Commercial property foreclosures are sometimes high stakes for the loan guarantor(s). Often, the guarantor is the person from whom the lender seeks to recover their foreclosure losses. Thus, a good defense strategy is paramount to protecting the guarantor from major loss. Sometimes, banks inflate these losses in order to recover more money from the guarantor. For example, if a lender forecloses on a commercial property that had been secured by a $1 million loan and acquires the property for a credit bid of $600,000 at the sale, the lender would typically have a valid deficiency claim for $400,000 against the borrower and any guarantors. 

Let’s suppose that the borrower is no longer recoverable. The lender is likely to sue the guarantor for the $400,000 deficiency. Yet, what if the guarantor, in his/her defense, can assert that the property is actually worth $1 million? What if the bank, from its own appraisal, knows that the property is worth $1 million—but hides that information?

These facts are essential to the guarantor’s defense strategy.

In situations where the lender is the foreclosure sale purchaser, the guarantor may defeat or reduce the deficiency claim by showing that the fair market value of the property is equal to the outstanding debt at the time of the sale, or by demonstrating that the foreclosure sale price is substantially less than the property’s fair market value. Instances where selling the property for market value would have generated a surplus rather than a deficiency gives rise to another defense strategy for the guarantor: filing a counterclaim for unjust enrichment against the lender.

The discovery process plays a key role in the guarantor’s defense. Copies of the lender's appraisals (which the lender may wrongly attempt to characterize as “work product”) and bid strategy can be leveraged against the lender in the action.  Guarantors can also employ their own expert appraisers to show evidence of value or to discredit the lender's appraiser and pressure the lender to settle for much less money than it initially sought in its deficiency claim. 

The commercial litigation department at Drew Cooper & Anding recently handled a case where discovery revealed three bank appraisals. The bank, however, only used the lowest appraisal value so it could seek the highest amount of deficiency against our client, the defendant. Through discovery of the three appraisals, and through a forensic appraisal conducted by an expert witness, we were able to devalue the bank’s deficiency claim. The end result was a settlement valued at much less than the bank originally sought.

Commercial loan guarantors have a great deal at stake in deficiency litigation. In order to minimize losses, it is essential to build a diligent, robust defense.  If you are involved in such a lawsuit, be sure to ask your attorney about the discovery, market value and counterclaim strategies discussed in this article.