Recently the North Carolina Court of Appeals in In re: Ballard (N.C. Ct. App. COA15-475, March 15, 2016) held that a foreclosing lender in North Carolina was not under any duty to bid the same amount at a resale of foreclosed property as it did at the first sale of the same property when the last and highest bidder at the first sale defaulted on his bid. As a result of its lower bid at the resale, the foreclosing lender was entitled to retain the cash deposit made by the defaulting bidder from the prior sale. To more fully understand why this is good news for foreclosing lenders, its best to start with a summary of the foreclosure sales process in North Carolina.
In North Carolina, foreclosure sales are public sales conducted by the trustee in foreclosure and subject to a statutory sales and bid procedure monitored by the clerk of court of the county in which the foreclosed property resides. After obtaining an order from the clerk of court allowing the sale to proceed, and advertising the sale as required by statute, the trustee will then conduct a public sale of the foreclosed property (usually at the courthouse, but in some cases at the foreclosed property).
The trustee's plans for conducting the sale pursuant to North Carolina's statutory requirements will be included in the "Notice of Sale" drafted by the trustee pursuant to N.C.G.S. § 45-21.1A. The "Notice of Sale" will contain all material terms of the sale, including, among other things: (a) the time and place of the sale; (b) the property to be sold; (c) the cash deposit to be paid at the time of sale to purchase the property; and (d) the timeframes for completing full payment of the foreclosure bid amount and closing of the sale of the property. The Notice of Sale will be posted at the courthouse and advertised in the newspaper prior to the sale in order to allow the bidding public time to understand the terms of the sale before making a bid. While the amount of the cash deposit required at the sale can vary, a 5% cash deposit is fairly typical. Foreclosing lenders entering a "credit bid ", i.e. a bid to be paid via offset against the indebtedness owed to the foreclosing lender and secured by the deed of trust being foreclosed upon, are not required to tender any cash deposit at the sale.
Once the sale is conduced and any cash deposit is tendered to the trustee, the sale results are reported to the clerk of court who then holds the sale open for a period of ten days to allow the bidding public to upset any bids tendered at the foreclosure sale. Each upset bid is made to the clerk of court and must contain at least a 5% increase over the prior bid amount (or a $750.00 increase, whichever is greater), and must be accompanied by a cash deposit of at least 5% of the upset bid amount (or $750.00, whichever is higher). The tendering of the cash deposit to the clerk of court for an upset bid starts the ten day upset bid period over again and also acts as a release of the obligations of the prior bidder to purchase the foreclosed property, which allows the cash deposit from the prior bid to be returned to the prior bidder. If a period of ten days expires without any upset bids, then the last and highest bidder from the foreclosure sale or from any upset bids becomes the winning bidder, the sale becomes final, and the winning bidder must complete the purchase the property from the trustee in the manner and within the timeframes specified in the Notice of Sale.
If the last and highest bidder fails to complete the sale of the property, then the winning bidder is deemed to be in default of their bid. Under North Carolina law, when the winning bidder defaults on his bid, the property is to be re-sold using the same foreclosure sales procedures as the original sale (N.C.G.S. § 45-21.30(c)). Also, as a result of the default, the foreclosing lender may be entitled to keep the winning bidder's cash deposit to compensate it for any damages sustained as a result of the resale (N.C.G.S. § 45-21.30(d)). These damages are calculated by taking the amount of the defaulting bid, subtracting the amount the property ultimately sells for at the resale, and including any costs and expenses incurred by the foreclosing lender in having to re-advertise the property. For example, if (a) the last and highest bidder at the first foreclosure sale bids $100,000.00 for the property, (b) tenders a $5,000 cash deposit to the trustee, (c) later defaults on his bid, (d) the lender spends another $1,500.00 in legal expenses and adverting fees to re-sell the property, and (e) the property ultimately sells for $110,000.00, then the lender would not be entitled to keep the $5,000 deposit from the defaulting bidder. This is because the foreclosing lender in this scenario has sustained no damages as ultimate sales amount the lender received for the property ($110,000) exceeded the defaulting bid amount ($100,000) plus the costs and expenses of the resale ($1,500). If, however, we change this scenario to provide that the property ultimately sold for only $90,000, then the lender would be entitled to retain the deposit tendered by the defaulting bidder. This is because the foreclosing lender in this scenario sustained damages of $11,500 (the difference between what the lender would have received if the defaulting bidder had not defaulted on his bid ($10,000), plus the costs and expenses of the resale ($1,500)).
In In re: Ballard the foreclosing lender entered an opening credit bid of $424,263.20. Abtos, LLC entered a higher bid of $424,264.20 at the sale and deposited $21,213.21 (5% of the winning bid) with the clerk of court. When Abtos, LLC ultimately defaulted on its bid, the foreclosure trustee conducted a resale of the property. At the resale the foreclosing lender only bid $400,300.00, and with no other bids it became the last and highest bidder on the property. The foreclosing lender then moved to recover the $21,213.21 cash deposit from the clerk of court from the prior sale since the resale price of $400,300 was at least $21,213.21 less than Abtos' prior winning bid at the first sale. The clerk agreed to turn over the deposit to the foreclosing lender, but Abtos ultimately appealed.
Abtos's argument on appeal was that because North Carolina law requires that the resale of foreclosed property be conducted using the same procedures as were used at the original sale, the foreclosing lender was required to enter the same opening bid amount at the resale as it did at the original sale. The foreclosing lender countered with an argument that the amount of the opining bid is not part of the "procedure" of the resale. The Court of Appeals agreed and stated that because real estate values can fluctuate over time it would make no sense to require that the foreclosing lender enter the same bid at a later sale of the same property. As a result, the foreclosing lender was entitled to retain Abtos's cash deposit from the original sale. This meant that the foreclosing lender ended up retaining both its real estate collateral and $21,213.21 in cash.
In re: Ballard reaffirms that the foreclosing lender at a resale of the property is under no obligation to bid the sale amount at a resale of the property as it did at the original sale. At a subsequent resale of the foreclosed property, if the foreclosed property ultimately sells for less than the winning bid at the original sale, then the foreclosing lender is entitled to retain the cash deposit from the original sale. This is so even if it is the foreclosing lender's own lower bid at the subsequent resale that leads to the damages to be recovered from the cash deposit.