Daily Development for
Tuesday, May 30, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; GOOD FAITH AND FAIR DEALING: Mortgagee owes mortgagor a duty to liquidate the mortgaged property for as much as possible in order to avoid any deficiency, and cannot collect deficiency where, prior to foreclosure sale, mortgagee contracted to sell property to third party for an amount in excess of mortgage debt. Pearman v. West Point National Bank, 887 S.W. 2d 366 (Ky. App. 1994).

Mortgagee was enforcing a judgment lien for a deficiency judgment resulting from a prior foreclosure. It purchased property at foreclosure sale for less than the amount owed, and immediately resold the property to a third party for an amount in excess of the mortgage debt pursuant to an agreement made before the foreclosure sale. Although the court had confirmed the sale as being for a fair price, the court held that the mortgagee had a supervening duty to "adopt a course that would have liquidated its customer's debt in the entirety."

Comment: Whatever the merits of this rule in the context of a mortgage foreclosure, particularly a private foreclosure, it is difficult to see how the rule should apply in the case of a judicial foreclosure of a judgment lien. Although the borrower may at one time have been a customer of the bank, and have been in a contractual relationship with the bank, surely that relationship ended when the mortgage originally was foreclosed.

Is the court going to apply this rule in the future to all judgment lienholders? On what grounds? Where does the implied duty come from? If it does not apply to all judgment lienholders, how can it apply here?

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 five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260. Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items reported in the Daily Development and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Items in the Daily Development are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.