Summary:
In November of 2005, Arlington Hills executed a promissory note and Deed of Trust for $596,345, with such currently being held by Wells Fargo. Thereafter, John & Beverly Cobb, Max & Christy Smith, and Mark Carpenter executed personally guarantees for the note in order to obtain renewals and modifications of the terms. When Arlington Hills defaulted the balance on the note was nearly $2 million, Wells Fargo initiated both a foreclosure and suit against both Arlington Hills and the several guarantors. Carpenter answered this suit, including the affirmative defense of offset pursuant to N.C.G.S. § 45-21.36, but denied any knowledge as to the value of the property. Arlington Hills filed a Chapter 11 bankruptcy, but Wells Fargo was granted relief from the automatic stay to proceed with foreclosure. Only a few days prior to the completion of the foreclosure, Arlington Hills transferred its ownership in the property to the guarantors. The property was sold at foreclosure for $1 million. Wells Fargo was then granted summary judgment against the guarantors for the deficiency, to which Carpenter appealed, ageing that he was entitle to present evidence that the property had been sold for less than it was fairly worth.
The Court of Appeals, however, held that N.C.G.S. § 45-21.36 allows for the fair value to be raised as a defense only by the “mortgagor, trustor or other maker of ... such obligations whose property has been purchased....” Accordingly, this offset defense is not available to guarantors. See Poughkeepsie Sav. Bank, FSB v. Harris, 833 F. Supp. 551 (W.D.N.C. 1993).
In further dicta, the Court “opined” that the earlier failure to assert a value for the property constituted judicial estoppel as the Guarantor should not be allowed to use contradictory testimony. See Wachovia Mortg. Co. v. Autry-Barker-Spurrier Real Estate, Inc., 39 N.C. App. 1, 9, 249 S.E.2d 727, 732 (1978)
Commentary:
The offset defense of N.C.G.S. § 45-21.36 can, however be used to object to a mortgage deficiency by a debtor. In a bankruptcy context, this would allow a Debtor to contend that a foreclosure sale was at an amount less than the fair market value for the property. To protect against the judicial estoppel argument to which Carpenter fell prey, Debtors should use an accurate value on the high end of reasonable. Additionally, since “What is good for the Goose, is good for the Gander”, if the mortgage lender leaves the value blank on its proof of claim (as seems to be the general practice), it should similarly be estopped from later asserting a value.
For a copy of the opinion, please see:
Wells Fargo Bank, N.A., v. Arlington Hills of Mint Hill, L.L.C.- Offset Defense to Foreclosure Deficiency not Available to Guarantor.pdf
Category
Blog comments