Recently, in In re Ballard, the North Carolina Court of Appeals issued an opinion that provides a blueprint for a lender to pocket a cash recovery if it is outbid at a foreclosure sale but the high bidder subsequently defaults on its bid. If a foreclosure goes to resale because a high bidder defaults, a lender can reduce its original bid by the high bidder’s deposit and then recover those funds from the Clerk of Superior Court. In other words, the lender can acquire the property for less money (and less credit on the secured debt) and recover cash in the process.
A foreclosure sale is a public event in which anyone can bid on the property being foreclosed. Usually the trustee conducting the foreclosure is the only person who attends the sale and, upon instructions from the lender, he places a credit bid for the lender. But sometimes the borrower, an associate of the borrower, or some other third party will out-bid the lender, either on the courthouse steps or by filing a higher "upset bid" during the 10-day period that follows the public sale. While a lender exercising its foreclosure rights may submit a credit bid, any other high bidder must secure its bid with a cash deposit equal to 5% of the bid. The high bidder then typically has 30 days to pay the balance of the purchase price to the trustee.
If the third-party bidder fails to close on the purchase, the trustee may move the Clerk of Superior Court to allow a resale of the property. North Carolina law imposes liability on a defaulting high bidder to the extent of the total if the amount of the final sale price is less than the high bidder's original bid plus all costs of resale. The 5% deposit secures payment of this amount.
In Ballard, the lender appointed a substitute trustee to commence a foreclosure. At the sale, the lender bid $424,263.20. Like a contestant on “The Price is Right,” an entity called Abtos, LLC outbid the lender by one dollar with a winning bid of $424,264.20. Abtos deposited $21,213.21 (5% of its high bid) with the Clerk of Superior Court.
Unfortunately for Abtos, it could not come up with the balance of the funds and after several months, the Clerk of Superior Court ordered a resale.
At the second sale, the lender placed the winning bid of $400,300. You need not be a Nobel laureate in math to recognize that the lender calculated its bid based on its original bid less Abtos’s bid deposit and the costs of resale. Abtos moved to recover its bid deposit, but the Clerk of Superior Court ordered the bid deposit disbursed to the lender. After all, the final sale price of $400,300 was $24,264.20 less than Abtos’s winning bid.
On appeal, Abtos argued that the lender had to bid the same amount as it did at the original sale. The opinion does not share many details, but one can suspect that Abtos argued that it wasn’t fair for the lender to discount its bid and that it did so solely to punish Abtos and take its deposit. Whatever the basis for the argument, the Court of Appeals found no support for having to bid the same amount in both sales. The Court stated that “given the vagaries of the real estate market, it would indeed seem strange to bind a party to the amount of its opening bid in a previous sale.”
In summary, the Ballard decision holds that a lender is not bound by its original bid. Upon a resale, the lender can calculate its second bid based on its original bid less the bid deposit and costs of resale. If it becomes the winning bidder at that amount, it can then recover the defaulting bidder’s deposit from the court as damages.
Ward and Smith's Creditors' Rights Practice Group is available to provide you with additional information about foreclosure strategies, and answer questions you have about Ballard and how it may affect you.
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