes stating their belief that the property “was at the time of the sale fairly worth the amount of the debt . . . [and] the amount bid for the property was substantially less than its fair market value at the time of the sale.”

On appeal, the North Carolina Court of Appeals reversed the trial court’s ruling, holding that the borrowers’ affidavit was sufficient to preclude summary judgment and required a trial to determine the value of the property. On May 5, however, the North Carolina Supreme Court reversed the ruling of the Court of Appeals and reinstated the judgment, finding that the borrowers’ affidavit did not create a genuine factual dispute as to the property’s value. Writing the opinion for the court, Justice Newby stated that the borrower’s opinion must be supported by specific facts and cannot simply restate statutory language in the form of an affidavit.  By making the bare statement that the property’s value was equal to the debt without stating any supporting facts or information, the Wolfes fell short of this standard.

The decision leaves an open question as to what underlying facts or information, if included in the affidavit, would have been sufficient to defeat summary judgment for the bank. At a minimum, lenders can expect that courts will now be less likely to require a trial based merely on the borrower’s unsupported statement of the property’s value.