The St. Croix Division of the District Court of the Virgin Islands recently clarified whether a foreclosed property's fair market value (as opposed to the price that is brings at a foreclosure sale) can serve as the basis from which a deficiency judgment is calculated. This is an important question, as it addresses an apparent conflict between the local judgment statutes and the American Law Institute's Third Restatement of Property on Mortgages, which has the force of law in the Virgin Islands. Most important, it emphasizes that, under current law, foreclosed defendants cannot invoke the fair market value of their property to avoid or lessen their post-judgment obligations.
After a foreclosure sale, the judgment creditor (usually the lender) will look at whether the proceeds from the sale have satisfied the amount of the judgment. If the sale proceeds are less than the judgment amount that is owed by the borrower (as is usually the case), the judgment creditor can ask the court for a deficiency judgment for the difference. Once entered by the court, a deficiency judgment can be executed against the remaining assets of the borrower until the judgment is fully satisfied.
Foreclosure defendants occasionally seek to limit their deficiency obligations after foreclosure by asking the court to use the fair market value of the property (rather than the sale price) as the baseline for calculating the deficiency judgment. For example, if a lender gets a foreclosure judgment of $100,000 and the property is later sold at a marshal's sale for $75,000, then the borrower still owes the lender $25,000. But if the fair market value of the property is $95,000, then the borrower owes only $5,000.
The"fair market value" approach is the preferred approach of the Restatement, which holds a special place in Virgin Islands law. By statute, the Restatements are the "law of the land" in the Virgin Islands where there are no local statutes to the contrary. This arrangement has the virtue of filling any gaps in the statutory and case law of the Virgin Islands. It also can lead to debates over whether a local provision is in conflict with the Restatement.
The District Court's decision in Soly v. Warlick, Civ. Nos. 1991/212 & 1995/84 (D.V.I. Aug. 18, 2011) (slip op.), turned on such a debate. The Court noted that the Virgin Islands Code provides that "a judgment creditor may recover the deficiency between proceeds of the sale and the underlying debt judgment 'by execution as in ordinary cases.'" (Slip Op. at 8.) The Court further noted that "[i]n 'ordinary' debt cases, a judgment creditor may execute against property of the judgment debtor until the judgment is completely satisfied." (Id.) The Court then concluded that, because deficiency judgments in "ordinary" debt case do not take into account the fair market value of the debtor's assets, the fair market value of a foreclosure defendant's property is irrelevant to the calculation of deficiency judgments. "If the Legislature intended judgment creditors to execute on the unpaid balance of a debt judgment following a foreclosure sale 'as in ordinary cases,'" the Court wrote, "it could not have meant that judgment debtors be able to invoke a fair market valuation defense not available in 'ordinary cases.'" (Id. at 9.)
All of this is to say that, as least as far as the District Court in St. Croix is concerned, borrowers cannot invoke the Restatement to reduce their deficiency obligations. If the fair market value of a property is more than what the lender recovers at a marshal's sale, the borrower is still on the hook for the balance owed to the lender. Whether the Court's conclusion prompts any legislative changes (or whether, given the recent decline in the housing market nationwide, the likelihood that the fair market value of a property will exceed the sale price is effectively nil) remains to be seen.