31 Mar Texas Judicial and District of Columbia Legislative Update
The Texas Supreme Court recently held that courts are permitted to factor in future sales price and costs associated with reselling foreclosed-upon homes in determining the fair market value of the property. The District of Columbia Council extended the Nationwide Mortgage Licensing System Conformity Act of 2014.
PlainsCapital Bank v. Martin, 13-0037 (Tex. 3/27/15)
After the borrower defaulted on a note, the bank foreclosed its contractual deed of trust lien on property securing the note. The bank was the highest bidder at the foreclosure sale and bought the property for less than the secured debt. The borrower sued the bank, asserting, in part, that the property’s fair market value on the date of foreclosure was in excess of the foreclosure sales price, and Texas Property Code § 51.003 required the bank to offset the excess against the borrower’s debt.
Texas Property Code § 51.003 provides:
(a) If the price at which real property is sold at a foreclosure sale is less than the unpaid balance of the indebtedness secured by the real property, resulting in a deficiency, any action brought to recover the deficiency must be brought within two years of the foreclosure sale.
(b) Any person against whom such a recovery is sought by motion may request that the court in which the action is pending determine the fair market value of the real property as of the date of the foreclosure sale. The fair market value will be determined by the finder of fact after the introduction by the parties of competent evidence of the value. Competent evidence of value may include, but is not limited to, the following: (1) expert opinion testimony; (2) comparable sales; (3) anticipated marketing time and holding costs; (4) cost of sale; and (5) the necessity and amount of any discount to be applied to the future sales price or the cash flow generated by the property to arrive at a current fair market value.
(c) If the court determines that the fair market value is greater than the sales price of the real property at the foreclosure sale, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market value, less the amount of any claim, indebtedness, or obligation of any kind that is secured by a lien or encumbrance on the real property that was not extinguished by the foreclosure, exceeds the sales price. If no party requests the determination of fair market value or if such a request is made and no competent evidence of fair market value is introduced, the sales price at the foreclosure sale will be used to compute the deficiency.
The trial court determined that § 51.003 did not apply and rendered judgment for the bank on its counterclaim for damages and attorney’s fees. The court of appeals reversed and remanded to the trial court. The court of appeals held that (1) § 51.003 applied, (2) the term “fair market value” as used in § 51.003 is the historical willing-seller/willing-buyer definition of fair market value, and (3) although legally insufficient evidence supported the trial court’s findings as to the bank’s damages, the borrower did not conclusively prove his affirmative defense, leaving a factual question unsettled. The appeals court remanded the case to the trial court for further proceedings.
The two issues before the Supreme Court were (1) whether § 51.003 applies, and if so, (2) whether the statute contemplates the use of a post-foreclosure sales price and actual post-foreclosure costs as competent evidence of fair market value.
The Supreme Court began its opinion with a discussion of § 51.003. The Court provided that § 51.003 adds balance to the borrower-lender relationship regarding deficiency judgments. It does so by defining lenders’ rights to seek deficiency judgments and specifying rights that borrowers have regarding alleged deficiencies. Section 51.003 substantively provides that when realty is foreclosed on pursuant to a contract lien and the foreclosure sales price is less than the debt secured, a suit brought against the borrower for the unpaid balance of the indebtedness secured by the real property is a suit for a deficiency judgment. The borrower in such a suit may request that the trial court make a finding as to the fair market value of the realty as of the date of the foreclosure sale. If the trial court finds the fair market value to be in excess of the foreclosure sales price, then the borrower is entitled to an offset against the deficiency in the amount of the excess (less the amount of any obligations secured by a lien on the property but not extinguished by the foreclosure).
After its explanation of § 51.003, the Supreme Court agreed with the court of appeals that § 51.003 applies to the borrower’s claim against the bank. The Court next discussed the meaning of the term “fair market value” under the statute.
The bank argued that the court of appeals erred by using a historic measure of “fair market value,” which is the price the property will bring when offered for sale by one who desires to sell, but is not obliged to sell, and is bought by one who desires to buy, but is under no necessity of buying. The borrower argued that the court of appeals applied the proper definition of “fair market value.”
The Supreme Court next provided an analysis of statutory construction. When a statute uses a word or phrase without defining it, courts presume that the Legislature intended the common meaning of the word or phrase to apply. However, when a statute provides a definition for or uses a word or phrase in a particular manner, then courts must apply that definition or manner of use when interpreting the statute. Similarly, courts presume that the words in a statute are selected with care and interpret them in a manner that gives meaning to all of them without disregarding some as having no meaning.
The Legislature used the phrase “fair market value” in § 51.003 without defining it, so courts would ordinarily presume the common meaning of the term applies, as did the court of appeals. However, the statute enumerates categories of evidence and clearly specifies that they may be considered by trial courts in determining fair market value. For example, § 51.003(b)(5) specifies that a trial court, when calculating the fair market value as of the date of the foreclosure sale, may consider evidence of “the necessity and amount of any discount to be applied to the future sales price.” This factor is forward looking, allowing the trial court to consider the price for which the lender eventually sells the property and to apply a discount, if appropriate, to determine a value as of the foreclosure sale date.
The Court provided that it may seem odd to make the price for which the property sold after foreclosure an integral component of competent evidence of the property’s fair market value on the foreclosure sale date, but that is clearly what the Legislature intended. If it were not, then the relevant part of § 51.003(b)(5) would be nonsensical because an unknown fair market value, which is the value being sought, cannot mathematically be determined by applying a discount to an unknown future sales price, nor could either a prospective buyer or the seller know what the future sales price will be in order to factor it into their decision to buy or sell, regardless of whether a discount factor is applied. The Court did not attribute to the Legislature an intent to enact nonsensical statutes. Further, if the Court were to rule the future sales price competent evidence, but only upon a showing of comparable market conditions between the foreclosure sale and the future sale, the Court would be adding words to § 51.003. The Court refused to do that in the absence of clear legislative intent to reach a different result from that reached by applying the plain language of the statute, or to prevent the statute from yielding an absurd or nonsensical result.
Accordingly, the enumerated factors in § 51.003(b) supported a fair market value finding under the statute even though that type of evidence might not otherwise be competent in the common or historical fair market value construct. That being so, the term “fair market value” in § 51.003 is not precisely equivalent to the common, or historical, definition. Rather, it means the historical definition as modified by evidence § 51.003(b) authorizes the trial court to consider in its discretion, to the extent such evidence is not subsumed in the historical definition.
An offset under § 51.003 operates as an affirmative defense to a deficiency claim. Borrowers are entitled to an offset only if they request, prove, and obtain a finding of the property’s § 51.003 fair market value as of the date of the foreclosure sale and that value exceeds the foreclosure sales price. Consequently, in order to receive an offset, the borrower bore the burden of proving and obtaining a § 51.003 fair market value finding, that exceeded the foreclosure sale price. After analyzing the values of the property against the actual costs, the Court concluded that the trial court did not abuse its discretion by the calculating the property’s fair market value using the future sales price, and the evidence was legally sufficient to support the trial court’s finding of the fair market value of the property on the date of the foreclosure sale.
The Supreme Court reversed the judgment of the court of appeals and remanded the case to that court for further proceedings. Two Supreme Court justices dissented. The dissenting justices agreed that § 51.003 applied but disagreed with how the Court calculated the offset.
DISTRICT OF COLUMBIA B20-802/A20-498
Our July 24, 2014 Compliance Memorandum discussed District of Columbia B20-0845, effective July 10, 2014, in which the Council of the District of Columbia (the “Council”) adopted an emergency act entitled the Nationwide Mortgage Licensing System Conformity Emergency Act of 2014 (the “Emergency Act”) pertaining to standardized licensing through the NMLS. The Emergency Act expired on October 8, 2014. Our December 29, 2014 Compliance Memorandum discussed the Council’s enactment of the Nationwide Mortgage Licensing System Conformity Temporary Act of 2014 (the “Temporary Act”), which extended the provisions of the Emergency Act until July 28, 2015. The Council recently enacted permanent legislation, which supersedes the Temporary Act, entitled the Nationwide Mortgage Licensing System Conformity Act of 2014 (the “Conformity Act”), which was effective March 7, 2015. The Conformity Act will remain in effect until March 7, 2017.