West Pleasant-CPGT, Inc. v. U.S. Home Corp., 243 N.J. 92 (2020). [Disclosure: I represented the successful defendant in this appeal]. This unanimous decision by Justice LaVecchia today addressed an equitable remedy that lower courts have made available to foreclosure debtors in cases where a creditor has pursued a deficiency action in addition to acquiring the foreclosed property: the fair market value credit. As Justice LaVecchia carefully explained, the “fair market value credit has a role in preventing windfalls to creditors when a creditor forecloses on property and pursues a deficiency claim. A defensive claim for fair market value credit may be invoked to prevent a creditor from recovering more than the debt permitted” (emphasis by Justice LaVecchia).
But what of a situation where the creditor purchases the subject property in foreclosure but does not file a deficiency action? That was the situation in today’s case. After much travail and expense over a period of many years, which Justice LaVecchia described in detail, U.S. Home, the creditor, decided to “not throw good money after bad” by pursuing a deficiency action. Instead, having purchased the two subject properties at sheriff’s sales, U.S. Home walked away.
The debtors whose properties were sold did not object to the sheriff’s sales (One of them entered into a consent order in bankruptcy proceedings that barred it from objecting, and the other chose not to object). Nor did they seek a fair market value credit in connection with the sale proceedings, though they had a right to do so if appropriate. The facts here, however, made it inappropriate, since the debtor that did not waive its right to contest the sale went to trial in the Bankruptcy Court regarding the value of the properties, and that court ruled that the value of those properties was far less than the debt owed to U.S. Home. The Bankruptcy Court then allowed sales of the properties, at which U.S. Home bought in.
After those sales, the debtors filed suit seeking a fair market value credit. Using appraisals generated in hindsight, they claimed that the properties were worth far more than the debt to U.S. Home. Over U.S. Home’s objections, the debtors’ claims went to bench trials in the Law Division and resulted in a judgment not merely for a credit, but for a seven-figure cash payment to the debtors by U.S. Home (who still, after all, had not been made whole on the seven-figure amount owed to it).
U.S. Home appealed, and the Appellate Division arrived at a different seven-figure sum that U.S. Home had to pay the debtors, applying reasoning different than that of the Law Division. U.S. Home obtained certification, and today the Supreme Court reversed the judgment in favor of the debtors.
Justice LaVecchia offered a comprehensive review of the history of the statutes, N.J.S.A. 2A:50-2 and -3, that afford a fair market credit in certain circumstances, and of the caselaw that had allowed such a credit on other facts as a matter of equity. “The history of N.J.S.A. 2A;50-3 suggests that the Legislature included the fair market credit as a protection for mortgagors in deficiency actions to use as a shield, not as a sword.” And “New Jersey courts that have equitably applied a fair market value credit, where statutorily it otherwise would not have applied, have done so when a creditor is seeking a deficiency judgment.” Justice LaVecchia noted that courts elsewhere “have done likewise.”
Here, there was no deficiency action, and the debtors failed to seek a fair market value credit at the time of the sheriff’s sales. Thus, “[t]his remarkable proceeding in which a debtor brought an after-the-fact affirmative claim for fair market value and obtained a money judgment against the creditor is as unprecedented and unwarranted as it was argued to be.” The action of the courts below “far exceeds the equitable applications that furthered the legislative purpose to fair market value credit recognized by the statutory scheme.” The Court “decline[d] to countenance” the debtors’ tactic of demanding a money judgment in these circumstances.
There simply was no basis for a fair market value credit, let alone an affirmative judgment against U.S. Home, given its choice to waive a deficiency action. Accordingly, the money judgment against U.S. Home was reversed.