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March 8, 2016 in Articles by

A Guaranteed Defense: An Overview of the North Carolina Supreme Court’s Decision in High Point Bank & Trust Co. v. Highmark Properties, LLC

By George F. Sanderson III & Lauren Miller Golden

Until recently, a common question that arose during foreclosure deficiency actions was whether a guarantor on a loan could raise the anti-deficiency defense set forth in section N.C.G.S. § 45–21.36. This past fall, the North Carolina Supreme Court answered yes to this question. In High Point Bank & Trust Co. v. Highmark Properties, LLC, the North Carolina Supreme Court held that non-mortgagor guarantors of a loan may raise the anti-deficiency defense set forth in N.C.G.S. § 45—21.36. The court held that the statute is not a “defense” in the usual sense, but establishes an equitable method of calculating indebtedness after a foreclosure sale. Consequently, the statute cannot be waived.

The Facts

The lender issued two loans to a North Carolina limited liability company. Each loan was secured by a parcel of real estate.  Four individuals guaranteed repayment of the loans. After the borrower defaulted, the lender filed a lawsuit against the borrower and the guarantors. The lender then initiated foreclosure proceedings on both properties. The lender was the sole bidder at both foreclosure sales. After the foreclosure, a significant deficiency balance remained on both loans. 

The Trial Court

The trial court entered summary judgment against the guarantors on the issue of their liability for payment of the deficiency under both loans. The sole issue for trial was what effect, if any, the value of the properties securing payment of the loans had on the deficiency owed. The borrower and the guarantors all sought to amend their answers to assert the anti-deficiency defense, which the trial court allowed. At trial, the jury found that the amounts paid by the lender for the parcels of real estate at foreclosure were substantially less than the fair market values of the parcels on the date of sale. The deficiency balances were adjusted to account for the fair market values the jury attributed to each property. 

The Appeal

On appeal, the lender made two primary arguments: (1) a guarantor is not among the class of obligors eligible to claim the benefit of section 45–21.36 because the statute applies only to a “mortgagor, trustor, or other maker of any such obligation whose property has been so purchased”; and (2) even if a guarantor is among those eligible to utilize the statute, the guarantors had waived their right to the statutory defense based on the guaranty’s express language. The Supreme Court disagreed with both arguments.

Prior Decisions

The court stated that it had previously addressed the essence of these two arguments in Wachovia Realty Investments v. Housing, Inc.Virginia Trust Company v. Dunlop; and Richmond Mortgage & Loan Corporation v. Wachovia Bank & Trust Company. 

In Richmond Mortgage, the Supreme Court held that a guarantor was within the group of those who enjoy the protection of section 45—21.36. In Dunlop, the court addressed an anti-deficiency statute that contained language similar to the current version of 45—21.36. In that case, the court held that the guarantor had the right to utilize the statutory protection at trial. In Richmond Mortgage, the court noted that the purpose of the statute “was to protect a debtor from a creditor unilaterally determining the amount to be applied to a debt resulting from the trustee’s sale of collateral.”

The court expressly re-affirmed its previous holdings in Dunlop and Richmond Mortgage. The Highmark court held that the effect of N.C.G.S. § 45—21.36 establishes an equitable method of calculating the indebtedness, and it is not a “defense” in the usual sense which can be waived. The court also stated that “[a] guaranty, as it operates here, is a promise to repay the ‘indebtedness.’ Section 45—21.36 simply provides the method of calculating that amount.” Because the guarantors only guaranteed the repayment of the indebtedness, the amount of the indebtedness is calculated pursuant to N.C.G.S. § 45-21.36, and this type of defense is not subject to waiver.

Practical Effects

The practical effect of Highmark is that fewer cases will be appropriate for summary judgment. It is reasonable to expect that guarantors will raise the anti-deficiency defense much more frequently when the lender is the higher bidder at the foreclosure sale. Guarantors can create factual issues to be resolved by the jury by offering an appraisal or other competent evidence on the property’s value that differs from the lender’s value.It is anticipated that these types of cases will necessitate more extensive discovery and a trial—increasing the time and expense associated with deficiency actions.

* This article was originally published in the March 2016 issue of the North Carolina Bar Association Bankruptcy Section’s Newsletter.