When a property owner faces foreclosure, he or she may assume they can just turn the keys over to the bank and walk away. That is not necessarily the case in New York and the majority of states that permit what is known as a deficiency judgment. Basically, if the lender receives less for the property at foreclosure auction than what the borrower owes, the lender can ask a court to issue a judgment against the borrower for the difference. So let's say a borrower owes $200,000 on his mortgage. If the bank forecloses and receives $150,000 at auction, it can sue the borrower for a deficiency judgment of $50,000.
Now there is one important legal limitation to a deficiency judgment. The lender cannot recover more than the “fair market value” of the property. So to revisit the example above, if the property with a $200,000 mortgage is only valued at $175,000, then the lender can only seek a deficiency judgment of $25,000—that is, the difference between the fair market value and the auction price.
Flushing Savings Bank v. Bitar
But how do you determine “fair market value”? The New York Court of Appeals recently considered this question. In this case, a borrower defaulted on his mortgage for a commercial building in Brooklyn. The lender foreclosed. The borrower never appeared in court or contested the foreclosure.
Brooklyn Supreme Court appointed a referee to conduct a foreclosure auction. The referee said the lender owed the borrower about $793,000 at the time of the foreclosure auction. The referee ultimately sold the property (to the lender) for $125,000. An appraiser hired by the lender assessed the fair market value of the property at $475,000. As this was higher than the sale price, the lender accordingly moved for a deficiency judgment of approximately $318,000. Once again, the borrower did not appear in court or oppose the motion.
The Supreme Court denied the lender's motion, however, citing the insufficiency of the appraiser's report. The Appellate Division, Second Department, agreed, noting the appraiser only submitted a four-paragraph affidavit which was not enough to justify “the large discrepancy between the appraised value and the relatively low sale price at the foreclosure sale.”
The lender then appealed to the Court of Appeals. New York Attorney General Eric T. Schneiderman's office appeared as a “friend of the court” in opposition to the lender. In a June 4 decision, the Court of Appeals partially concurred with the two lower courts. It agreed the appraiser's affidavit was insufficient to prove the “fair market value” of the property. Judge Eugene F. Pigott, Jr, writing for a unanimous Court, said under New York law, the burden was on the lender to prove the fair market value. The lender incorrectly argued its appraiser's affidavit was sufficient proof as the borrower never contested it. Judge Pigott said the affidavit was nothing more than a series of “conclusory” statements “unsupported by any detailed analysis of the data and valuation criteria he utilized in reaching his valuation.”
That said, Judge Pigott held the Supreme Court erred by dismissing the lender's motion for a deficiency judgment outright, without first giving it a chance to produce additional evidence. The Court of Appeals said it is generally up to the trial courts to determine what types of evidence are sufficient to demonstrate fair market value. But Judge Pigott cautioned, “Lenders seeking deficiency judgments, however, must always strive to provide the court with all the necessary information in their first application.”
Real property matters like foreclosure involve many complex laws. That is why it is always a good idea to work with an experienced New York real estate attorney when dealing with such issues. Contact our offices today if you need to speak with an attorney.