Commercial Loans and the Fair Market Credit

COMMERCIAL LOANS AND THE FAIR MARKET CREDIT

By Rick Shulman, Esq., Member of the Firm

            It is not at all uncommon for a small business borrower, and its principals/guarantors, to assume that if they are unable to repay a commercial mortgage loan that the lender’s foreclosure recovery will be limited to whatever the property itself may be sold for at sheriff’s sale or later REO sale.  This understanding is largely based upon the doctrine of “fair market credit,” which provides, in the residential mortgage foreclosure context, that the lender may not pursue a deficiency judgment against the obligors unless the amount of the debt exceeds the fair market value (“FMV”) of the property, irrespective of its actual resale price[1].  Although the statute expressly exempts commercial mortgages from its reach, the New Jersey courts have essentially given business borrowers the same status, by granting them safe harbor FMV protection under “broad equitable concepts,” especially where the property is sold/resold for a nominal price or where the party seeking the FMV credit has otherwise established through evidence that the sale price was “entirely inadequate”.[2]

            Now, however, commercial lenders have some protection with respect to the borrower’s FMV argument.  In Valley National Bank v. Patyrak Realty, L.L.C.[3] defendant borrower and guarantors unsuccessfully argued that a FMV hearing should have been held before a deficiency judgment was entered against them.  The facts submitted on the motion indicated that although defendants had allegedly received offers to purchase the property for between $875,000 and $950,000, and the Bank had received an offer of $700,000-720,000 for its position, a foreclosure sale of the property for $810,000 (net to the Bank being $777,887), did not compel the trial court to conduct a FMV hearing.  Because the property was not sold for nominal value, and the sale price was not “entirely inadequate,” the Appellate Division upheld the trial court, even where the property was for an amount arguably below its FMV.  Under the circumstances, neither the holding of a FMV hearing, nor the imposition of a FMV credit, was required.

            The Patyrak case is also helpful to financiers in two additional respects.  First, it offers valuable guidance to a lender which seeks to enter a judgment on its note in an amount which is greater than the judgment previously entered by the foreclosure court; specifically, that unless the additional sums are of a category which was not included in the foreclosure judgment calculation, or did not accrue until after entry of the foreclosure judgment, they will not be recoverable.  Or, in other words, that the preferable practice is to seek to amend (increase) the foreclosure judgment prior to the property being sold at foreclosure sale.  Lastly, for those lenders who routinely face lender liability, Consumer Fraud Act and/or similar counterclaims in response to their suit on the note and guarantees, the Appellate Division upheld the trial court’s summary dismissal of those claims, on the grounds that the defendants had not presented sufficient competent proof to establish the elements of any of those claims.

            For further information regarding the Fair Market Value Credit, please contact Rick Shulman, Esq., at (201)391-3737 or email at rshulman@pricemeese.com.