A Simple (Or Not So Simple) Lesson About Deficiency Judgments

A recent case from New York’s highest court, which only very rarely rules on this subject, clarifies the nature of the proof needed to support a motion for a deficiency judgment.  But at the same time, it tacitly calls into question some reliable traditions.  [Flushing Sav. Bank, FSB v. Bitar, 25 N.Y.3d 307, 33 N.E.3d 1282, 12 N.Y.S.3d 12 (2015)]  We try to sort it all out.

It is recognized that foreclosing mortgage holders only occasionally pursue deficiency judgments – the shortfall when a foreclosed property is worth less than the debt.  In the home loan situation, borrowers who lose their homes are not so likely to have assets or funds to pursue if a deficiency judgment is awarded.  While commercial cases might be more promising, the borrower is typically a single purpose entity so it is devoid of other assets.  But then, there might be a guarantor capable of responding in damages.  Suffice it to say, there are some cases where it is advisable to seek that deficiency.

In moving for a deficiency after a foreclosure sale, there must be a showing of the market value of the property as of the date of that sale.  This is so because a deficiency is measured by the difference between the sum due the lender and the greater of the market value of the property or the amount bid at the sale.  Thus, demonstrating market value is an essential part of the equation.

How to do this?  A full appraisal is the usual approach.  This does not prohibit the borrower (or other party liable) from offering a counter-appraisal (or other contrary evidence) but there should be no doubt that an appraisal satisfies the burden of the moving party.

But appraisals can be expensive and because they can take some time to prepare may not be readily available at the last minute.  (A deficiency motion must be made within ninety days of delivery of the referee’s deed.)

Therefore in some cases, the lender will rely on a broker’s price opinion.  While sometimes this may contain comparable sales, often it will be little more than a letter.  While it may be easier to oppose than a full appraisal, case law had always allowed such a method to prove value, the only issue being the possible weight it may be given at a valuation trial.

We now arrive at the subject case where the lender endeavored to establish market value with an affidavit from an appraiser.  It consisted of four paragraphs, two of which were devoted to the appraiser’s qualifications, the balance reciting the address, that the appraiser inspected the property and his conclusion as to value.  He mentioned comparables, but cited none.  While this was thin, certainly unimpressive, it would typically have met the threshold burden as previous case law seems to have confirmed.

Here, though, the court evaluated the affidavit as mere conclusory assertions and insufficient to allow it to determine a fair reasonable market value.

In the end, what does this tell lenders about the quality of proof as to the market value upon a deficiency judgment motion?  A qualified appraiser gave his opinion.  It was uncontroverted.  What was apparent here was that the trial court was disinclined to find a deficiency.  The weak affidavit afforded the court the legitimate basis to find that there was not enough for it to determine market value.  The court had the discretion to so determine.  Other courts would have accepted the presentation.

It comes down to gleaning how much the court needs to conclude what the market value is.  An appraisal works.  A broker’s price opinion with comparables should suffice.  Less than that usually will do the job (when unopposed) unless the court is disinclined to make the award, something which is unlikely to be known in advance.

Lenders will never quite know and so are well advised to do the best job possible or appropriate under the circumstances.  And there is a saving grace.  The New York Court of Appeals ruled that while the court below was correct in its analysis of the proof of value, nonetheless it should not have denied the motion.  Instead, it should have directed the lender to bring further proof to support market value.

The lender therefore can err and later fix the mistake.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.