Chapter 51 Applies Regardless of Lender’s Measure of Damages; FMV Must Be Measured on Date of Foreclosure
April 1, 2013The court reversed a trial court’s judgment in favor of PlainsCapital Bank for damages and attorney’s fees resulting from Martin’s loan default based on Chapter 51 of the Property Code. In 2008 Martin defaulted and the Bank foreclosed upon and purchased the underlying property at auction for $539,000. Martin owed the Bank nearly $800,000. In 2009, over a year later, the Bank sold the property for $599,000 and sued Martin for the deficiency. Martin sought a damages offset under Property Code § 51.003 based on the value of the property, introducing expert testimony at trial that the property’s fair market value at the time of foreclosure was $850,000. The Bank argued that § 51.003 did not apply because it was not seeking to apply the foreclosure sale price as a credit but instead what the Bank actually received from the property: the 2009 sales price. The trial court agreed, holding § 51.003 inapplicable and crediting Martin $599,000 toward the deficiency.
On appeal, the court held that § 51.003 applies, regardless of the lender’s requested measure of damages, when (1) §51.002 foreclosure sale occurs, (2) the foreclosure sale price is less than the debt, and (3) an action is brought to recover the “deficiency,” or the amount owed on the debt after application of the collateral’s value. The court noted that the lender may not receive the benefit of a § 51.002 foreclosure sale but then “opt out” of § 51.003’s offset to the borrower. Additionally, the price received in the 2009 sale was legally insufficient evidence under § 51.003 because the Bank failed to link that price to the property’s value on the date of foreclosure. The court refused to render judgment based on Martin’s evidence, however, noting that the Bank refuted this value with its own expert testimony but indicating that the 2009 sales price was not evidence of the property’s fair market value at foreclosure.
It should be noted that the court did not hold that a later sales price of property can never be evidence of its fair market value. Rather, it is important for the lender to tie the actual sales price closely to § 51.003’s definition of fair market value, including a showing how it reflects the property’s value on the date of foreclosure.
