Daily Development for Wednesday, November 5, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURES; JUDICIAL FORECLOSURE; JUDICIAL CONFIRMATION:  In actions to confirm a foreclosure sale, the court’s standard for confirmation must be whether the sales price is equal to or exceeds the true market value of the property, and not  the “shock the conscience” standard used in an equity action brought to set aside a foreclosure sale (i.e. whether the sale was fairly conducted and whether any disparity existed between value and sales price such as to “shock the judicial conscience”). 

Cartersville Developers LLC v. Georgia Bank & Trust, 292 Ga. App.  375, 664 S.E.2d 783 (Ga. Ct. App. 2008). 

Bank purchased townhomes built by developer pursuant to a foreclosure sale and hired a real estate appraiser to value the townhomes.  Appraiser arrived at its values by making taking into account the fact that the properties were in foreclosure, leading to a lower appraisal.   In fact, the appraiser discounted each townhome by $10,000.   The appraiser stated specifically that the market value of properties in foreclosure is lower than others.  The bank’s bid came it at just over these values, and it bought all of the townhomes at the sale.

At the judicial confirmation hearing, mortgagor/developer objected to this approach.  Its own appraiser estimated the value of the townhomes at around $20,000 more than the bank’s appraiser.  The trial court concluded that its only obligation was to determine if its “judicial conscience was shocked” by any disparity between the foreclosure sales price and the true market value per Darby & Assoc. v. Federal Deposit Ins. Corp., 141 Ga. App. 78, 232 S.E.2nd 615 (1977).  Darby had been a case in which a mortgagor attempted to set aside a foreclosure sale due to inadequacy of price.  The court concluded in that case that the court must conclude that there has been some procedural inadequacy and, in addition, that the price was such as to “shock the judicial conscience.”

The appeals court disagreed with the use of this standard.  It pointed out that a different standard must be applied by trial court in an action by a lender to confirm a foreclosure sale.  A trial court cannot confirm a foreclosure sale unless it its satisfied that the property sold brought at least its “true market value.”

“True market value "is the price that the property will bring when it is offered for sale by one who is not obligated, but has the desire to sell it, and is bought by one who wishes to buy it, but is not under a necessity to do so . . .

Based on this definition, this court has previously found that a trial court erred by confirming a foreclosure sale based upon "evidence of the 'quick sale' value of the subject property because such a valuation does not reflect the price that would be obtained in a sale under the usual market conditions. . . .”

The court expressly disapproved of applying the standard in Darby in actions to confirm a foreclosure sale where the evidence demonstrates that the sales price is not at least as much as the true market value of property.  It vacated the order of the trial court and remanded.

Comment 1: Certainly the appraiser should not have stated the case as we have seen.  The market value of the properties should not be discounted simply because of the presence of a foreclosure.  But some courts, on similar facts, have taken into account that the price produced at the sale is a cash auction price and necessarily is likely to be lower than what might be the price if the owner had months to sell and served cookies at open houses.  Note that the only thing that happened here is that the Darby test was disapproved and the case remanded.  But the quote of what ought to be the “fair market value” test certainly suggests that the “distress sale” character of the price bid at the sale ought not to be taken into account.

Comment 2: The primary function of the confirmation sale in most jurisdictions is just to set up a deficiency judgment.  In light of that, the editor isn’t troubled by the court’s insisting on limiting the deficiency to an amount between fair market value and debt, since, after all, the foreclosure lender that buys at the sale will be able to use open houses and cookies to resell the property.    Maybe even toasters!!!

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