Daily Development for Tuesday, December 18, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; GOOD FAITH AND FAIR DEALING: There is no requirement of good faith and fair dealing governing the mortgagee's bid at a private foreclosure sale, even when that sale results from the expiration of a forebearance agreement in which additional collateral was pledged, and consequently there is no requirement that the sales price approximate the fair market value of the property.

Dreyfuss v. Union Bank of California, 11P.3d 383 (Cal. 2000).

Dreyfuss, the borrower, owned three pieces of property which the lender foreclosed upon serially. Dreyfuss asserted that, due to California's anti-deficiency laws applicable to non-judicial foreclosures, the lender seeking to foreclose serially had a duty to credit to the borrower the fair value of a foreclosed parcel before foreclosing on the next parcel. Borrower invoked a little used and largely superceded section of California law, Civil Code Section 580a, which requires determination of fair value in some cases to protect mortgagors against unfair deficiency judgments. After the enactment of 580a, the California legislature passed statutes prohibiting deficiencies altogether in most non-judicial sales, and consequently the statute has little modern significance. Lender did not seek a deficiency judgment here, but borrower alleged that the serial foreclosure, without taking into account the value of the properties, amounted to the creation and collection of deficiency judgments against the other properties.

The lower court dismissed Borrower's claims upon the lender's motion for summary judgment, with the California Court of Appeals affirmed. By the time the case came to the California Supreme Court, the California Bankers had joined the case as amicus and heavyweight appellate counsel were on both sides.

The California Supreme Court noted that under established precedent in California there is no requirement for a determination of fair market value when a third party purchases from non-judicial foreclosure sale and seeks no deficiency (normally it would be barred from a deficiency. It noted that the serial foreclosure on various parcels does not constitute the collection of a deficiency under established precedent. Note that there was no argument that the parcels might have been sold for more as a unit - they were located in distinctly separate locations - one was out of state.

The Court also noted there is no requirement that the price at a foreclosure sale be equivalent to fair market value, and that a failure of such equivalent is not a violation of the covenant of good faith and fair dealing. It took into account Borrower's argument that a special duty arose when the lender was purchasing at the sale and the lender had earlier entered into a forebearance agreement with borrower that further circumscribed borrower's defenses - such as waiving the automatic stay in any bankruptcy (a waiver the bankruptcy court honored here). In a word, the court answered "Nope." No such duty.

Comment 1: To a large extent, this case represents nothing new because it was decided the way it was. The borrower's attempts to graft a new concept of good faith and fair dealing into California's foreclosure process would have generated a very noteworthy case had borrower been successful. The interpretation of California's anti-deficiency precedent doesn't strike the Editor as anything new, although California foreclosure mavens may want to weigh in with differing views.

Comment 2: The editor nevertheless notes the case because of the special argument that the lender acquired additional duties in the foreclosure process as a consequence of the forebearance agreement. A novel idea - and one that the California Court, in the editor's view, properly trashes. In the long run, any notion that special duties would arise from such agreements is likely to prevent lenders from entering into them. Thus, the rule designed to protect the interests of impecunious borrowers most likely would bite them more often than feeding them.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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