It is fairly well-settled that a bank who breaches the implied duty of good faith and fair dealing may be barred from collecting its deficiency judgment in a foreclosure action. See de Jong v. Leitchfield Deposit Bank, 254 S.W.3d 817, 823 (Ky. App. 2007) (quoting Farmers Bank and Trust Co. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005)).
Yet, in Harvest Homebuilders LLC v. Commonwealth Bank and Trust Company, 2008-CA-001897 (01/29/2010), the Kentucky Court of Appeals affirmed a judgment of the Oldham Circuit Court awarding Commonwealth Bank a deficiency judgment against the borrower and an individual guIt is fairly well-settled that a bank who breaches the implied duty of good faith and fair dealing may be barred from collecting its deficiency judgment in a foreclosure action. See de Jong v. Leitchfield Deposit Bank, 254 S.W.3d 817, 823 (Ky. App. 2007) (quoting Farmers Bank and Trust Co. v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005)).
Yet, in Harvest Homebuilders LLC v. Commonwealth Bank and Trust Company, 2008-CA-001897 (01/29/2010), the Kentucky Court of Appeals affirmed a judgment of the Oldham Circuit Court awarding Commonwealth Bank a deficiency judgment against the borrower and an individual guarantor. The Court held that the trial court did not err by awarding the deficiency judgment as the record clearly established that the bank did not breach the implied covenant of good faith and fair dealing imposed in every contract, which “impose[s] on the parties … a duty to do everything necessary to carry” out the contract. The Court distinguished the holding in Pearman v. West Point National Bank, 887 S.W.2d 366 (Ky. App. 1994), in that Commonwealth Bank neither entered into a contract to sell the subject real property during the foreclosure proceedings nor actually sold the real property to a third party. Further, its lack of consent to a sale of the property prior to foreclosure was based on an unacceptable condition imposed by the borrower and individual guarantor that the sale only occur if they were released by the bank from liability for any resulting deficiency.
In Pearman, the Court of Appeals was faced with materially different facts: (a) a bank foreclosed upon real property owned by its borrower; (b) the real property was sold at two-thirds of its appraised value to the bank at the master commissioner sale; (c) a deficiency judgment was entered against the borrower for the difference; however, (d) the day before the deficiency judgment was entered, the bank contracted to sell the subject property to a third party for more than the total indebtedness borrower owed to the bank and ultimately closed that transaction. Based on these facts, the Pearman Court determined the bank breached its implied duty of good faith and fair dealing – reasoning: “the bank contracted with third parties … to sell the mortgaged property during the foreclosure action and, in fact, ultimately sold same for an amount which would have wholly satisfied the debt owed by Pearman.” (Emphasis in the original). .arantor. The Court held that the trial court did not err by awarding the deficiency judgment as the record clearly established that the bank did not breach the implied covenant of good faith and fair dealing imposed in every contract, which “impose[s] on the parties … a duty to do everything necessary to carry” out the contract. The Court distinguished the holding in Pearman v. West Point National Bank, 887 S.W.2d 366 (Ky. App. 1994), in that Commonwealth Bank neither entered into a contract to sell the subject real property during the foreclosure proceedings nor actually sold the real property to a third party. Further, its lack of consent to a sale of the property prior to foreclosure was based on an unacceptable condition imposed by the borrower and individual guarantor that the sale only occur if they were released by the bank from liability for any resulting deficiency.
In Pearman, the Court of Appeals was faced with materially different facts: (a) a bank foreclosed upon real property owned by its borrower; (b) the real property was sold at two-thirds of its appraised value to the bank at the master commissioner sale; (c) a deficiency judgment was entered against the borrower for the difference; however, (d) the day before the deficiency judgment was entered, the bank contracted to sell the subject property to a third party for more than the total indebtedness borrower owed to the bank and ultimately closed that transaction. Based on these facts, the Pearman Court determined the bank breached its implied duty of good faith and fair dealing – reasoning: “the bank contracted with third parties … to sell the mortgaged property during the foreclosure action and, in fact, ultimately sold same for an amount which would have wholly satisfied the debt owed by Pearman.” (Emphasis in the original).
