A Brief Overview
Amid the current economic crisis, foreclosure sales are running rampant, lawyers are howling at the moon on behalf of their clients, and the courts are seemingly befuddled with determining what is, in fact, “fair market value.” This opinion discusses, among other things, the standards the Florida courts must follow when granting or denying a Motion for Deficiency Judgment, the factors that Florida courts have taken into consideration in doing so, and the most effective manner, in our view, for a lender to position itself to obtain a favorable deficiency judgment.
Definition, Authority, and Calculation of Deficiency Judgments in Foreclosure Proceedings
A deficiency judgment in a mortgage foreclosure suit is defined as a judgment for the balance of the indebtedness after applying the proceeds of a sale of the mortgaged property to such indebtedness.1
The authority for a deficiency judgment in mortgage foreclosure rests on the rule that, where the court undertakes jurisdiction, it will administer full legal and equitable relief.2 In other words, Florida courts look to principles of fairness when dealing with deficiency judgments.
The correct formula for calculating a deficiency judgment is the total debt, as established by the final judgment of foreclosure (which, in addition to the principal indebtedness, generally includes all interest and costs of the foreclosure proceedings), minus the fair market value of the foreclosed property, as determined by the court.3
The date at which the fair market value is determined for purposes of calculating a deficiency judgment is the date of the foreclosure sale.4
Trial Court Standard for Grant or Denial of a Deficiency Judgment
Florida Statutes Chapter 702, entitled “Foreclosure of Mortgages, […]”, Section 702.06, entitled “Deficiency decree, […]” codifies the common-law right of a mortgagee to recover a deficiency judgment in a real property foreclosure proceeding, and states as follows:
“In all suits for the foreclosure of mortgages heretofore or hereafter executed the entry of a deficiency decree for any portion of a deficiency, should one exist, shall be within the sound judicial discretion of the court, […]” (emphasis added).
The entry of a deficiency judgment is, therefore, at the discretion of the court and the exercise of that discretion allows the court to inquire into the reasonable and fair market value of the property, the reasonableness of the price at the foreclosure sale, and other equitable considerations.5 The court must first determine the difference between the amount of the outstanding debt and the fair market value of the property and then ascertain whether any “equitable considerations” exist that warrant reduction of the actual deficiency.6
What is “Fair Market Value?”
Subsection 8 of Florida Statutes Section 45.031, which is the judicial sales procedure employed in carrying out mortgage foreclosure judgments, states that: “If the case is one in which a deficiency judgment may be sought and application is made for a deficiency, the amount bid at the sale may be considered by the court as one of the factors in determining a deficiency under the usual equitable principles.”
The amount of the deficiency therefore is not necessarily the difference between the judicial sale price and the amount of the judgment. The mortgagee has the burden of setting forth, typically in a hearing before the court, evidence that the fair market value of the property was less than the total debt determined by the foreclosure judgment. The mortgagor, in turn, may offer evidence to refute the mortgagee’s contention. For purposes of determining a right to a deficiency judgment, fair market value of property may be deemed to be that sum which, considering all circumstances, would be arrived at by fair negotiations between an owner willing to sell and a purchaser willing to buy, neither being under any pressure.7 Such a definition leaves much room for debate between the parties as to what is fair market value in each particular case.
Some of the more common factors considered by Florida courts in determining fair market value in deficiency proceedings include the price paid at the foreclosure sale, a subsequent sales price for the property, and expert opinion testimony. In a proceeding to obtain a deficiency judgment, a trial court has the power to act upon the assumption that the foreclosure sale price reflects the fair market value of the subject property, in the absence of any other evidence submitted by the defendant as to fair market value of the property.8 In Merrill v. Nuzum, 470 So. 2d 128 (1985), the mortgagor was entitled in the deficiency proceeding to challenge the mortgagee’s contention that the subsequent sale of the foreclosed property represented the fair market value of the property at the time of the foreclosure by showing, among other things, that the subsequent sale was not an arm’s length transaction or that, even if it was, events between the time of the foreclosure sale and subsequent sale thereafter altered the value of the property. In Federal Deposit Ins. Corp. v. Morley, C.A.11 (Fla. 1990) 915 F. 2d 1517, the appellate court acknowledged the lower court’s discretion in weighing expert testimony and utilizing a wholesale bulk-sale standard of valuation rather than an individual retail sales standard in determining the amount of a deficiency judgment in a foreclosure action.
Appellate Court Standard of Review in the Grant or Denial of Deficiency Judgments
Additionally, and highly important from a lender’s perspective, if the court decides to deny or reduce a deficiency judgment, the court must state with particularity the equitable principles it relied upon.9 This is because, generally, granting a deficiency judgment is the rule rather than the exception, unless there are facts and circumstances creating equitable considerations upon which a court should deny the deficiency judgment in the exercise of its discretion.10
While the grant or denial of a deficiency judgment is a matter within the sound judicial discretion of the trial court, such discretion is not absolute and unbridled, and where the exercise of such discretion results in a denial of a deficiency judgment, it must be supported by disclosed equitable considerations which constitute sound and sufficient reasons for such actions.11 As another court has put it: the discretion of the court as to entry of a deficiency judgment must be exercised within limits of proof and evidence and should not be arbitrary.12
A trial court’s refusal to grant a deficiency judgment in a mortgage foreclosure suit will be reversed by a reviewing appellate court unless the record under review, on appeal, discloses the facts and circumstances creating equitable considerations upon which the trial court could properly deny a deficiency judgment in its discretion.13 However, a denial of a deficiency judgment in a foreclosure proceeding will not be disturbed on appeal absent a clear abuse of discretion, where there are facts and circumstances in the record under review that create equitable considerations supporting the trial court’s denial.14
Exemplary Cases of Abuse of Discretion in Denial of Deficiency Judgment
Some noteworthy examples of cases where appellate courts have found an abuse of discretion in the trial court’s denial of a deficiency judgment include the following:
Lloyd v. Cannon, 399 So 2d 1095 (1981), in which the reviewing court found that, where the mortgagor was indebted to the mortgagee in the amount of $16,790, and the foreclosure sale of the mortgaged property to a third person produced the sum of $9,000, leaving a deficiency of $7,790, the trial court’s finding that the property was worth at the time of the foreclosure sale the same amount that it was worth at the time the mortgagee sold it to the mortgagor, and that the mortgagee apparently recovered at least the amount of her cost basis in the property, failed to show equitable considerations constituting sound and sufficient reasons for denying the mortgagee’s motion for deficiency and depriving her of the benefit of her contract; thus, the trial court abused its discretion in denying the motion for deficiency judgment.
Steketee v. Balance Homes, Inc., 376 So. 2d 873 (1979), in which the appellate court found that the trial court’s denial of the petition for judgment against the mortgagors for a deficiency on account of the court’s perception of the mortgagee’s dilatory prosecution of the foreclosure action, constituted an abuse of discretion even though the case had been dormant for two and one-half years, because the appeals court determined that the record sufficiently evidenced that the mortgagee had made serious and substantial efforts to pursue its right to a deficiency against the mortgagors and otherwise mitigate its loss in a reasonable manner.
Barnard v. First Nat. Bank of Okaloosa County, 482 So. 2d 534 (1986), in which the appellate court found that thedeficiency judgment rendered in favor of the mortgagee, following foreclosure of seven residential lots securing a loan, was an abuse of discretion, where the fair market value of the lots at the time of the foreclosure sale was substantially in excess of the debt owed to the mortgagee, the mortgagee and the foreclosure sale purchaser were one and the same, the mortgagee was the only bidder at the foreclosure sale, and the bid price of the mortgagee was more an indication of a “quick sale” value than of the lots’ true fair market value.
There are also many examples of cases in which the appellate court found that a denial of a deficiency judgment was not an abuse of the trial court’s discretion, including:
Wilson v. Adams & Fusselle, Inc., 467 So. 2d 345 (1985), in which the appellate court found that the act of the trial court in declining to enter a deficiency judgment sought by mortgagee after it purchased the mortgaged property at the foreclosure sale on a bid of $100 was not an abuse of discretion in that experts for mortgagor and mortgagee alike testified as to the market value of the property in amounts varying from $14,400 to $50,800 and no clear showing was made that the value of the property was less than the mortgage debt of $20,500.
Thomas v. Premier Capital, Inc., 906 So.2d 1139 (2005), in which the appellate court found that the trial court did not abuse its discretion in a foreclosure action by entering deficiency judgment of $45,363.39 against mortgagors following foreclosure sale of the property, as the trial court considered the testimony of the mortgagee’s appraiser, appraiser’s report, and testimony of the mortgagor who was not a real estate agent, broker, or appraiser, and found mortgagee’s evidence more persuasive as to fair market value of the property.
Realty Mortgage Co. v. Moore, 85 So. 155 (1920), in which the appellate court determined that in a suit for a deficiency against a mortgagor who had conveyed the property subject to a mortgage, and where it appeared that the property was sufficient to pay the debt on its maturity, and where the mortgagee had granted extensions without the mortgagor’s knowledge, to which he protested, pointing out the danger of depreciation in the value of the property, the mortgagee could not obtain a deficiency judgment against the mortgagor after the property had acutely depreciated due to a generalized housing market decline.
Analysis & Conclusion
Deficiency judgments in foreclosure proceedings are a judicial means to accord full and fair relief to the mortgagee in such circumstances and consideration should be given them as a significant stage of the foreclosure process. The determination of fair market value of the property at the time of the foreclosure sale is, due to the nature of land valuation, necessarily conducted on a case by case basis. However, there are some predictable factors that will weigh heavily in the court’s judgment.
Since the mortgagee bears the burden of proof in a deficiency proceeding, it is advisable in all cases, as a matter of course, to obtain a professional appraisal of the subject property as of the foreclosure sale date to submit to the court in evidence of the claimed deficiency amount and to have the appraiser available in the event a hearing on the matter is held. Because the deficiency judgment is at the trial court’s discretion, they are not required to conduct an evidentiary hearing on the matter and familiarity with the presiding judge in a foreclosure matter will speak much as to how the deficiency process may proceed. However, the judge will always consider valuation evidence presented by the parties and therefore proof of third party offers to purchase the subject property received by the mortgagee following the foreclosure sale will also be helpful, probative, and admissible as to what the fair market value of the property is for purposes of a deficiency judgment. It is, therefore, recommended that all such offers be properly documented and provided to counsel for presentation to the court.
With proper preparation and precaution, deficiency proceedings can be fairly straightforward and relatively short and provide the mortgagee with an opportunity to mitigate its losses to the greatest extent possible.
1 Commercial Bank v. First Nat. Bank, 87 So. 315 (1921); Grace v. Hendricks, 140 So. 790 (1932).
2 Younghusband v. Ft. Pierce Bank & Trust Co., 130 So. 725 (1930).
3 Kahn v. Simkins Industries, Inc., 687 So. 2d 16, 18 (Fla. 3d DCA 1996); Residential Funding Corp. v. Barrera, 762 So. 2d 948, 949 (Fla. 3d DCA 2000).
4 Estepa v. Jordan, 678 So. 2d 876, 878 (Fla. 5th DCA 1996); Community Bank of Homestead v. Valois, 570 So. 2d 300, 301 n.1 (Fla. 3d DCA 1990).
5 FDIC v. Hy Kom Dev. Co., 603 So. 2d 59 (Fla. 2d DCA 1992).
6 Federal Deposit Ins. Corp. v. Morley, C.A.11 (Fla. 1990) 915 F. 2d 1517.
7 Flagship Bank of Orlando v. Bryan, 384 So. 2d 1323 (1980).
8 Fara Mfg. Co., Inc. v. First Federal Sav. And Loan Ass’n of Miami, 366 So. 2d 164 (1979).
9 Chidnese v. McCollem, 696 So. 2d 879 (Fla. 4th DCA 1997).
10 S/D Enterprises, Inc. v. Chase Manhattan Bank, 374 So. 2d 1121 (1979).
11 Lloyd v. Cannon, 399 So 2d 1095 (1981).
12 Horne v. Smith, 368 So. 2d 392 (1979).
13 Nathanson v. Weston, 163 So. 2d 41 (1964).
14 FDIC v. Hy Kom Dev. Co., 603 So. 2d 59 (Fla. 2d DCA 1992).