National Canada Corp. v. Dikeou

Decision Date29 July 1993
Docket NumberNo. 92CA0029,92CA0029
PartiesNATIONAL CANADA CORPORATION, a Delaware corporation, f/k/a MBC Financial Services Corporation, Plaintiff-Appellee and Cross-Appellant, v. John P. DIKEOU, George P. Dikeou, the Panayes John Dikeou Trust, and the Devon Anne Dikeou Trust, Defendants-Appellants and Cross-Appellees. . V
CourtColorado Court of Appeals

Kirkland & Ellis, Andrew J. Petrie, Cris D. Campbell, Denver, for plaintiff-appellee and cross-appellant.

Gueck & Mohney, P.C., Jay L. Gueck, Dallas, TX, for defendants-appellants and cross-appellees.

Opinion by Judge DAVIDSON.

In an action for a deficiency judgment, defendants, John P. and George P. Dikeou, the Panayes John Dikeou Trust, and the Devon Anne Dikeou Trust, appeal from the judgment entered on a jury verdict in favor of plaintiff, National Canada Corporation (NCC), and NCC cross-appeals. We affirm in part and reverse in part.

The following facts are undisputed. This claim arose as a result of defendants' default on promissory notes for $9,000,000 executed by defendants to NCC, which notes were secured by deeds of trust on four parcels of real estate. NCC, in deciding to foreclose on the properties pursuant to a power of sale, retained the company KPMG Peat Marwick (Marwick) to provide independent appraisals on the properties. On the basis of these appraisals, which totaled approximately $6,400,000, and after making certain deductions NCC bid $5,274,320.30 at the foreclosure sale and acquired all four properties. Defendants did not exercise their right of redemption.

Thereafter, NCC brought this suit to obtain a personal judgment against defendants on the notes. In its complaint, NCC alleged that the debt, including principal and interest, totaled $10,471,658.46 and sought to recover a $5,905,243.33 deficiency on the defaulted loan.

In their answer, as relevant here, defendants asserted that NCC was not entitled to the full $5,905,243.33 deficiency because NCC had purchased the properties through bids that were so far below the properties' fair market value as to be unconscionable.

After trial, at which the parties presented conflicting evidence as to the fair market values of the properties at the time of foreclosure, the jury returned a $2,750,000 verdict for NCC.

I.

Defendants assert several contentions of error regarding the trial court's instruction on unconscionably low bids. We perceive no reversible error.

The instruction at issue states:

It is an affirmative defense to an action for recovery of a deficiency after a foreclosure sale that the amount bid by the creditor at the foreclosure sale was so low as to shock the conscience of the jury.

In this connection you are instructed that a lender has no obligation to bid the fair market value at a foreclosure sale. However, as stated above, if the price bid is so low as to be shocking to one's reasonable sense of basic fairness, then the jury may take this into account in determining the amount of deficiency, if any, to be awarded the lender.

A.

In giving this instruction, the trial court refused a related instruction tendered by defendants which stated that plaintiff had the burden of proving that it had bid the fair market value. On appeal, defendants, relying solely on Moreland v. Marwich, Ltd., 629 P.2d 1095 (Colo.App.1981), rev'd on other grounds, 665 P.2d 613 (Colo.1983), argue that, if NCC was to be entitled to any deficiency whatsoever, as part of its case-in-chief, it was required to prove generally that its bid was fair and proper and more specifically that it bid the fair market value. Thus, they contend that the trial court erred by giving this instruction erroneously placing the burden on defendants to prove that NCC's bid was unconscionably low. We disagree.

When, as here, there is a power of sale foreclosure, the sale price of the property determines the amount to be applied upon the debt. If, after such application, there remains a balance, the creditor may sue for that deficiency in an action at law. See G. Nelson, Real Estate Finance Law § 8.1 (1985); United Bank v. One Center Joint Venture, 773 P.2d 637 (Colo.App.1989).

Generally, that price for which the property sold at the foreclosure sale is the conclusive measure of the deficiency. United Bank v. One Center Joint Venture, supra; see Duke v. Daniels, 660 S.W.2d 793 (Tenn.App.1983) (presumption that the sale price at a public auction is fair).

However, the defendant may challenge the deficiency amount by asserting an affirmative defense that the sale was "not conducted in good faith or in a strictly fair manner." United Bank v. One Center Joint Venture, supra, at 640. The burden is on defendant to prove that defense. Gale v. Rice, 636 P.2d 1280, 1282 (Colo.App.1981) (in an action to collect a deficiency on a judgment, burden was on defendant to show that "plaintiff's actions were deliberately undertaken to subject him to a large deficiency"); see Duke v. Daniels, supra (to overcome presumption that sale price is fair, burden is on defendant to show gross inadequacy); see also Illini Federal Savings & Loan Ass'n v. Doering, 162 Ill.App.3d 768, 114 Ill.Dec. 454, 516 N.E.2d 609 (1987); Regional Investment Co. v. Willis, 572 S.W.2d 191 (Mo.App.1978).

Thus, a plaintiff must establish the amount of the debt, the sale price, that the sale price was applied to the debt, and the resulting deficiency. That deficiency is conclusive unless the defendant pleads and proves that the sale was not conducted in a strictly fair manner. United Bank v. One Center Joint Venture, supra; see Duke v. Daniels, supra. If the defendant proves that the sale was unfair, then the amount of deficiency is a question of fact to be determined by the jury. See United Bank v. One Joint Venture, supra; see also Regional Investment Co. v. Willis, supra.

Here, defendants asserted the affirmative defense that NCC's bid was unfair because it was unconscionably low. Defendants, therefore, had the burden to prove the alleged unfairness, see Gale v. Rice, supra, and hence, the trial court did not err by so instructing the jury.

Contrary to defendants' assertion, Moreland v. Marwich, Ltd., supra, does not require a different conclusion. Specifically, defendants reference the following excerpt from Moreland v. Marwich, Ltd., supra, at 1097:

There is nothing improper in a foreclosing creditor bidding in the amount of its debt. [When] he is not seeking a deficiency judgment, and bids the full amount of the debt, he is not required to bid the fair market value of the property.

Defendants argue that the corollary to this, which was stated in one of their tendered instructions, is that if a foreclosing creditor is seeking a deficiency judgment, then it must prove that it bid the fair market value. We disagree.

In Moreland, a creditor, and thereafter a junior lienor through its right of redemption, acquired certain property at the foreclosure sale for approximately $20,000. The stipulated fair market value was $100,000. The debtor, in an action seeking additional time to redeem from the foreclosure sale, alleged that its right to due process was violated in the C.R.C.P. 120 hearing. The trial court agreed, set aside the junior lienor's redemption and the sale on which it was based, and extended the time for debtor's cure or redemption.

On appeal, this court reversed. The supreme court, deciding that the trial court had acted within its discretion, reinstated the trial court's judgment. Moreland v. Marwich, Ltd., 665 P.2d 613 (Colo.1983).

As pertinent here, the debtor also had asserted that the sale price was grossly and unconscionably below the fair market price. The supreme court held that the $80,000 disparity was not controlling, but merely was "an appropriate factor to consider in determining whether an [extension] period should be allowed for equitable reasons." Moreland v. Marwich, Ltd., 665 P.2d 613, 619 (Colo.1983).

In this light, we interpret the excerpt referenced by defendants to mean that if the foreclosing creditor bids neither the fair market value nor the debt or is seeking a deficiency judgment, these are additional factors relevant to a defendant's defense, but are not determinative standing alone. See Davis Manufacturing & Supply Co. v. Coonskin Properties, 646 P.2d 940 (Colo.App.1982); cf. Hawthorne v. Assured Premiums Corp., 472 P.2d 715 (Colo.App.1970) (not selected for official publication).

Similarly, we conclude that, in a deficiency action, a creditor is not required to prove that it bid fair market value, but its failure to so bid, together with other factors, may be evidence of defendant's claim of unfairness. See United Bank v. One Center Joint Venture, supra.

B.

Defendants rely on Chew v. Acacia Mutual Life Insurance Co., 165 Colo. 43, 437 P.2d 339 (1968), and United Bank v. One Center Joint Venture, supra, to assert next that the trial court erred by failing to instruct the jury that it could refuse to award any deficiency if it found the bid to be unconscionably low. We disagree.

As is pertinent here, in Chew, the debtor sought to have the court, in equity, set aside a foreclosure sale and the resulting entry of deficiency judgment. On evidence that, before bidding, the creditor had investigated the debtors' financial condition specifically to determine that it could successfully collect a substantially large deficiency from debtors, our supreme court found that the creditor's bid was not made in good faith and, thus, that the debtors were entitled to have the sale set aside and a new sale conducted.

Here, however, the action is at law for recovery of damages. And, it is the jury's function to determine what damages were incurred. Accordingly, the trial court properly instructed the jury to award NCC its claimed damages or, if it found the bids to be unconscionably low, to determine the actual damages, if any, incurred by NCC.

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