Daily Development for
Thursday, January 29, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
MORTGAGES; FORECLOSURES; DEFICIENCY JUDGMENT: Although court has equitable discretion to modify or deny deficiency judgment, it must set forth clearly the equitable factors warranting any such limitation and cannot impose the limitation prior to the sale itself.
Chidnese v. McCollem, 695 So.2d 936 (Fla.App. 4 Dist. 1997).
In this unique case, the parties originally had been engaged in a dispute concerning division of proceeds of a law practice in which they had been partners. One of the parties agreed to release a claim for $200,000 of those proceeds. Simultaneously, that party sold an office building to the former partners for a price of $800,000, secured by a purchase money mortgage. A few years later, the partners defaulted on the mortgage note, and their former partner sued to foreclose.
At trial, the mortgagor/partners brought in evidence that the mortgagee/seller had paid registration taxes on only $600,000 of the mortgage, allocating the balance of the principle to "personal property." They argued, apparently, that the personal property in question was in fact a $200,000 fee receivable to which mortgagee had waived his claim at the time of the sale of the building. The mortgagors then introduced evidence that the party owing that fee was suing for malpractice and that in fact there would be no fee.
The trial court, at the close of mortgagee's case, heard a motion to dismiss from mortgagors. Instead of granting the mortion, however, the court issued a judgment for foreclosure but indicated that, based upon the equities, there would be no deficiency judgment permitted.
On appeal by the mortgagee, held: Reversed. The trial court cannot make a determination to deny a deficiency judgment until after the property has been sold. Further, the trial court must set forth the express equitable grounds for modifying or denying the deficiency judgment.
It is interesting to note that the court did not conclude that the apparent grounds for denial of the deficiency were insufficient, unconventional though they were. But this may be due to the fact that the appeals court had insufficient findings upon which to base a critique of the trial court's reasoning.
The appeals court, instead, emphasized that *whatever* the grounds for denial of a deficiency judgment, it is impossible for a trial court to deny such a judgment before it has evidence of the price at which the property sells at foreclosure. As the court points out, the equitable basis for denying a deficiency if the property sells for $600,000 may not be as strong if the property sells for only $400,000.
Comment 1: The appeals court ruling indulges in the somewhat questionable presumption that the price at the foreclosure sale bears some relationship to the fair market value. It is true that it may be some evidence of such value, but a court ought to be able to make a determination of market value even without such evidence, and order a deficiency judgment accordingly. The approach required here would appear to require further judicial proceedings in every case in which there are grounds to question the entry of a deficiency judgment. In many cases, this is simply a waste of time (although on the special facts of this case there may have been a better argument to look at what the foreclosure sale price - as it was possible that the mortgagee would not be the primary bidder.)
Comment 2: A number of states permit the trial court to set an "upset" price - a minimum price at which the property must sell at foreclosure. If the price isn't bid, the property either is resold or the matter returned to the court. Some would even permit the court to fix the deficiency or deny the deficiency in advance of the sale on the basis of the court's perception of the fair market value of the property. The Florida appeals court didn't permit that in this case, perhaps because, notwithstanding the lack of findings below, the perception of the appeals court was that the trial court's decision was based upon facts other than the trial court's view of the value of the land. Because of that, the appeals court required that the decision involve an analysis of the value of the land, and the way it achieved that result was to compel that the land be sold first. As indicated above, however, the foreclosure sale price is not always the best indication of value.
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