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Court rules that loan guarantor may use defense previously reserved for debtor

court houseThe N.C. Court of Appeals has taken a different tack in a recent holding that a guarantor may be entitled to a statutory defense in a deficiency action that previous opinions had held was available only to those with a property interest.

The appeals court cited a 1938 state Supreme Court ruling in its decision, while recognizing that it runs counter to previous appeals court decisions that it said seemed to support the plaintiff bank’s position.

In Branch Banking & Trust Co. v. Smith, appellant Mounib “Michael” Aoun was one of eight defendants who had entered into guaranty agreements with BB&T on a $1.675 million loan to Garrett Enterprise LLC for a real estate project in Durham.

The2008 loan, secured by the property, was in default by 2012, with more than $1.4 million outstanding. After foreclosing on the property, the bank bought it back at the foreclosure sale for $800,000, leaving a loan deficiency of about $700,000.

After the foreclosure sale, BB&T brought suit against the LLC – claims it eventually dismissed without prejudice – and all eight guarantors. The matter was heard in Wake County Superior Court, which granted the bank summary judgment against all eight defendants, including a $502,309.52 judgment against Aoun.

Aoun appealed, arguing that summary judgment was inappropriate because there was an issue of fact, per N.C. General Statute Section 45-21.36, regarding his entitlement to a defense, or at least an offset, available when the foreclosing creditor purchases a property for less than it is worth and sues for the deficiency.

According to court documents, a BB&T officer confirmed in an email that just months before the foreclosure sale, the property had been appraised at more than $2.1 million.

“There was ample evidence in this case that the value of the collateral property was significantly greater than the foreclosure sale price of $800,000,” said Aoun’s attorney, Clay Hodges of Harris Sarratt & Hodges in Raleigh.

Hodges added that the trial court now has to assess the actual fair-market value of the property.

In its argument that Aoun was not entitled to the statutory defense, BB&T cited statutory language that specifies its availability to “the mortgagor, trustor or other maker of any such obligation whose property has been so purchased [at foreclosure by the creditor].”

The court conceded that there were several appeals court cases that bolstered BB&T’s argument that the protection in General Statute 45-21.36 was intended for “persons who hold a property interest in the mortgaged property.”

But Judge Chris Dillon, writing for the court, said the court was compelled by the Supreme Court’s ruling in Virginia Trust Company v. Dunlop that a guarantor had a right to “present the facts” concerning the statutory defense at trial.

“[i]t is not, of course, for us to say whether the defendants can make good the allegations of their further defense: We only say that at this stage of the case we do not deny their right to make it,” the court wrote in Dunlop.

“We are bound by this holding until our Supreme Court speaks on this issue and renders a holding contrary to that in Dunlop, notwithstanding holdings by this Court which may appear to conflict with Dunlop,” Dillon wrote.

Hodges said he believed the cases on which BB&T relied overlooked the valid law in Dunlop, which he said has “never been overruled or disturbed by a separate decision of the North Carolina Supreme Court.”

As it happens, the issue is currently before the Supreme Court in a case appealed from Guilford County, High Point Bank & Trust Co. v. Highmark Props., LLC.

“I believe the holding in Dunlop should have always been the controlling law in North Carolina with respect to protecting personal guarantors on a bank loan, whether the actual borrower is a party to the case or not,” Hodges said.

The bank further argued that even if the defense was available, Aoun waived the defense under the terms of the guaranty agreement. It cites language that “the undersigned [Appellant] hereby waives the benefits of all provisions of law[.]”

The appeals court, however, found that the bank left out the rest of the clause that limits the waiver’s scope.

“When read in its entirety, the language makes no mention of a waiver of Appellant’s potential G.S. 45-21.36 defense/offset,” Dillon wrote. “Rather, it only purports to waive any obligation by the Bank under law to first pursue its remedies against the Borrower-LLC and the collateral before pursuing Appellant.”

Hodges said he believes the decision provides much-needed clarification regarding the rights of personal guarantors under applicable law.

“And, the decision will lead to more fairness in banking and foreclosures throughout the state,” he said.

HEATH HAMACHER can be reached at 704-817-1359, heath.hamacher@mecktimes.com or follow him on Twitter @NCLWHamacher

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