Section 51.003 of the Texas Property Code entitles borrowers to an offset against deficiency judgments in the amount the property’s fair market value, if, on the date of foreclosure, the fair market value exceeds the foreclosure sale price. Last month, in PlainsCaptial Bank v. Martin,[1] the Texas Supreme Court clarified that “fair market value” does not equate to the common law “willing buyer-willing seller” definition. Instead, the Court held actual holding costs and an eventual post-foreclosure sales price factor into the “fair market value” of foreclosed realty.

Introduction to Texas Property Code Section 51.003

Section 51.003 balances the mortgagor-mortgagee relationship by partially limiting available remedies in deficiency suits.[2] The borrower may try to reduce the amount it owes after foreclosure by seeking a determination of the fair market value of the property.[3] If the fair market value exceeds the foreclosure sale price, then the court may apply an offset against the deficiency for the excess amount.[4]

Factual and Procedural Background—PlainsCapital Bank v. Martin

In Martin, a borrower sought financing to build a house he intended to sell. He secured his obligations to PlainsCapital Bank with a deed of trust on the lot and improvements. The borrower defaulted on his note when he couldn’t sell the house, prompting the bank to foreclose on the property. The bank was the highest bidder at the foreclosure sale, buying the property for $539,000—an amount less the outstanding debt.[5] Despite promptly marketing the property, the bank was not able to find a buyer right away. About a year after the foreclosure, the bank sold the property for $599,000—still less than the outstanding debt.

The borrower initially sued the bank for fraud and wrongful foreclosure theories, and the bank counterclaimed for the deficiency balance on the note. The borrower later dropped his affirmative claims, but the case went to trial on the bank’s deficiency claim. The trial court entered judgment in favor of the bank for the loan’s principal and accrued interest, as well as holding and disposition costs, discounted by the $599,000 sales price. The Dallas Court of Appeals reversed this judgment, holding that the borrower was entitled to an offset under section 51.003 for the fair market value on the foreclosure date, not the actual sale price more than a year later.

The Court’s analysis and holding

The Supreme Court’s analysis addressed two issues: (1) whether section 51.003 applies to a deficiency based on an amount other than the foreclosure price, and (2) whether section 51.003 permits the use of a post-foreclosure sale price and actual post-foreclosure costs as evidence of “fair market value.”

  • Section 51.003 applies when deficiencies are calculated using a future sales price.

The Court made quick work of the bank’s argument that section 51.003 did not apply. The bank argued that the statute applied only to deficiencies calculated using the foreclosure sales price because the Legislature used the word “the” when referencing deficiency as opposed to “a” or “any” deficiency.[6] The Court did not agree that the use of a definite article permits lenders to bypass the statute’s protections for borrowers and creditors by simply suing for deficiencies calculated differently. Accordingly, section 51.003 applies regardless of whether the deficiency is calculated using a future sales price.

  • Courts may consider the future sales price to consider the fair market value of property on the foreclosure sale date.

Next, the Court turned to the issue of whether fair market value under section 51.003 authorizes courts to consider the price for which a lender eventually sells foreclosed realty. The Dallas Court of Appeals reasoned that fair market value means the historic measure of fair market value: “the price the property will bring when offered for sale by one who desires to sell, but is not obliged to sell, and is bought by one who desires to buy, but is under no necessity of buying.”[7]

The Supreme Court clarified that the historic definition is not the correct definition, however, because section 51.003 enumerates the categories of evidence that may be considered in determining fair market value.[8]