By Thomas G. Wolfe, J.D.
Notably, the North Carolina Supreme Court recently ruled that, after foreclosure, non-mortgagor guarantors are permitted to “stand in the shoes of the principal borrower” and raise an anti-deficiency defense under North Carolina law to reduce their outstanding indebtedness to the principal borrower’s lender—regardless of whether the principal borrower-mortgagor is a party in the action. Moreover, in reaching its decision in High Point Bank and Trust Company v. Highmark Properties, LLC, the state’s high court further determined that, despite certain waiver-related provisions contained in the underlying guaranty agreement that was executed by the loan guarantors, the North Carolina law “provides an equitable calculation method that is not subject to waiver.”
By way of background, North Carolina’s anti-deficiency statute (N.C. Gen. Stat. §45-21.36) provides that: “When any sale of real estate has been made by a mortgagee, trustee, or other person authorized to make the same, at which the mortgagee, payee or other holder of the obligation thereby secured becomes the purchaser and takes title … and thereafter such mortgagee, payee or other holder of the secured obligation, as aforesaid, shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor or other maker of any such obligation whose property has been so purchased, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as a matter of defense and offset, but not by way of counterclaim, that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale or that the amount bid was substantially less than its true value, and, upon such showing, to defeat or offset any deficiency judgment against him.”
The plaintiff lending bank in the case, High Point Bank and Trust Company, argued that loan guarantors were not included among the “class of obligors” contemplated by the North Carolina statute. In addition, the bank maintained that even if the guarantors could be considered as obligors covered by the law, the guarantors still were not entitled to the statutory defense of debt reduction or offset because the guarantors had waived their right to the statutory defense by executing the guaranty agreement containing waiver provisions. The North Carolina Supreme Court disagreed.
In reviewing the North Carolina anti-deficiency statute and accompanying case law, the court noted that the statute protects a debtor by calculating the applicable debt based on the fair market value of the real property—the pertinent collateral for the loan—instead of the amount bid by a purchasing creditor at a sale of the real property. Viewing the statute as an equitable method of calculating indebtedness, the court asserted that it is not subject to waiver, despite language in a guaranty agreement to the contrary.
As previously reported (see WK Banking & Finance Law Blog, March 3, 2015), in the earlier, separate case of Branch Banking and Trust Company v. Smith, the intermediate appellate court in North Carolina decided the issue in a similar fashion. That prior blog post raised the query about how the North Carolina Supreme Court might rule on the issue. That question has now been answered via the court’s High Point Bank decision.
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