Also known as: deficiency judgements · deficiency judgments · deficiency decree
Written by attorneys — see sources below.
A judgment for the amount by which a secured obligation exceeds the proceeds realized from the sale of the collateral. The secured party may obtain the judgment against any person personally liable on the obligation unless a statute prohibits or limits the remedy.
Denise Donovan borrowed $200,000 from a bank secured by a mortgage on her home. After default the bank foreclosed and the property sold at auction for $140,000. The bank now sues Donovan personally for the $60,000 shortfall plus costs.
Demetrius Douglas defaulted on a purchase-money mortgage in a state that bars deficiency judgments after foreclosure. The lender obtained a federal diversity judgment for the shortfall but the court refused to enter it because state law prohibited the remedy.
Shady Grove Orthopedic Associates, P.A., provided medical care to Sonia E. Galvez for injuries she suffered in an automobile accident. As partial payment for that care, Galvez assigned to Shady Grove her rights to insurance benefits under a policy issued in New York by Allstate Insurance Co. Shady Grove tendered a claim for the assigned benefits to Allstate, which under New York law had 30 days to pay the claim or deny it. Allstate apparently paid, but not on time, and it refused to pay the statutory interest that accrued on the overdue benefits at two percent per month. Shady Grove filed this diversity suit in the Eastern District of New York to recover the unpaid statutory interest. Alleging that Allstate routinely refuses to pay interest on overdue benefits, Shady Grove sought relief on behalf of itself and a class of all others to whom Allstate owes interest. The individual claim was worth roughly $500, which fell far short of the amount-in-controversy requirement for individual suits under 28 U.S.C. § 1332(a). The District Court dismissed the suit for lack of jurisdiction. It reasoned that N.Y. Civ. Prac. Law Ann. § 901(b), which precludes a suit to recover a penalty from proceeding as a class action, applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Concluding that statutory interest is a penalty under New York law, it held that § 901(b) prohibited the proposed class action.
View caseDoris Duffy defaulted during a statewide mortgage moratorium enacted to protect debtors. The lender foreclosed but was barred from pursuing a deficiency judgment against Duffy until the moratorium period ended.
The Blaisdells executed a mortgage on their property in Minneapolis to the Home Building & Loan Association on August 1, 1928. The mortgage contained a valid power of sale by advertisement. After default, the mortgage was foreclosed and the property sold to the Association on May 2, 1932, for $3700.98. The period of redemption under the law then in effect was set to expire on May 2, 1933. On April 18, 1933, Minnesota enacted Chapter 339 of the Laws of 1933, known as the Mortgage Moratorium Law. The statute authorized district courts to extend the period of redemption from foreclosure sales for such additional time as the court deemed just and equitable, not beyond May 1, 1935, upon condition that the mortgagor pay a reasonable part of the income or rental value toward taxes, insurance, interest, and principal. The Blaisdells applied to the District Court of Hennepin County for an extension of the redemption period. The district court found that the reasonable rental value of the property was $40 per month and the present market value was $6000. It extended the redemption period to May 1, 1935, requiring the Blaisdells to pay $40 per month to the Association. The Supreme Court of Minnesota affirmed the order. The Home Building & Loan Association appealed to the United States Supreme Court, which reviewed the judgment sustaining the statute as applied to the preexisting mortgage.
View caseA mortgagee may obtain a deficiency judgment when the foreclosure sale price is less than the mortgage obligation. The judgment is for the difference and may be sought against any person personally liable on the obligation.
Supporting sources
Yes. State statutes may prohibit or restrict deficiency judgments after foreclosure of purchase-money mortgages or after power-of-sale foreclosure. Some states also require the deficiency to be calculated using fair market value rather than the sale price.
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Any surplus after payment of the debt and costs is distributed first to junior lienholders in order of priority and then to the mortgagor.
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In most jurisdictions the mortgagee may sue on the personal obligation first and later foreclose, or foreclose first and then seek a deficiency for any unpaid balance.
Supporting sources
…affect the enforcement of the right as given by the State”). Just as Erie precludes a federal court from entering a deficiency judgment when a State has “authoritatively announced that [such] judgments cannot be secured within its borders,” Angel v. Bullington , so too Erie should prevent a federal court from awarding…