Protection

Ever wondered about the fair market value of your house, the one which will be foreclosed on because you can’t pay all those law school loans?  As Utah is a deficiency state, the question may be of interest.  In Capital Assets, the Court of Appeals held that fair market value is the same for foreclosure purposes as for accounting – the price at which a willing seller and buyer in an arm’s length negotiation arrive.  That is, subject to any existing encumbrances, which a willing buyer should care about.  Not so controversial one would think.  In Capital Assets, a junior lien-holder foreclosed on a $1.5 million note, taking the property with a $1 million credit bid, and then seeking the remaining $500,000 from the borrowers (deficiency).  Owners said that the demand failed because the unencumbered fair market value exceeded what as owed.  The property was worth about $2 million unencumbered.  (Paragraph 3.)  The deficiency statute allows the lender to go after the amount by which the total of encumbrances (secured debt) exceeds fair market value.  (Paragraph 6.)  The court sees this as a protection for the debtor – a foreclosing lender may not low-bid and collect the difference from the borrower, as the deficiency is just the difference between remaining debt amount and fair market price.  True, but non-deficiency is what would protect the debtor.  Anyway, this protection of the debtor means, in this case, that the debtor owes $500,000 rather than nothing. The lender has the property, albeit subject to a prior lien of over $1 million – which makes the whole transaction interesting: why do the parties think that the property will be worth in excess of $2 million (the break even point)?