Credit Bids and Claims for Overage or Wrongful Foreclosure by Borrowers

INTERESTING NUCLEAR OPTION: “A credit bid submitted by anyone, whether authorized or not, might well be an admission (or at least a question of fact allowing the homeowner to go forward in discovery) that the amount owed was far less than the amount demanded in the Notice of Default and demands for collection. The point is not just that the foreclosure could be overturned or that an overage was created for the benefit of the borrower (because the creditor is only entitled to the amount owed). This issue could lead to the holy grail of discovery requiring the forecloser and other players in the securitization chain to produce the transactions that paid off part or all of the amount due the investor and therefore part or all of the amount due from the borrower.” — Neil F Garfield, http://www.livinglies.me

Editor’s Note: This is a puzzle and I am wondering if it might have some significance. The legislature has clearly enunciated the premise that they do not want any creditor to get a windfall at the expense of the borrower. (see below). The case below is a commercial case in which the object for the Bank was to get a deficiency judgment — something that Arizonians and residents of most states don’t need to worry about. But the rest of the discussion is applicable to residential foreclosures and trustee sales.

The credit bid that is submitted is often under Fair  Market Value. I am wondering if that can be turned around to say that the higher amount of fair market value minus the credit bid might be an overpayment. The credit bid is supposed to be the amount that is owed.

“The primary purpose of the statute is to “prohibit a creditor from seeking a windfall by buying property at a trustee’s sale for less than fair market value.” First Interstate Bank of Ariz., N.A. v. Tatum & Bell Ctr. Assoc., 170 Ariz. 99, 103, 821 P.2d 1384, 1388 (App. 1991). Because of the nature of a trustee’s sale, the statute does not contemplate that the purchase price will necessarily reflect the fair market value of the property. Dewey v. Arnold, 159 Ariz. 65, 70, 764 P.2d 1124, 1129 (App. 1988). For this reason, the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded. A.R.S. § 33-814(A). The court is directed then to subtract from the amount owed the higher of the sales price or the fair market value. Section 33-814(A) defines fair market value as:

[T]he most probable price, as of the date of the execution sale . . . after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.

There is no requirement of which I am aware that the creditor submit the bid at the amount owed, but there is a question of fact as to why they would bid anything else. Is the credit bid an admission that despite prior declarations of default and demands, the real amount owed was less than what had been used?

If that is the case, then is it possible that the issue of fact can be raised as to exactly what was really owed. If that opens the door to a full accounting it might be an admission that the “creditor” received mitigating payments from co-obligors like insurers and counterparties on credit default swaps.

That in turn would be the basis for an attack on the sale in that the Notice of Default and the redemption rights of the borrower were all affected by lies about the amount owed. If the amount owed was really as low as the bid, then did the forecloser get a windfall? Was the borrower prevented from submitting a meaningful proposal for modification since the “Creditor” withheld information about the real balance due.

Discovery might well lead to the conclusion that the figure used was, as Charles Koppa concluded, the amount reported to the investors after computations made by the Master Servicer. That can of worms would lead to the possibility that what they reported to investors was also a lie and that in fact they had been paid multiple times on behalf of the true “creditor.” Thus the action for overturning a foreclosure under a wrongful foreclosure pleading becomes enhanced. If the amounts received through insurance and other means exceed the debt, then the “creditor” was wrong in foreclosing because there was no balance due that was secured by the mortgage or deed of trust.

http://scholar.google.com/scholar_case?q=%22Appellants+Mike+and+Linda+Chase%22&hl=en&as_sdt=2,10&case=12267603999973988233&scilh=0

From Ken McLeod:

I missed this decision……bolds are mine.  I know it was a judicial sale but the Court did take notice of credit bids being lower that reasonable value of the property

 

Paragraph 4:  ¶ 4 After MidFirst filed its lawsuit, Palo Desert filed for bankruptcy protection. MidFirst obtained an order lifting the automatic stay in the bankruptcy, and a trustee’s sale was held in March 2010. MidFirst purchased the property at the trustee’s sale for a credit bid[3] of $486,000. MidFirst then moved for summary judgment against the Chases, seeking a deficiency judgment of $1,325,044.09. The Chases argued that there was no deficiency because the “value of the Property far exceeds anything that could be owed on the Loan.” The trial court granted MidFirst’s motion, finding that no genuine issue of material fact existed as to the fair market value of the property. The court stated that the Chases’ “contention that the property is worth more than the credit bid is purely speculative, has no foundation, and is based on a date far in the future, not as of the date of the trustee sale. No reasonable juror could find for [the Chases] on the issue of fair market value based upon the record presented herein.” The trial court also granted MidFirst’s request for attorneys’ fees of $80,550.91.

Paragraph 6:  ¶ 6 The Chases contend, inter alia, that the amount realized at a trustee’s sale does not fairly indicate the fair market value of the property conveyed, and that summary judgment granted to MidFirst solely on the basis of the credit bid was inappropriate.

Paragraph 9: Therefore, because the Chases were entitled to a determination of the fair market value of the property, we hold that the trial court erred in finding that MidFirst was entitled to judgment as a matter of law as to its entitlement to a deficiency judgment in the amount sought in its summary judgment motion. Section 33-814(A) requires that a deficiency judgment equal the amount owed minus either the fair market value of the property on the date of the sale or the sale price, whichever is higher. MidFirst only presented evidence of the credit bid, and no evidence as to the value of the property. On these facts, summary judgment was improper.

 

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