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?
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