Deficiency Collection Actions Made Easier

In a recent opinion, the Texas Supreme Court effectively squashed a debtor’s most potent defense to a post-foreclosure collection action — the fair market value (FMV) defense. After foreclosure, a debtor is credited for the foreclosure sales price against his or her outstanding debt, and the remaining debt is known as a deficiency. By Texas statute, a debtor may reduce or offset a deficiency debt by pleading and proving this statutory FMV defense, which increases the credit afforded to a debtor from the foreclosure sales price to the FMV of the foreclosed property at the time of foreclosure. See Tex. Prop. Code § 51.003. Because properties in foreclosure are sold at auction, as is, the sales price is usually much lower than FMV, which is based in part, on comparable sales of properties sold without the stigma of foreclosure. Regardless of the relevance of FMV to foreclosure, the Texas Legislature has empowered debtors with this FMV defense against creditors’ actions to collect deficiencies. Id.

In Moayedi v. Interstate 35/Chisam Road, L.P., No. 12-0937, 2014 WL 2619524, at *4 (Tex. Jun. 13, 2014), the Court held in a case of first impression that a debtor’s contractual waiver of this statutory FMV defense was both constitutional and aligned with public policy. Even further, the Court blessed the most generic ‘waiver of defenses’ clauses as effective to waive this statutory FMV defense. In effect, most loan documents with boilerplate language will contain a generic ‘waiver of defenses’ clause and therefore serve as an effective waiver of a debtor’s FMV defense. See id. at *5.

Prior to Moayedi, debtors had argued that the law was not completely settled, and that a more specific waiver clause was necessary to waive the FMV defense or that public policy prohibited such a waiver, in an effort to defeat summary judgment, and gain some leverage in settlement negotiations. Now, Moayedi removes this line of argument and source of potential leverage for most debtors.

Typically, in these deficiency actions, the debtor’s strategy is to create a fact issue to survive summary judgment, or at least create doubt about it, to push the case to trial before a jury, pitting the “greedy” bank against the “victim” debtor. To this end, an appraisal or other evidence of FMV of the foreclosed property could serve as powerful evidence for the debtor. With Moayedi, this type of evidence will never see the light of day in almost all cases.

In sum, Moayedi should make the collection of deficiency debt easier, from less motion drafting and reduced legal bills in collection actions, stronger bargaining position in settlement negotiations, to more certainty on waiver of defense language in loan documents.

In a recent opinion, the Texas Supreme Court effectively squashed a debtor’s most potent defense to a post-foreclosure collection action — the fair market value (FMV) defense. After foreclosure, a debtor is credited for the foreclosure sales price against his or her outstanding debt, and the remaining debt is known as a deficiency. By Texas statute, a debtor may reduce or offset a deficiency debt by pleading and proving this statutory FMV defense, which increases the credit afforded to a debtor from the foreclosure sales price to the FMV of the foreclosed property at the time of foreclosure. See Tex. Prop. Code § 51.003. Because properties in foreclosure are sold at auction, as is, the sales price is usually much lower than FMV, which is based in part, on comparable sales of properties sold without the stigma of foreclosure. Regardless of the relevance of FMV to foreclosure, the Texas Legislature has empowered debtors with this FMV defense against creditors’ actions to collect deficiencies. Id.

In Moayedi v. Interstate 35/Chisam Road, L.P., No. 12-0937, 2014 WL 2619524, at *4 (Tex. Jun. 13, 2014), the Court held in a case of first impression that a debtor’s contractual waiver of this statutory FMV defense was both constitutional and aligned with public policy. Even further, the Court blessed the most generic ‘waiver of defenses’ clauses as effective to waive this statutory FMV defense. In effect, most loan documents with boilerplate language will contain a generic ‘waiver of defenses’ clause and therefore serve as an effective waiver of a debtor’s FMV defense. See id. at *5.

Prior to Moayedi, debtors had argued that the law was not completely settled, and that a more specific waiver clause was necessary to waive the FMV defense or that public policy prohibited such a waiver, in an effort to defeat summary judgment, and gain some leverage in settlement negotiations. Now, Moayedi removes this line of argument and source of potential leverage for most debtors.

Typically, in these deficiency actions, the debtor’s strategy is to create a fact issue to survive summary judgment, or at least create doubt about it, to push the case to trial before a jury, pitting the “greedy” bank against the “victim” debtor. To this end, an appraisal or other evidence of FMV of the foreclosed property could serve as powerful evidence for the debtor. With Moayedi, this type of evidence will never see the light of day in almost all cases.

In sum, Moayedi should make the collection of deficiency debt easier, from less motion drafting and reduced legal bills in collection actions, stronger bargaining position in settlement negotiations, to more certainty on waiver of defense language in loan documents.