Nancy and Stjepan Sostaric v. Sally Marshall

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA

September 2014 Term

_______________ FILED

November 12, 2014

released at 3:00 p.m.

No. 14-0143 RORY L. PERRY II, CLERK

SUPREME COURT OF APPEALS

_______________ OF WEST VIRGINIA

NANCY SOSTARIC and

STJEPAN SOSTARIC,

Defendants Below, Petitioners

v.

SALLY MARSHALL,

Plaintiff Below, Respondent

____________________________________________________________

Appeal from the Circuit Court of Morgan County

The Honorable Michael D. Lorensen, Judge

Civil Action No. 12-C-160

REVERSED AND REMANDED

____________________________________________________________

Submitted: October 14, 2014

Filed: November 12, 2014

Nancy Sostaric Sally Marshall

Stjepan Sostaric Pro Se

Pro Se Berkeley Springs, West Virginia

Falls Church, Virginia

JUSTICE KETCHUM delivered the Opinion of the Court.

CHIEF JUSTICE DAVIS dissents and reserves the right to file a dissenting Opinion.

SYLLABUS BY THE COURT

1. A trust deed grantor may assert, as a defense in a lawsuit seeking a

deficiency judgment, that the fair market value of the secured real property was not

obtained at a trust deed foreclosure sale. In view of this holding, Syllabus Point 4 of

Fayette County National Bank v. Lilly, 199 W.Va. 349, 484 S.E.2d 232 (1997) is

overruled.

2. A fair market value determination in a lawsuit seeking a deficiency

judgment following a trust deed foreclosure sale must be asserted by the deficiency

defendant. Unless the deficiency defendant requests such a determination, the

foreclosure sale price, rather than the property’s fair market value, will be used to

compute the deficiency.

3. If a circuit court in a lawsuit seeking a deficiency judgment

following a trust deed foreclosure sale determines that the fair market value of the

foreclosed property is greater than the foreclosure sale price, the deficiency defendant is

entitled to an offset against the deficiency in the amount by which the fair market value,

less the amount of any liens on the real estate that were not extinguished by the

foreclosure, exceeds the sale price.

Justice Ketchum:

Petitioners, Nancy Sostaric and Stjepan Sostaric (“Mr. and Mrs. Sostaric”),1

who are appearing pro se, appeal from an order entered January 16, 2014, by the Circuit

Court of Morgan County. The circuit court granted summary judgment to respondent,

Sally Marshall (“Ms. Marshall”), who is also appearing pro se, awarding her a deficiency

judgment against Mr. and Mrs. Sostaric and attorney’s fees.2

On appeal, Mr. and Mrs. Sostaric contend that summary judgment was

improper because there exist genuine issues of material fact. They contend that the

amount of the deficiency judgment awarded was too high and that it should have been

adjusted to reflect the fair market value of their property when it was sold at the trust

deed sale. They argue the property was sold for less than its fair market value at the

trustee’s foreclosure sale.

Upon review, we find that Mr. and Mrs. Sostaric may assert, as a defense in

the lawsuit seeking a deficiency judgment, that the property was sold for less than its fair

market value at the trust deed foreclosure sale. In so finding, we overrule Syllabus Point

4 of Fayette County National Bank v. Lilly, 199 W.Va. 349, 484 S.E.2d 232 (1997). We

1

At the time of the underlying proceedings, it appears that Mr. and Mrs. Sostaric

were in the midst of divorce proceedings. Nevertheless, to maintain consistency with the

record in this case, we will continue to refer to them as “Mr. and Mrs. Sostaric.”

2

Ms. Marshall initially was represented by counsel when she filed the lawsuit

seeking the deficiency judgment against Mr. and Mrs. Sostaric.

1

therefore reverse the circuit court’s summary judgment order and remand this matter for

further proceedings consistent with this Opinion.

I.

FACTUAL AND PROCEDURAL BACKGROUND

Mr. and Mrs. Sostaric signed a “Secured Balloon Promissory Note” on

December 26, 2006, whereby Ms. Marshall lent them $200,000.00. The loan was

“secured by a first deed of trust on real property owned by Borrowers [Mr. and Mrs.

Sostaric]” in Berkeley Springs, West Virginia.3 The note’s payment terms required that

[t]he full amount of the note is due and payable December 30,

2013. Interest only payments will be made on a monthly

basis. The first interest only payment of $1208.00 will be due

on January 30, 2007 and will continue to be paid monthly

thereafter. The full payment of Two Hundred Thousand

Dollars ($200,000.00) will be due on December 31, 2013.

Additionally, the note included a “DEFAULT AND ACCELERATION

CLAUSE,” which provided:

If Borrowers [Mr. and Mrs. Sostaric] default in the payment

of this Note or in the performance of any obligation, and the

default is not cured within fifteen days after Lender [Ms.

Marshall] has given to Borrowers written notice of the default

and time to cure, then Lender may declare the unpaid

3

It appears from the record that the property securing the promissory note was the

primary residence of Mr. and Mrs. Sostaric, which they had purchased in March 2006 for

$155,900.

2

principal balance and earned interest on this Note

immediately due. Borrowers and each surety, endorser, and

guarantor waive all demands for payment, presentation for

payment, notices of intentions to accelerate maturity, protests

and notices of protest, to the extent permitted by law.

Finally, the note allowed for the recovery of attorney’s fees incurred in the

collection or enforcement of the note:

If this Note is given to an attorney for collection or

enforcement, or if suit is brought for cancellation or

enforcement, or if it is collected or enforced through probate,

bankruptcy or other judicial proceeding, then Borrowers [Mr.

and Mrs. Sostaric] shall pay to Lender [Ms. Marshall] all

costs of collection and enforcement, including reasonable

attorneys fees and court costs in addition to other amounts

due.

While Mr. and Mrs. Sostaric made the required monthly interest payments

for a period of time after signing the promissory note, they stopped making their monthly

payments in October 2010 and subsequently defaulted on their obligation. On July 17,

2012, Ms. Marshall sent Mrs. Sostaric5 a “NOTICE OF RIGHT TO CURE DEFAULT,”

which “serve[d] as formal notice that the default outline[d] below must be satisfied

within thirty (30) days. Failure to cure the default by the date indicated shall result in the

acceleration of the balance owing on the deed of trust and sale of collateral involved.”

5

It is unclear why Mr. Sostaric’s name was not also included on the right to cure

notice.

3

The property sought to be sold was the residence of Mr. and Mrs. Sostaric that had served

as collateral for the promissory note. The notice further provided:

YOU HAVE THE RIGHT TO CURE THE

FOLLOWING DEFAULT:

Total amount of payments in default (including all charges):

$25,911.00 and any other payments or fees that may become

due prior to the curing of the default.

Other Required Performance Which is in Default: Show proof

that 2011 real estate taxes have been paid. ($1,050.73 if paid

by July 31, 2012)

Date by which payment must be made or other required

performance accomplished in order to cure the default:

August 17th, 2012.

(Emphasis in original.)

Despite this notice, Mr. and Mrs. Sostaric did not cure their default.

Therefore, on September 21, 2012, counsel for Ms. Marshall sent Mrs. Sostaric6 notice of

a trustee’s sale of the property securing their promissory note. The notice served to

1. Accelerate and declare all sums secured by said

Deed of Trust to be immediately due and payable without

further demand, subject to the terms of said deed of trust and

applicable law; and

2. Invoke the power given by said Deed of Trust to sell

the above-described real estate at public auction on

Wednesday, October 17, 2012, at 11:36 AM, at the front door

6

It also is unclear why Mr. Sostaric’s name was not included on the

correspondence providing notice of the trustee’s sale.

4

of the Morgan County Courthouse, Berkeley Springs, West

Virginia.

(Emphasis in original.)

On October 17, 2012, Ms. Marshall purchased the subject property at the

trustee’s sale for $60,000.00. Of this amount, $58,260.757 was distributed to “Sally

Marshall, the holder and owner of the note secured by said deed of trust to apply on

principal and interest of said note[8] and obligations set forth in said deed of trust,” while

the remaining sum of $1,739.25 was applied to the costs of the sale. (Footnote added.)

Thereafter, on December 13, 2012, Ms. Marshall, by counsel, filed the

instant lawsuit against Mr. and Mrs. Sostaric seeking a deficiency judgment for the

unpaid balance of their promissory note. By order entered January 16, 2014, the circuit

court awarded summary judgment to Ms. Marshall, ruling as follows:

The Plaintiff [Ms. Marshall] has set forth evidence, by

way of a sworn affidavit, of an outstanding debt in the

amount of $175,407.45, the collection of which is supported

by an exhibit to the Complaint, the Secured Balloon

Promissory Note. Further, the Plaintiff has set forth evidence,

by way of a sworn affidavit, of attorneys’ fees in the amount

of $1,749.25, the collection of which is supported by an

exhibit to the Complaint, the Secured Balloon Promissory

Note.

7

The “TRUSTEE’S REPORT OF SALE UNDER DEED OF TRUST” indicates

that $58,250.75 of the sales proceeds was applied to reduce the indebtedness under the

promissory note.

8

The “Disclosure Form Trustee Report of Sale” indicated that the “Total Secured

Indebtedness at Foreclosure [was] 231,660.68.”

5

The court also awarded Ms. Marshall post-judgment interest on this award. From this

adverse ruling, Mr. and Mrs. Sostaric now appeal to this Court.9

II.

STANDARD OF REVIEW

Mr. and Mrs. Sostaric appeal from the circuit court’s order granting

summary judgment. We previously have held that “[a] motion for summary judgment

should be granted only when it is clear that there is no genuine issue of fact to be tried

and inquiry concerning the facts is not desirable to clarify the application of the law.”

Syl. pt. 3, Aetna Cas. & Sur. Co. v. Fed. Ins. Co. of New York, 148 W. Va. 160, 133

S.E.2d 770 (1963). We afford a plenary review to a lower court’s order awarding

summary judgment: “[a] circuit court’s entry of summary judgment is reviewed de

novo.” Syl. pt. 1, Painter v. Peavy, 192 W. Va. 189, 451 S.E.2d 755 (1994).

9

There is no contention that the trust deed sale was invalid or defective. Our

review of the record reveals that the foreclosure procedure and trustee’s sale complied

with our law and that title to the foreclosed property was legally conveyed to Ms.

Marshall.

6

III.

ANALYSIS

This case involves a deficiency judgment. A deficiency judgment “is an

imposition of personal liability upon a mortgagor for an unpaid balance of a secured

obligation after foreclosure of the mortgage has failed to yield the full amount of the

underlying debt.” Lawrence R. Ahern, III, The Law of Debtors and Creditors, § 8:20

(2014).10

In this appeal, Mr. and Mrs. Sostaric contend that the circuit court’s award

of summary judgment to Ms. Marshall was improper because the deficiency judgment

award was not adjusted to reflect the fair market value of the property securing the debt.

In addressing whether a defendant may challenge the sale price of foreclosed property in

a deficiency judgment lawsuit and assert that the property was sold for less than its fair

market value, we will examine and consider: (1) the majority view of other jurisdictions

that permit the sale price of foreclosed property to be challenged in a deficiency judgment

lawsuit; and (2) West Virginia’s statutory law on trust deed foreclosure sales, as well as

10

We use the terms deed of trust (trust deed) and mortgage interchangeably. A

deed of trust is, in effect, a mortgage. Both instruments secure payment of a debt. The

primary difference is that the holder of a trust deed does not have to apply to a court in

order to foreclose, whereas the holder of a mortgage is required to apply to a court in

order to foreclose. For a more detailed explanation see Arnold v. Palmer, 224 W.Va.

495, 503 fn. 10, 686 S.E.2d 725, 733 fn.10 (2009).

7

this Court’s ruling in Fayette County. National Bank v. Lilly, 199 W.Va. 349, 484 S.E.2d

232 (1997).

A. The Majority Rule

Our Court has recognized that “a majority of jurisdictions permit the sale

price of foreclosed property to be challenged in a deficiency judgment proceeding[.]”

Fayette Cnty. Nat’l Bank v. Lilly, 199 W.Va. at 356, 484 S.E.2d at 239. Whether by

judicial decision or by statute,11 the majority view “afford[s] the deficiency defendant the

right to insist that the greater of the fair market value of the real estate or the foreclosure

11

Statutes that define the deficiency as the difference between the mortgage

obligation and the “fair value” of the foreclosed real estate include the following: Ariz.

Rev. Stat. § 33-814 (“fair market value” as of the date of sale); West’s Ann. Cal. Code

Civ. Proc. §§ 580a (“fair market value” as of date of sale in power of sale foreclosure),

726(b) (“fair value” as of sale date in judicial foreclosure); Colo. Rev. Stat. Ann. § 38-38­

106 (“fair market value”); Conn. Gen. Stat. Ann. § 49-14(a) (“actual value” as of date

title vested in mortgagee in strict foreclosure); Ga. Code Ann. § 44-14-161 (“true market

value” as of sale date); Idaho Code § 6-108 (“reasonable value”); Kan. Stat. Ann. § 60­

2415 (“fair value”); Me. Rev. Stat. Ann. tit. 14, § 6324 (“fair market value” at time of

sale); Mich. Comp. Laws Ann. § 600.3280 (“true value” at time of sale); Minn. Stat. Ann.

§ 582.30, subd. 5(a) (“fair market value”); Neb. Rev. Stat. § 76-1013 (“fair market value”

as of sale date); Nev. Rev. Stat. §§ 40.455-40.457 (“fair market value” as of sale date);

N.J. Rev. Stat. § 2A:50-3 (“fair market value”); N.Y. Real Prop. Acts. § 1371 (“fair and

reasonable market value” as of sale date); N.C. Gen. Stat. § 45-21.36 (“true value” as of

sale date); N.D. Cent. Code §§ 32-19-06, 32-19-06.1 (“fair value”); Okla. Stat. Ann. tit.

12, § 686 (“fair and reasonable market value” as of sale date); Pa. Stat. Ann. tit. 42, §

8103 (“fair market value”); S.C. Code Ann. § 29-3-700 et seq. (“true value”); S.D.

Codified Laws Ann. § 21-47-16 (“fair and reasonable value”); Tex. Prop. Code Ann. §

51.003 (“fair market value” as of sale date); Utah Code Ann. § 57-1-32 (“fair market

value”); Wash. Rev. Code Ann. § 61.12.060 (“fair value”); Wis. Stat. Ann. § 846.165

(“fair value”).

8

sale price be used in calculating the deficiency.” Restatement (Third) of Property:

Mortgages, § 8.4 cmt. a (1997).

In one such judicial decision, the Montana Supreme Court determined that

its real property foreclosure statute was silent on whether the fair market value of the

property could be raised in a deficiency judgment proceeding. Because the statute was

silent, the court used its inherent equitable powers to require that the fair market value of

the foreclosed property be determined and form the basis of any deficiency judgment

award. See Trustees of the Wash.-Idaho-Mont.-Carpenters-Emp’r Ret. Trust Fund v.

Galleria P’ship, 239 Mont. 250, 265, 780 P.2d 608, 617 (1989) (“Courts sitting in equity

are empowered to determine all the questions involved in the case and to do complete

justice; this includes the power to fashion an equitable remedy. . . . In the exercise of our

equity jurisdiction, therefore, we deem it proper to remand to the District Court to

determine the fair market value of the property[.]”).

A number of other states have also adopted the majority rule through

judicial decision. See, e.g., First Union Nat’l Bank of Fla. v. Goodwin Beach P’ship, 644

So. 2d 1361 (Fla.Dist.Ct.App. 1994) (In Florida, a party seeking deficiency judgment

must present competent evidence that the mortgage indebtedness exceeds the fair market

value of the property.); Shutze v. Credithrift of Am., 607 So. 2d 55, 65 (Miss. 1992) (In

Mississippi, in a deficiency proceeding, the mortgagee “must give the debtor fair credit

for the commercially reasonable value of the collateral.”); and Licursi v. Sweeney, 594

9

A.2d 396, 398 (Vt. 1991) (Vermont requires that the value of the foreclosed real estate be

applied to the mortgage obligation.).

The Restatement (Third) of Property: Mortgages, § 8.4 cmt. a (1997),

agrees with the majority rule and has adopted the

widely held view that when the foreclosure process does not

fully satisfy the mortgage obligation, the mortgagee may

obtain a deficiency judgment against any person who is

personally liable on that obligation. Thus, this section rejects

the approach of those states that prohibit a deficiency

judgment after foreclosure of a purchase money mortgage, or

that prohibit deficiency judgments after a foreclosure by

power of sale. On the other hand, it also rejects the traditional

view that the amount realized at the foreclosure sale is

automatically applied to the mortgage obligation and that the

mortgagee is entitled to a judgment for the balance. Instead, it

adopts the position of the substantial number of states

that, by legislation or judicial decision, afford the

deficiency defendant the right to insist that the greater of

the fair market value of the real estate or the foreclosure

sale price be used in calculating the deficiency. This

approach enables the mortgagee to be made whole where the

mortgaged real estate is insufficient to satisfy the mortgage

obligation, but at the same time protects against the

mortgagee purchasing the property at a deflated price,

obtaining a deficiency judgment and, by reselling the real

estate at a profit, achieving a recovery that exceeds the

obligation. Thus, it is aimed primarily at preventing the unjust

enrichment of the mortgagee. This section also protects the

mortgagor from the harsh consequences of suffering both the

loss of the real estate and the burden of a deficiency judgment

that does not fairly recognize the value of that real estate.

(Emphasis added.) Based on its view that a deficiency defendant has the right to insist

that the fair market value of the real estate be used in calculating the deficiency, section

8.4 of the Restatement provides:

10

(a) If the foreclosure sale price is less than the unpaid balance

of the mortgage obligation, an action may be brought to

recover a deficiency judgment against any person who is

personally liable on the mortgage obligation in accordance

with the provisions of this section.

(b) Subject to Subsections (c) and (d) of this section, the

deficiency judgment is for the amount by which the mortgage

obligation exceeds the foreclosure sale price.

(c) Any person against whom such a recovery is sought

may request in the proceeding in which the action for a

deficiency is pending a determination of the fair market

value of the real estate as of the date of the foreclosure

sale.

(d) If it is determined that the fair market value is greater than

the foreclosure sale price, 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 liens on the real estate that were not

extinguished by the foreclosure, exceeds the sale price.

(Emphasis added.)

One final note on section 8.4 of the Restatement—it requires a defendant in

a deficiency proceeding to request that a fair market value determination be made: “The

fair market value determination of this section is not self-executing. Unless the

deficiency defendant affirmatively requests such a determination, the foreclosure sale

11

price, rather than the property’s fair market value, will be used to compute the

deficiency.” supra at § 8.4 cmt. b.12

B. West Virginia Rule

In West Virginia, the Legislature has provided for two types of real

property foreclosure sales: judicial sales13 and trustee sales. The present issue concerns a

trustee foreclosure sale, which is set forth in W.Va. Code § 38-1-3 [1923]. It provides:

The trustee in any trust deed given as security shall, whenever

required by any creditor secured or any surety indemnified by

the deed, or the assignee or personal representative of any

such creditor or surety, after the debt due to such creditor or

for which such surety may be liable shall have become

payable and default shall have been made in the payment

thereof, or any part thereof, by the grantor or other person

owing such debt, and if all other conditions precedent to sale

by the trustee, as expressed in the trust deed, shall have

happened, sell the property conveyed by the deed, or so much

thereof as may be necessary, at public auction, having first

given notice of such sale as prescribed in the following

section.

12

In many jurisdictions, the court must conduct a hearing as to value and apply the

“fair value” amount in computing a deficiency even though the deficiency defendant fails

to request it. See, e.g., Idaho Code Ann. § 6-108; Neb. Rev. Stat. § 76-1013; Nev. Rev.

Stat. § 40.457; Okla. Stat. Ann. tit. 12, § 686; Pa. Stat. Ann. tit. 42, § 8103. Other states

place the burden on the deficiency defendant to raise the “fair value” defense. See, e.g.,

Kan. Stat. Ann. § 60-2415; Me. Rev. Stat. Ann. tit. 14, § 6324; Mich. Comp. Laws Ann.

§ 600.3280; N.C. Gen. Stat. § 45-21.36; N.J. Rev. Stat. § 2A:50-3; and Tex. Prop. Code

Ann. § 51.003.

13

The statutory provisions for judicial sales are found in W.Va. Code § 55-12-1 et

seq. [1994].

12

The issue of whether the value of foreclosed real property may be challenged in a

deficiency judgment lawsuit is not addressed by our trustee foreclosure sale statutes—

W.Va. Code § 38-1-3 neither permits nor forbids such a challenge.14

This Court has previously considered whether the value of foreclosed real

property may be challenged in a deficiency judgment lawsuit. In Lilly, supra, a divorcing

couple defaulted on a promissory note that was secured by a deed of trust. The holder of

the note, a bank, purchased the property at a trustee’s sale and then sued the grantors of

the note to recover a deficiency judgment for the balance of the amount due under the

note. The grantors contended, however, that the deficiency judgment sought should be

offset by the fair market value of the property securing the loan, which, they claimed, had

been sold for less than its true value. The Court rejected this argument, concluding that

the subject sale had complied with W.Va. Code § 38-1-3, and reasoned that

[u]nder the current real property foreclosure scheme there is a

conclusive presumption that, at the point of a deficiency

judgment proceeding, the property sold was sold for a fair

market value. The Lillys [grantors] now seek to have this

Court redefine that presumption so that it becomes rebuttable.

This we refuse to do.

Lilly, 199 W. Va. at 357, 484 S.E.2d at 240.

14

In Syllabus Point 2 of Dennison v. Jack, 172 W.Va. 147, 304 S.E.2d 300 (1983),

this Court held, “[t]he provisions of W.Va. Code, ch. 38, art. 1, which permit, pursuant to

the terms of a trust deed, a public sale of property by a trustee upon the default of the

grantor of the trust deed, do not violate the public policy of this State.”

13

The Court in Lilly acknowledged that a “majority of jurisdictions permit the

sale price of foreclosed property to be challenged in a deficiency judgment proceeding,”

and that “our cases have applied common law principles of equity to permit an action to

set aside a foreclosure sale.” 199 W.Va. at 356-57, 484 S.E.2d at 239-40. Despite its

recognition that this Court had previously applied common law principles of equity in

cases involving trustee foreclosure sales, the Court in Lilly refused to allow the deficiency

defendant to assert that the foreclosed real property was sold for less than its fair market

value.

Lilly offered two main reasons for declining to follow the majority of

jurisdictions that permit the sale price of foreclosed real property to be challenged: (1)

West Virginia’s “trustee foreclosure laws would be unsettled were we to allow grantors

to challenge the value of real property at a deficiency judgment proceeding,” 199 W.Va.

at 357, 484 S.E.2d at 240; and (2) the Legislature has addressed the issue in the area of

consumer goods, therefore, it is up to the Legislature to address the issue in the context of

a trustee’s foreclosure sale of real property. 199 W.Va. at 357-58, 484 S.E.2d at 240-41.

Based on this reasoning, the Court held, “A grantor may not assert, as a defense in a

deficiency judgment proceeding, that the fair market value of real property was not

obtained at a trustee foreclosure sale.” Syllabus Point 4, Lilly.

The issue raised in the present case requires us to revisit our holding in

Lilly. In Syllabus Point 2 of Dailey v. Bechtel Corp., 157 W.Va. 1023, 207 S.E.2d 169

(1974), we held that “[a]n appellate court should not overrule a previous decision recently

14

rendered without evidence of changing conditions or serious judicial error in

interpretation sufficient to compel deviation from the basic policy of the doctrine of stare

decisis, which is to promote certainty, stability, and uniformity in the law.” This Court

has also observed that “uniformity and predictability are important in the formulation and

application of our rules of property. Under the doctrine of stare decisis, a rule of property

long acquiesced in should not be overthrown except for compelling reasons of public

policy or the imperative demands of justice.” Faith United Methodist Church and

Cemetery of Terra Alta v. Morgan, 231 W.Va. 423, 437, 745 S.E.2d 461, 475 (2013)

(internal citation and quotation omitted). Similarly, this Court has stated:

No prior decision is to be reversed without good and

sufficient cause; yet the rule is not in any sense ironclad, and

the future and permanent good to the public is to be

considered, rather than any particular case or interest. Even if

the decision affects real-estate interests and titles, there may

be cases where it is plainly the duty of the court to interfere

and overrule a bad decision. Precedent should not have an

overwhelming or despotic influence in shaping legal

decisions. No elementary or well-settled principle of law can

be violated by any decision or any length of time. The benefit

to the public in the future is of greater moment than any

incorrect decision in the past. Where vital and important

public and private rights are concerned, and the decisions

regarding them are to have a direct and permanent influence

in all future time, it becomes the duty as well as the right of

the court to consider them carefully, and to allow no previous

error to continue, if it can be corrected. The reason that the

rule of stare decisis was promulgated was on the ground of

public policy, and it would be an egregious mistake to allow

more harm than good to accrue from it. Much, not only of

legislation, but of judicial decision, is based upon the broad

ground of public policy, and this latter must not be lost sight

of.

15

Adkins v. St. Francis Hosp., 149 W.Va. 705, 719, 143 S.E.2d 154, 163 (1965) (internal

citation and quotation omitted).

With these considerations in mind, we find “good and sufficient cause” to

depart from the Court’s holding in Syllabus Point 4 of Lilly, which denies a grantor the

right to assert, as a defense in a deficiency judgment proceeding, that the fair market

value of real property was not obtained at a trustee foreclosure sale. We conclude that

the better and more legally sound approach is to follow section 8.4 of the Restatement, as

well as the majority of other states, and allow a defendant to assert, as a defense in a

deficiency judgment proceeding, that the fair market value of real property was not

obtained at a trustee foreclosure sale. We arrive at this conclusion for the following

reasons.

First, our trustee foreclosure statutes, including W.Va. Code § 38-1-3,

neither permit nor forbid a trust deed grantor from challenging the value of real property

at a deficiency judgment proceeding. While the statute is silent on this issue, this Court

has previously applied common law principles of equity to permit an action to set aside a

trustee’s foreclosure sale. As the Court noted in Lilly,

merely because the legislature has failed to provide by statute

a mechanism for challenging the value of real property

obtained from a foreclosure sale, does not necessarily mean

that this Court may not resolve the matter. Our trustee sale

statutes do not address the issue of setting aside a foreclosure

sale. But, our cases have applied common law principles of

equity to permit an action to set aside a foreclosure sale.

16

199 W.Va. at 357, 484 S.E.2d at 240. (Emphasis added.)15 We agree with the reasoning

of the Montana Supreme Court who, also faced with a statute that neither permitted nor

forbade such a challenge, used its inherent equitable powers to require that the fair

market value of the foreclosed property be determined and form the basis of any

deficiency judgment award. See Trustees of the Wash.-Idaho-Mont.-Carpenters-Emp’r

Ret. Trust Fund v. Galleria P’ship, supra.

Further, we find that the Court’s ruling in Lilly creates the potential for a

creditor to receive a windfall at the expense of an already financially distressed trust deed

grantor. Under Syllabus Point 4 of Lilly, the holder of the promissory note may purchase

the foreclosed property at a deflated price, receive a deed to the property, and thereafter,

obtain a deficiency judgment which is not subject to a fair market value challenge. Then,

by reselling the real estate at its fair market value, the holder of the promissory note will

achieve a double recovery that far exceeds the amount owed by the trust deed grantor.

This scenario results in the unjust enrichment of the holder of the promissory note and

15

See Syllabus Point 2, Corrothers v. Harris, 23 W.Va. 177 (1883) (“A sale under

a trust-deed will not be set aside unless for weighty reasons.”). See also Syllabus Point

12, Atkinson v. Washington and Jefferson College, 54 W.Va. 32, 46 S.E. 253 (1903) (In

part: “Such sale will not be set aside, on the ground of inadequacy of price . . . [where]

the evidence as to the value of the land does not clearly show that the price for which it

sold is so inadequate as to shock the conscience[.]”).

17

forces the trust deed grantor to suffer both the loss of their real estate and the burden of a

deficiency judgment that does not fairly recognize the value of that real estate.16

Next, we find no authority or data demonstrating that our trustee

foreclosure laws would be unsettled were we to allow a trust deed grantor to challenge

the value of real property at a deficiency judgment proceeding. A majority of states

16

The Missouri Supreme Court considered this issue and, like Lilly, followed the

minority rule that does not permit a deficiency defendant to assert a fair market value

challenge following a foreclosure sale. Missouri Chief Justice Richard B. Teitelman

dissented to the court’s ruling and discussed why denying a deficiency defendant the

opportunity to present a fair market value challenge is inconsistent with the general

purpose underlying a damage award:

The purpose of a damage award is to make the injured

party whole without creating a windfall. Accordingly, in

nearly every context in which a party sustains damage to or

the loss of a property or business interest, Missouri law

measures damages by reference to fair market value. Yet in

the foreclosure context, Missouri law ignores the fair market

value of the foreclosed property and, instead, measures the

lender’s damages with reference to the foreclosure sale price.

Rather than making the injured party whole, this anomaly in

the law of damages, in many cases, will require the defaulting

party to subsidize a substantial windfall to the lender. Aside

from the fact that this anomaly long has been a part of

Missouri law, there is no other compelling reason for

continued adherence to a measure of damages that too often

enriches one party at the expense of another. Consequently, I

would hold that damages in a deficiency action should be

measured by reference to the fair market value of the

foreclosed property.

First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216, 224-25 (Mo., 2012) (C.J.

Teitelman, dissenting).

18

allow grantors to challenge the value of real property at a deficiency judgment

proceeding. We have found no authority suggesting that the states that follow the

majority rule suffer from unsettled foreclosure laws, nor have we found any data

demonstrating that the banking institutions in those states have been negatively affected

as a result of their jurisdictions adhering to the majority rule.17

Additionally, Lilly noted that the Legislature has addressed a debtor’s right

to challenge the sale price of consumer goods in a deficiency judgment proceeding. In

17

In response to a bank’s argument that allowing a defendant to present a fair

market value challenge in a deficiency judgment proceeding could negatively affect

banking institutions, one court noted:

First Bank argues that changing to the fair market

value approach will place all the risk in the foreclosure

process onto the lender. This argument is not persuasive. By

focusing only on the foreclosure process, First Bank deflects

consideration of the risk management techniques available to

lenders when the loan is made. A lender compensates for risk

by charging an interest rate that is set both by the financial

markets and by the lender’s assessment of the borrower’s

creditworthiness. The lender also manages risk by appraising

the fair market value of the property to ensure that the loan is

adequately secured. Changing to a fair market value approach

certainly would lessen the lender’s chance of a large windfall

and would mean only that First Bank, like the borrower, is

losing or gaining money based on fair market value of

property. The risk of loss is part of the risk of lending. That

risk of loss should not be borne solely by the borrower and

then amplified by measuring the deficiency by reference to

the foreclosure sale price.

First Bank, 364 S.W.3d at 228 fn. 5 (C.J. Teitelman, dissenting).

19

Syllabus Point 4 of Bank of Chapmanville v. Workman, 185 W.Va. 161, 406 S.E.2d 58

(1991), the Court held:

When a secured creditor is found to have sold

collateral in a commercially unreasonable manner, the fair

market value of the collateral is rebuttably presumed to be

equal to the amount of the remaining debt; to recover a

deficiency, the secured creditor must prove that the debt

exceeded the fair market value of the collateral.

The Court in Lilly stated that “[o]ur holding in syllabus point 4 of Bank of Chapmanville

was premised upon the statutory right of a debtor to challenge the sale price of goods at a

deficiency judgment proceeding.” 199 W.Va. at 358, 484 S.E.2d at 241. The Court then

concluded in Lilly that because the Legislature addressed the issue in the area of

consumer goods, it is up to the Legislature, and not the Court, to address whether a trust

deed grantor may challenge the sale price of real property in a deficiency judgment

proceeding following a trustee’s foreclosure sale. We disagree.

The fact that the Legislature has addressed (and permitted) a debtor to

challenge the sale price of consumer goods in a deficiency judgment proceeding does not

vest the Legislature with the sole authority to permit a trust deed grantor to undertake a

similar challenge following a trustee’s foreclosure sale of real property. The Legislature’s

silence on the issue does not foreclose this Court from applying our common law

principles of equity and fairness to allow a grantor to challenge the sale price of real

property following a trustee’s foreclosure sale. Indeed, this Court recognized in Lilly that

“our cases have applied common law principles of equity to permit an action to set aside

a foreclosure sale[.]” 199 W.Va. at 357, 484 S.E.2d at 240. The Restatement also

20

concludes that a court may apply common law principles of equity to allow a defendant

to assert a fair market value challenge in a deficiency judgment proceeding. See

Restatement, supra § 8.4 cmt. a.

Further, under the Court’s holding in Lilly, a defendant may not assert a fair

market value challenge following a trustee’s foreclosure sale of real property. However,

under the Court’s ruling in Bank of Chapmanville, a defendant may assert a fair market

value challenge in a deficiency judgment proceeding following a foreclosure sale

involving a mobile home.18 We find no justification for this result and find that it

produces an absurdity: a mobile home owning defendant may present a fair market value

challenge in a deficiency proceeding, but a real property owning defendant may not. This

peculiar juxtaposition illustrates why we feel compelled to depart from the Court’s

holding in Syllabus Point 4 of Lilly.

Based on all of the foregoing, we now hold that a trust deed grantor may

assert, as a defense in a lawsuit seeking a deficiency judgment, that the fair market value

of the secured real property was not obtained at a trust deed foreclosure sale. In view of

this holding, Syllabus Point 4 of Fayette County National Bank v. Lilly, 199 W.Va. 349,

484 S.E.2d 232 (1997) is overruled. Additionally, we hold that a fair market value

determination in a lawsuit seeking a deficiency judgment following a trust deed

18

“A mobile home that a person uses as a private residence is a ‘consumer good.’”

Bank of Chapmanville, 185 W.Va. at 168, 406 S.E.2d at 65.

21

foreclosure sale must be asserted by the deficiency defendant. Unless the deficiency

defendant requests such a determination, the foreclosure sale price, rather than the

property’s fair market value, will be used to compute the deficiency. Finally, we hold

that if a circuit court in a lawsuit seeking a deficiency judgment following a trust deed

foreclosure sale determines that the fair market value of the foreclosed property is greater

than the foreclosure sale price, the deficiency defendant is entitled to an offset against the

deficiency in the amount by which the fair market value, less the amount of any liens on

the real estate that were not extinguished by the foreclosure, exceeds the sale price.

Our ruling herein is consistent with the majority view of other jurisdictions,

with section 8.4 of the Restatement, and with prior decisions from this Court that have

applied common law principles of equity to permit an action to set aside a real property

foreclosure sale. Our ruling will also prevent a creditor from receiving a windfall and

being unjustly enriched at the expense of an already financially distressed grantor. In

sum, we are on solid legal ground revisiting and overruling Syllabus Point 4 of Lilly.19

Applying this holding to the present case, we find that Mr. and Mrs.

Sostaric may assert, as a defense, that the amount of the deficiency judgment awarded

was too high and that it should be adjusted to reflect the fair market value of the subject

19

The Court in Lilly also held that “a circuit court’s order granting summary

judgment must set out factual findings sufficient to permit meaningful appellate review.”

Syllabus Point 3, in part. This holding remains good law.

22

property. If the circuit court determines that the fair market value of the property is

greater than the foreclosure sale price, Mr. and Mrs. Sostaric are entitled to an offset

against the deficiency in the amount by which the fair market value, less the amount of

any liens on the real estate that were not extinguished by the foreclosure, exceeds the sale

price.20

IV.

CONCLUSION

The circuit court’s January 16, 2014, summary judgment order is reversed

and this case is remanded for further proceedings consistent with this Opinion.

Reversed and Remanded.

20

Upon remand, the circuit court’s order must set forth a detailed calculation

describing how it arrives at any deficiency judgment award. See Syllabus Point 3, Lilly,

supra.

23