In an opinion issued the last week of March, the Texas Supreme Court articulated the meaning of “fair market value” as used in Texas Property Code section 51.003 as
the historical definition [The price the property would bring when offered for sale by a seller desiring to sell, but not obliged to do so, and bought by a purchaser desiring to buy, but under no necessity of doing so] as modified by evidence § 51.003(b) authorizes the trial court to consider in its discretion, to the extent such evidence is not subsumed in the historical definition.
Plains Capital Bank v. William Martin. No. 13-0337, __ S.W.3d__ (Tex. March 27, 2015) [emphasis added]; see Tex. Prop. Code §51.003.
Martin, the Borrower, took a loan to build a house he hoped to sell. After default, the Bank foreclosed and, after holding it for more than a year, sold the house in September 2009. The Borrower sued the Bank and the Bank counterclaimed for a deficiency based on the difference between what was owed and the price the Bank eventually obtained for the house, less its costs.
Facts regarding the value of the collateral included an estimate of fair market value obtained by the Bank before foreclosure of $770k. That valuation came with the caveat that the market was depressed and it would likely take 273 days to sell the property. The Bank put on evidence that its estimated costs to hold and dispose of the property were 30% of this valuation or $231k. It also put on evidence of the actual costs it later incurred. The Bank foreclosed on June 3, 2008 when the undisputed, unpaid debt was $790k. The Bank purchased the property at the sale, bidding $539k ($770k – $231k). One week later, the property was appraised for $825k, and the appraiser opined that the value would have been the same on the foreclosure date. Thirteen months later, the Bank again had the property appraised. This time, the property’s appraised value was $575k. About two months later, the Bank sold the property for $599k.
Eventually, the Borrower dismissed his affirmative claims but continued to assert that he was entitled to an offset under section 51.003 because the fair market value of the property on the date of foreclosure exceeded the foreclosure sales price. The case was tried without a jury. The Bank argued that section 51.003 did not apply, an argument the trial court accepted. The Bank argued its claim was not for “the” deficiency as contemplated in section 51.003 because the measure of damages was not the difference between the outstanding debt and the price obtained at foreclosure. Rather, the Bank sought to recover only the difference between the debt owed and the price it received when the property sold.
The trial court concluded that section 51.003 did not apply but, even if it did, the property’s fair market value on the date of foreclosure was less than the foreclosure sales price and, thus, Martin was not entitled to an offset. The trial court calculated the property’s fair market value by beginning with the $599k “future sale price” (see Tex. Prop. Code § 51.003(b)(5)) and then deducting actual holding costs ($75,376.41) and costs of sale ($45,907.94). See Tex. Prop. Code § 51.003(b)(3), (4).
The Dallas court of appeals reversed, holding that section 51.003 was applicable and that the trial court’s findings on value were not sustainable. Consistent with several other courts of appeals, the Dallas court of appeals said fair market value as used in the statute has the “historical” meaning:
The price the property would bring when offered for sale by a seller desiring to sell, but not obliged to do so, and bought by a purchaser desiring to buy, but under no necessity of doing so.
The Dallas court of appeals held there was legally insufficient evidence of the Bank’s damages because the trial court used the later resale price without evidence linking that amount to the property’s fair market value on the date of foreclosure.
The Supreme Court agreed with the court of appeals that 51.003 applies–the distinction between “a” deficiency and “the” deficiency advocated by the Bank was rejected. However, in a 7 to 2 decision (dissent by Justice Boyd joined by Justice Guzman), the Supreme Court arrived at a different conclusion about what can constitute evidence of fair market value under section 51.003.
After going through traditional statutory construction rules, the majority said, “the statute enumerates categories of evidence and clearly specifies that they may be considered by trial courts in determining fair market value,” including “evidence of ‘the necessity and amount of any discount to be applied to the future sales price.’” Op’n, p. 10. The court called this factor “forward looking, allowing the trial court to consider the price for which the lender eventually sells the property and to apply a discount, if appropriate, to determine a value as of the foreclosure sale date.” Id. Then, Justice Johnson observed: “It may seem odd to make the price for which the property sold after foreclosure an integral component of competent evidence of the property’s fair market value on the foreclosure sale date, but that is clearly what the Legislature intended.” The “take-away” is at page 11:
Therefore, the enumerated factors in § 51.003(b) will support a fair market value finding under the statute even though that type of evidence might not otherwise be competent in the common or historical fair market value construct. That being so, the term “fair market value” in § 51.003 does not equate precisely to the common, or historical, definition. Rather, it means the historical definition as modified by evidence § 51.003(b) authorizes the trial court to consider in its discretion, to the extent such evidence is not subsumed in the historical definition.
Op’n, p. 11 [emphasis added].
There are other factual and legal sufficiency components in the case. But, it appears we have a new—or at least modified or modifiable—construct for determining fair market value in the section 51.003 deficiency context.
Justice Boyd’s dissent warrants a read, too. It may indicate the Court could further refine its take on what constitutes permitted evidence to establish fair market value on the date of foreclosure for section 51.003 purposes.
No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.
If you have questions about this article, please contact Michael D. Conner.