When a loan is secured by real property, the current value of the property will be a determining factor in how the lender is treated in bankruptcy and will drive the lender’s bidding strategy in foreclosure. Valuing real property has never been an exact science. Volatility in the residential and commercial real estate markets over the last two years has made it even harder for lenders to rely with confidence on the appraisals they obtain to plan and predict how they will fare in bankruptcy or in foreclosure. Helpful guidance can be drawn, however, from certain lenders’ experience in recent North Carolina bankruptcy and state court cases.

To Appraise or Not to Appraise Again, and What (Not) to Ask the Appraiser

The value of real property securing a loan must be determined for numerous purposes in bankruptcy cases. For example, real property must be valued in order to determine whether the lender is entitled to stay relief or adequate protection payments, to determine whether the lender is entitled to recover post-petition, pre-confirmation interest and attorneys’ fees, or to establish the amount of a secured creditor’s claim for purposes of cramdown of a contested Chapter 11 plan of reorganization. Lenders may have numerous appraisals of the property on file as of the bankruptcy petition date, obtained at different times since the inception of the credit. Lenders also frequently obtain one or more appraisals or updates after the petition date because, depending on the issue in dispute, the relevant time for valuation might be the petition date, the hearing date, or the effective date of a proposed Chapter 11 plan.

A lender should consider, though, how an adverse party might use a trail of differing appraisals to cast doubt on the credibility of the appraisal upon which the lender chooses to rely at a particular hearing. Parties in bankruptcy are entitled to conduct discovery and may be able to obtain copies of all of the lender’s appraisals, even if not shared voluntarily, or the prior appraisals may be revealed through testimony on cross-examination at a hearing. The reasons for a difference in value between different appraisals obtained by the same lender are often sound, such as the passage of time and when new or more similar comparable sales are available. What lenders need to avoid is creating the appearance of “appraisal shopping”or using going-concern value compared with liquidation value.

In one recent North Carolina bankruptcy case, valuation of the debtor’s real property was necessary to determine whether the debtor’s proposed treatment of the secured creditor’s claim under the Chapter 11 plan was legally acceptable despite the creditor’s objection. The debtor proposed a “dirt for debt” plan, whereby the debtor would surrender to the lender eleven of the fifteen condominium units securing the claim in full satisfaction of the debt, with the debtor retaining the remaining units for sale. The evidence revealed that the lender had obtained ten appraisals over roughly a two year period, using several different appraisers, with the lowest valuation being a fraction of the highest.

The number of appraisals, while noted by the court, was not cited as a cause for concern so much as the manner in which the appraisals were procured. In a footnote, the court expressed “serious concerns regarding the implications of appraisers running their ‘initial’ opinions of value by a client/creditor, or their attorney, before rendering a ‘final’ opinion of value.” The court chose not to rely heavily on the appraisals conducted by a particular appraiser who the court noted was not qualified in the area upon which he was testifying and whose communications with the lender were characterized as being of “questionable propriety,” so the court’s decision regarding the lender’s plan treatment was not directly affected by the dubious communications between lender and appraiser. The lesson to be drawn from this case is clear, though: lenders and their counsel must use caution and good judgment in communications with appraisers, and thoroughly evaluate an appraisal not just on its face, but in the context of the history of appraisals on the same property and how these issues may impact credibility in court.

Property Valuation and Effect of Inadequate Bidding in Foreclosure

North Carolina General Statutes Section 45-21.34 provides that any person having a legal or equitable interest in real property may seek to enjoin a foreclosure sale on the basis that the bid amount was inadequate and inequitable and will result in irreparable damage to the property owner. In addition, Section 45-21.36 provides that where the mortgagee (secured lender) is the winning bidder at foreclosure and later sues to collect a deficiency balance on the debt, the mortgagor (borrower) may prove the reasonable value of the property as a defense to the deficiency suit. At first blush, then, it sounds like heavy reliance on an appraisal of the property during bidding is necessary to determine whether the foreclosure sale stands or falls when challenged, but is the appraisal really the litmus test?

It turns out that, practically speaking, the appraised value will not necessarily be the deciding factor when a foreclosure sale gets challenged after the fact. In the case of a borrower’s effort to enjoin a foreclosure sale from closing, the North Carolina Court of Appeals recently held that the borrower must not only file his or her application to enjoin the sale before the 10-day upset bid period expires, but also must obtain a hearing and a decision from the court within that short period. Moreover, for many years North Carolina courts have held that inadequacy of the purchase price alone is not sufficient to upset a sale that was properly noticed and conducted. There must also be some irregular or inequitable element to the sale that contributed to the inadequacy of price.

Finally, the situations in which an inadequate foreclosure sale price may serve as a defense to a deficiency claim are limited. This defense is only available when the creditor purchases the property at its own sale, and even then, the defense may only be raised by parties who had an interest in the property. This means that the defense can rarely be invoked by guarantors.


The use of appraisals is necessary for lenders, but savvy lenders understand that no appraisal exists in a vacuum. The usefulness and credibility of a particular appraisal or appraiser must be evaluated in light of the larger picture. When handled appropriately, a lender can use an appraisal as both a sword and a shield in bankruptcy and foreclosure.