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Issue  227  Article  366
Published:  3/1/2016

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NC Supreme Court - Deficiency Offset Available to Guarantors
Chris Burti, Vice President and Senior Legal Council, Statew

High Point Bank & Trust Co. v Highmark Props., LLC

On discretionary review of a unanimous decision of the Court of Appeals, ___ N.C. App. ___, 750 S.E.2d 886 (2013), finding no error in orders of the respective trial courts, the Supreme Court allowed defendants' conditional petition for discretionary review as to additional issues. The issue of a guarantor's liability for a foreclosure deficiency was raised again on appeal in less than a year from the prior reported case. In Court of Appeals opinions cited in the Court of Appeals opinion, the Court has made a distinction of finding availability of the defense where the mortgagor was a party to the action, but determining that it was unavailable when not a party.

The borrower was voluntarily dismissed by the plaintiff in this deficiency action and the trial court ordered an offset after the borrower was re-joined in the action pursuant to N.C.G.S. § 26-12(b). The jury found that the value of the property at the time of the foreclosure sale represented the bulk of the debt though the lender's bid was substantially lees. The plaintiff argued that the defense and offset provided for in N.C.G.S. § 45-21.36 is personal to the borrower, and is not available to the guarantors simply because the borrower had availed itself of the offset defense.

While the Court of Appeals agreed that the plain language of N.C.G.S. Section 26-12(b) does not expand the defenses available to the guarantors beyond those that were available when the action was brought against both simply because of the re-joinder of the borrower, it held that the guarantors "were not allowed an offset defense, Borrower was. The fact that Guarantors "benefitted," because the amount of Borrower's indebtedness was determined at trial to be less than what Plaintiff claimed, does not alter this fact."

The Court parsed the issue in the case as "not whether a guarantor can personally assert an offset defense pursuant to N.C.G.S. § 45–21.36. We have not held that Guarantors had the right to avail themselves of the offset defense in N.C.G.S. § 45-21.36. We quite assiduously avoided making that determination. We hold that Guarantors were only responsible for Borrower's indebtedness. This holding is in accord with precedent and the language of the guaranty agreements drafted by Plaintiff. Once the jury and the trial court determined Borrower's indebtedness to Plaintiff, Guarantors' liability to Plaintiff was thereby established."

The distinction might seem a bit dubious in light of the opinions citation of Wells Fargo Bank, N.A. v. Arlington Hills of Mint Hill, LLC, N.C. App. __, __, 742 S.E.2d 201, 204 (2013) which held that the offset defense was personal to the borrower even though the borrower had been joined in the action against the guarantor. The majority determined that once Highmark was joined as a party, guarantors were entitled to benefit from Highmark's use of N.C.G.S. Section  45-21.36. However, the concurring judge reached the same result as the majority by concluding that guarantors could assert the anti-deficiency defense provided by N.C.G.S. Section 45-21.36 even if Highmark was not a party citing the North Carolina Supreme Court Virginia Trust Co. v. Dunlop, 214 N.C. 196, (1938) as ruling that the guarantor of a purchase money deed of trust is entitled to plead the anti-deficiency statute as a defense in an action brought on his personal guaranty. The concurring opinion points out that as the issue before the Supreme Court was the appropriateness of a motion to strike, the right to plead could only entail a right to prevail on the pleading. Also at issue was the appropriateness of the trial judge's joinder of the borrower, Highmark as a defendant in this action pursuant to N.C.G.S. Section 26-12 and the issue of whether the waiver of defenses in the Guaranty Agreement precluded the guarantors from raising the anti-deficiency defense of the statute.

As the controlling law supports the contention that the offset defense is not personal to the borrower, this Court of Appeals opinion set up the likelihood that the Supreme Court might resolve the question expressly rather than implicitly and that proved to be the case here.

After reciting the essential facts of the appeal, the Supreme Court observed that had previously addressed the essence of these arguments. It stated that it had held that guarantors are within the group of those protected by N.C.G.S. Section 45-21.36 citing Wachovia Realty Invs. v. Housing, Inc., 292 N.C. 93, (1977) "‘The statute provides only that when the creditor has elected to become the purchaser of the property conveyed by the mortgage or deed of trust at a sale made under a power of sale . . . he shall not recover judgment against his debtor for any deficiency, after the application of the amount of his bid as a payment on the debt, without first accounting to his debtor for the fair value of the property at the time and place of the sale, and that such value shall be determined by the court.' (quoting Richmond Mortg. & Loan Corp. v. Wachovia Bank & Tr. Co.(Richmond Mortgage), 210 N.C. 29, 185 S.E. 482 (1936), aff'd, 300 U.S. 124, 57 S. Ct. 338, 81 L. Ed. 552 (1937)). The effect is that the section establishes an equitable method of calculating the indebtedness; therefore, it is not a "defense" in the usual sense which can be waived."

Citing Virginia Trust Co. v. Dunlop, 214 N.C. 196, 198 S.E. 645 (1938), the Supreme Court stated that it had addressed an anti-deficiency statute containing language nearly identical to the present-day section N.C.G.S. Section 45-21.36 and concluding that a guarantor had the right to utilize the statutory protection at trial. The Court determined that its holdings in Dunlop and Richmond Mortgage are controlling, that a guarantor may raise the statutory defense, is entitled to its benefits when it has been determined that the property's fair value exceeded the purchase price paid by the creditor at the foreclosure sale, had the right to have the court determine the outstanding indebtedness by application of the fair market value of the collateral at the time of sale and that as the guarantors only guaranteed the repayment of the indebtedness which is merely being calculated pursuant to the statute, it is not the type of "defense or offset" which is subject to waiver.

It appears that the Court may have been concerned about the likelihood of creditor attempts to circumvent the doctrine confirmed in this case by the use of artful drafting of waiver language in future guaranty agreements. Such efforts are forestalled where, after a thorough analysis of the history and purpose of the statute the Supreme Court states; "we further conclude that because anti-deficiency legislation is so narrowly tailored to address specific instances of the public's vulnerability to lender overreach, waiver of this statutory protection as a prerequisite to receipt of a mortgage or as a condition of a guaranty agreement would violate public policy..."

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