Title: Mt. Carmel Estates, Inc. v. Regions Bank
Citation: 853 So. 2d 160
Docket Number: 1011357
State: Alabama
Issuer: Alabama Supreme Court
Date: December 13, 2002

853 So. 2d 160 (2002)
MT. CARMEL ESTATES, INC., et al.
v.
REGIONS BANK.
1011357.

Supreme Court of Alabama.
December 13, 2002.
Stephen V. Hammond of Chenault, Hammond &amp; Hall, P.C., Decatur, for appellants.
Robert P. Reynolds of Reynolds, Reynolds &amp; Duncan, L.L.C., Tuscaloosa, for appellee.
MADDOX, Retired Justice.
The sole legal question presented in this case is whether a lending institution that foreclosed on a mortgage and then was the only bidder at the foreclosure sale breached its duty of fairness and good faith to the borrowers, when its bid at the foreclosure sale was an amount less than the amount due under the terms of the note secured by the mortgage and was so inadequate, *161 the borrower and the guarantors contend, as to shock the conscience.
The basic facts are not disputed. Regions Bank foreclosed on a mortgage given as security for a promissory note executed on May 12, 1999, in the amount of $2,000,000 by Mt. Carmel Estates, Inc. ("Mt. Carmel"), and guaranteed by Charles M. Sisco, David Wall, Mychiallyn Wall, and Myron Wilson (hereinafter referred to collectively as "the guarantors").
At the foreclosure sale, Regions Bank, the only bidder, bid $1,242,000, an amount less than the unpaid balance on the note, creating a deficiency. Regions Bank sued Mt. Carmel and the guarantors to collect the deficiency and demanded a judgment against the defendants, jointly and severally, for the sum of $375,122.16, attorney fees in the amount of $30,000, and interest "at the Index rate plus .50% until paid [in] full and costs." After the defendants answered, Regions Bank filed a motion for a summary judgment. Mt. Carmel and the guarantors opposed the motion, contending that there was a genuine issue of material fact presented in that the fair market value of the foreclosed property so greatly exceeded the amount of Regions Bank's bid at the foreclosure sale as to shock the conscience. The trial court entered a summary judgment in favor of Regions Bank, and against Mt. Carmel and the guarantors, with the exception of Myron Wilson, who had entered into a pro tanto release before the judgment was entered. We affirm.
As security for the $2,000,000 promissory note, Mt. Carmel mortgaged two parcels of real property: one parcel had been subdivided into 61 lots; the other parcel consisted of 18.23 acres of undeveloped land. After executing the note, Mt. Carmel sold 13 lots from the first parcel and reduced the amount of the note, including principal, interest, and late fees, to $1,611,686. Mt. Carmel then defaulted. On April 28, 2000, Mt. Carmel and the guarantors entered into a contract with Enfinger Development to sell the 48 remaining lots of the first parcel and the second parcel of land to Enfinger for $1,205,985; however, this sale was not consummated.[1] Regions Bank foreclosed on the mortgage, and on July 10, 2000, held a foreclosure sale. Regions Bank offered for separate bids each lot in the first parcel and the second parcel, and then offered for bid all of the real property as a whole. Regions Bank, the only bidder at the sale, offered the highest bids on each individual lot and the second parcel and offered the highest bid on the property as a whole. The sum of the separate bids was slightly less than the bid for the property as a whole, which was the sum of $ 1,242,000.[2]
On July 14, 2000, Regions Bank sued Mt. Carmel and the guarantors for the alleged deficiency of $375,122.16, plus interest and attorneys fees and costs. Wilson, one of the guarantors, answered on August 15, 2000. The remaining defendants answered and asserted as an affirmative defense that Regions Bank's claim was barred because, the defendants alleged, Regions Bank had breached its duty of good faith and fairness in conducting *162 the foreclosure. On February 8, 2001, Regions Bank filed its motion for a summary judgment. On March 6, 2001, Sisco filed his response in opposition to the motion for a summary judgment. On March 8, 2001, Regions Bank filed a motion seeking the dismissal of Wilson, with whom it had entered into a pro tanto release. On March 19, 2001, Regions Bank filed its amended motion for a summary judgment, stating that Wilson had been dismissed in exchange for Wilson's payment to Regions Bank of $130,000. Regions Bank stated that, after application of Wilson's payment to interest, attorneys fees, and principal, there remained a deficiency of $278,640.18. In a supplemental response to Regions Bank's motion for a summary judgment, Mt. Carmel and the remaining guarantors (hereinafter referred to collectively as "the defendants") stated:
On May 22, 2001, the defendants filed a counterclaim, followed on May 23, 2001, by an amended counterclaim, in which they alleged that the price Regions Bank paid for the land$1,242,000was far below the reasonable fair market value of the land and violated the duty of good faith and fairness, which the defendants alleged Regions Bank owed them. The defendants then demanded compensatory and punitive damages and further asked that the foreclosure sale be set aside.
On November 5, 2001, the trial court entered a summary judgment in favor of Regions Bank in the sum of $311,013.20.[3]*163 In addition, the trial court rendered a judgment in favor of Regions Bank as to the defendant's counterclaim. On appeal, the defendant's raise three issues:
"1. Did Regions [Bank] breach its duty of fairness and good faith owed [the defendants] by not bidding in the amount of the debt at the foreclosure sale, thus creating a false or sham deficiency?
"2. Did the trial court err in granting a summary judgment to Regions [Bank] before the correct amount of the deficiency was known?
*164 "3. Did the trial court err in granting Regions [Bank] a judgment on [the defendants'] counterclaim?"
(Defendants' brief, p. 7.)
This Court's standard for reviewing a summary judgment has been stated many times, most recently in Potter v. First Real Estate Co., 844 So. 2d 540 (Ala.2002), in which this Court stated:
"`We apply the same standard of review the trial court used in determining whether the evidence presented to the trial court created a genuine issue of material fact. Once a party moving for a summary judgment establishes that no genuine issue of material fact exists, the burden shifts to the nonmovant to present substantial evidence creating a genuine issue of material fact. "Substantial evidence" is "evidence of such weight and quality that fair-minded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." In reviewing a summary judgment, we view the evidence in the light most favorable to the nonmovant and entertain such reasonable inferences as the jury would have been free to draw.'
"Nationwide Prop. &amp; Cas. Ins. Co. [v. DPF Architects, P.C.], 792 So.2d [369] at 372 [(Ala.2001)], quoted in American Liberty Ins. Co., 825 So. 2d  at 790."
844 So. 2d  at 545.
The defendants state that Regions Bank's alleged lack of good faith and fairness constitutes a defense to Regions Bank's claim, and they also say that Regions Bank's lack of good faith and fairness supports their counterclaim, in which they demanded compensatory and punitive damages.
In their counterclaim, the defendants stated:
To support their contention that the trial court erred in deciding their counterclaim adversely to them, the defendants argue:
"[Regions Bank], as trustee for the debtors, owed a duty to obtain the highest and best price for the property at the foreclosure sale in order to reduce or eliminate the debt. In view of the market value of the property securing the debt, [Regions Bank] could have easily bid in the amount of the debt and eliminated any deficiency. Instead, [Regions *165 Bank] created an artificial deficiency by intentionally bidding in an amount for the property that was far below its fair market value. [Regions Bank] breached its duty of fairness and good faith with the debtors by not bidding in the amount of the debt at the foreclosure sale."
(Defendants' brief, p. 17.) In support of their position that Regions Bank owed them a duty of fairness and good faith, the defendants cite Wood River Development, Inc. v. Armbrester, 547 So. 2d 844 (Ala.1989). In Wood River Development this Court stated:
547 So. 2d  at 847. The defendants further argue that to fulfill its duty to be fair and to act in good faith, and in view of the fair market value of the land, Regions Bank should have bid the amount of the remaining debt, and had Regions Bank done so, there would not have been a deficiency.
Counsel for the defendants candidly admits that he was unable to find an Alabama case to support such a position, but cites a Florida case, Barnard v. First National Bank of Okaloosa County, 482 So. 2d 534 (Fla.Dist.Ct.App.1986), and urges this Court to "follow the logic of the Florida appellate court and reverse the learned trial judge, remanding the case for trial." (Defendants' brief, p. 18.)
In Barnard, the Florida District Court of Appeal stated:
"In light of the facts and the evidence in this case, the trial court abused its discretion in granting a deficiency judgment. The undisputed expert testimony showed the fair market value of the seven lots at the time of the sale to be substantially in excess of the debt owed to appellee. Further, the purchaser and the mortgagee were one and the same and the mortgagee was the only bidder at the foreclosure sale. Last, fair market *166 value has been defined as `the sum arrived at by fair negotiation between an owner willing to sell and a purchaser willing to buy, neither being under pressure to do so.' Flagship Bank of Orlando v. Bryan, 384 So. 2d 1323 (Fla. 5th DCA 1980). A witness for the appellee admitted at the deficiency hearing that the bank was under pressure to sell the lots and that its bid was lowered because the bank would not be able to sell the lots for what they were worth. The bid price was therefore more an indication of a `quick sale' value than of the property's true fair market value."
482 So. 2d  at 535-36. In their reply brief to this Court, the defendants "admit that the able attorney for Regions [Bank] `duly and properly' conducted the foreclosure sale on that date," and state that they "are not contesting the mechanics of the foreclosure sale itself," but "are alleging that the amount bid by Regions [Bank] on that date was so far below the fair market value of the property that it should shock the conscience of the Court." (Defendants' reply brief, p. 4.) The defendants also state:
(Defendants' reply brief, p. 6.) Regions Bank counters that "the purchase price at a properly conducted foreclosure sale is deemed conclusive of the fair and reasonable price at the sale." (Regions Bank's brief, p. 13.) In support of its argument, Regions Bank cites BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994), Wood River Development, Inc. v. Armbrester, 547 So. 2d 844 (Ala. 1989), and Breen v. Baldwin County Federal Savings Bank, 567 So. 2d 1329 (Ala. 1990).
In BFP, the United States Supreme Court interpreted the meaning of the phrase "reasonably equivalent value" found in 11 U.S.C. § 548(a)(2)(A), in the context of a foreclosure sale. That section allows the trustee in bankruptcy to avoid a fraudulent transfer where a debtor had an interest in property that was transferred within one year of the filing of the bankruptcy petition, where the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer and where the debtor received less than a "reasonably equivalent value" in exchange for the transfer. The Court stated:
511 U.S.  at 537-39, 114 S. Ct. 1757 (citations and footnotes omitted).
Regions Bank argues that Wood River Development held that "in a foreclosure sale where no evidence of fraud, collusion, or other irregularity exists, mere inadequacy of price would not void the sale." (Regions Bank's brief, p. 14.) We note, however, that Wood River Development involved a judicial foreclosure sale, conducted by the court register, and that the sale here was conducted by the mortgagee, under the powers granted in the mortgage. While similar, Wood River Development is not nearly as helpful as Breen, the facts of which are nearly identical to the facts in this case. In Breen, this Court stated:
"Breen argues that his affidavits were sufficient to create a genuine issue of fact as to the commercial reasonableness of the foreclosure sale. As previously noted, the Bank had the burden of showing that it was entitled to recover from Breen the amount that it had alleged was due. The record shows that the Bank made a prima facie showing that it was entitled to a judgment as a matter of law; therefore, the burden shifted to Breen to present evidence tending to show that a triable issue of fact existed. Breen submitted two affidavits in which he stated that, in his opinion, the Bank *168 had paid a commercially unreasonable price for the property that was the subject of the foreclosure sale.
"....
"`The general rule is that, "where the price realized at the [foreclosure] sale is so inadequate as to shock the conscience, it may itself raise a presumption of fraud, trickery, unfairness, or culpable mismanagement, and therefore be sufficient ground for setting the sale aside." 27 Cyc. 1508.
"`And, although mere inadequacy of price is not sufficient to that end, it is "always a circumstance to be considered in connection with other grounds of objection to the sale, and will be sufficient to justify setting the sale aside, when coupled with any other circumstances showing unfairness, misconduct, fraud, or even stupid management, resulting in the sacrifice of the property." 27 Cyc. 1508; Holdsworth v. Shannon, 113 Mo. 508, 21 S.W. 85, 35 Am.St.Rep. 719 [(1893)], where the subject is discussed quite fully, with a review of many pertinent cases; 2 Jones on Mortgages (6th Ed.) 1670.'"
567 So. 2d  at 1331-33 (emphasis added).
In this case, the foreclosure sale was held on July 10, 2000. The property was offered for sale by separate lots and then as a whole. Although Regions Bank was the only bidder, it bid on each lot and the second parcel separately, for a total of $1,241,470, and it bid $1,242,000 for the real property as a whole. As stated above, the defendants admit in their brief to this Court that proper notice of the sale was given and that the sale was properly conducted. As the defendants point out, a July 24, 2000, appraisal valued the property at $1,530,000. Assuming that this sum actually represented the fair market value at the time of foreclosure, can we say that Regions Bank's bid of $1,242,000 was so low as to shock the conscience? We think not.
For the reasons stated above, we affirm the summary judgment in favor of Regions Bank on the original complaint in the amount of $311,013.20, and in favor of Regions Bank on the defendants' counterclaim.
The defendants argued to the trial court, in their brief in opposition to Regions Bank's summary-judgment motion, filed on May 22, 2001, that the amount of the deficiency, if any, could not be established at that time. The defendants stated:
In their brief to this Court, the defendants make the following argument:
(Defendants' brief, p. 19.)
In Springer v. Baldwin County Federal Savings Bank, 562 So. 2d 138 (Ala.1990) ("Springer I"), this Court stated:
562 So. 2d  at 140.
Springer v. Baldwin County Federal Savings Bank, 597 So. 2d 677 (Ala.1992) ("Springer II"), is even more applicable to this case. In Springer II, this Court decided the question of what constitutes "profit" to the mortgagee that sells foreclosed property. This Court stated:
"In Springer I, we held that a
"`mortgagee who purchases the mortgaged property at a foreclosure sale and then resells it to a third party during the statutory redemption period is required to apply the profit (the sum realized by the mortgagee in excess of the amount it paid at foreclosure) to the reduction of the mortgagor's debt.'
*170 "562 So. 2d  at 139. However, we did not specifically define `sum realized' or `profit.'
"Although this Court in Springer I has held that a mortgagee, in certain circumstances, is in a position of quasi-trustee over the property purchased, we cannot conclude that he is a trustee at his own expense. If this Court were to disallow the recovery of the ordinary and necessary expenses incurred by the bank, we would be thwarting any ultimate benefit to debtors in the future. This is so because a mortgagee (in this case, the bank) would have no incentive to act within the one-year redemption period, because in acting the mortgagee will necessarily spend money, which it would not be allowed to recover. If the mortgagee is disallowed the recovery of *171 these expenses, it would appear that the natural consequence would be for the mortgagee to be reluctant to expend any money to sell the property, and thus there would arise the possibility of no benefit to the debtor."
597 So. 2d  at 677-78.
In its brief to this Court, Regions Bank argues that its bid of $1,242,000 was 81% of the appraised value of $1,530,000, based on an appraisal made only two weeks after the sale, and Regions Bank points out that this appraisal contemplated a long-term development and subdivision marketing plan, not a foreclosure. Regions Bank argues that "anyone purchasing the vacant lots and raw acreage would be required to hold the property for one year before commencing development, thus absorbing the interest cost related to the foreclosure bid for equal period of time." (Regions Bank's brief, p. 17.) Regions Bank further argues that the record shows that "all of [Regions Bank's] attempts to sell the subdivided lots were unsuccessful due to the existence of the Defendants' right of redemption," and that "[t]he right of redemption materially and substantially impaired the value of the property," and that "no reasonable person could have found the bid placed by Regions [Bank] to have been so low as to shock the conscience," and that "the trial court was correct in finding no genuine issue of material fact existed as to the accuracy of the deficiency balance remaining after the application of [Regions Bank's] bid at the foreclosure sale."[5] (Regions Bank's brief, p. 17.)
Based on the foregoing, we conclude that the amount of the bid made by Regions Bank at the foreclosure sale was not so low that it should have shocked the conscience; consequently, we affirm the summary judgment.
This opinion was prepared by Retired Justice Hugh Maddox, sitting as a Justice of this Court pursuant to § 12-18-10(e).
AFFIRMED.
MOORE, C.J., and SEE, BROWN, HARWOOD, and STUART, JJ., concur.
[1]  The record does not reveal why this sale did not take place. In Sisco's affidavit, which appears in the record, Sisco states that he signed the contract with Enfinger in conjunction with a second contract. Sisco stated: "[T]hese two contracts, taken together, would have allowed me ... to walk away from these developments debt free.... Neither contract was implemented, for reasons unknown to me."
[2]  The sum of the bids offered for each individual lot and the second parcel amounted to $1,241,470; the bid for the property as a whole was $1,242,000.
[3]  The order reads as follows:

"The Court, having reviewed [Regions Bank's] Amended Motion for Summary Judgment, the pleadings, the Affidavits of Steve Monger, [chairman of Regions Bank in Huntsville,] Terry D. West [vice president/commercial loans of Regions Bank in Huntsville,] and Robert Reynolds [one of Regions Bank's attorneys whose testimony supported Regions Bank's request for attorneys fees] in Support of [Regions Bank's] Motion for Summary Judgment, the Responses in Opposition to Plaintiff's Summary Judgment and Supporting Affidavits, the Responses filed by Defendants and the supporting affidavits and having considered all other admissible evidence, is of the opinion that there is no genuine issue as to any material fact, and that [Regions Bank] is entitled to a judgment as a matter of law. It is, therefore, Ordered, Adjudged, and Decreed as follows:
"1. Judgment is hereby rendered in favor of Regions Bank and against Defendants, Mt. Carmel Estates, Inc., Charles M. Sisco, Jr., H. David Wall and Mychiallyn Wall, for the principal sum of $278,640.18, interest in the amount of $22,373.02, and attorney fees in the amount of $10,000.00, for a total judgment in the amount of $311,013.20.
"....
"4. Judgment is rendered in favor of [Regions Bank] and against Defendants as to Defendants' counterclaims as amended."
It appears that the trial court accepted the facts as stated in the affidavit of Terry West, dated March 19, 2001, in which he stated:
"6. At the time of said mortgage foreclosure sale, there was due and owing by the Defendants to Regions Bank the following:
"7. The proceeds of said mortgage foreclosure sale were applied first to the costs and expenses of foreclosure and preforeclosure workout negotiations representing attorney fees and expenses in the amount of $3,926.41 and foreclosure advertising costs of $1,508.76, resulting in net sales proceeds of $1,236,564.83, which proceeds were applied to pay accrued interest of $51,348.24, late charges in the amount of $400.00 with the remaining sum of $1,184,816.59 applied to the outstanding balance of the loan resulting in an after foreclosure deficiency as of July 10, 2000, of the sum of $375,122.16.
"8. I have reviewed the factual matters set forth in the affidavit of Steve Monger attached to the original Motion for Summary Judgment filed by our attorneys on behalf of Regions Bank on February 8, 2001. Since the filing of that Motion, Regions Bank has settled with the Defendant, Myron R. Wilson, for the sum of $130,000.00 and this Affidavit is offered in support of the Amended Motion for Summary Judgment to which this Affidavit is attached. In exchange for the Pro Tanto Release of Myron R. Wilson, and payment by Mr. Wilson on February 16, 2001, of the sum of $130,000.00, the settlement proceeds were applied as follows:
"9. After the application of the $130,000.00 payment from Mr. Wilson, as set forth above, there remained due and owing, as of February 16, 2001, the principal sum of $278,640.18. Interest has continued to accrue subsequent to February 16, 2001, at the variable rate of interest as provided under the note which rate was equal to 9.00% per annum from February 16, 2001, which is equal to a daily per diem of $68.70."
[4]  Durrett and Bundles state that a foreclosure sale that yields less than 57% of the property's fair market value can be set aside and indicates in dicta that a sale for less than 70% of the property's fair market value can be set aside.
[5]  The record contains an affidavit of Terry D. West, a loan officer for Regions Bank, who stated:

"The acreage property was, however, sold on December 31, 2000, for net proceeds in the amount of $ 106,973.50 or approximately $ 6,500 more than the amount originally proposed by Enfinger Development, Inc., under the terms of the contract which the Defendants had signed..... Of course, the interest accrual upon the value of the 18 acres absorbed substantially all this gain. In addition, [Regions] Bank has been required to pay to date $9,200 in homeowner association fees and has received a special assessment of another $250 per lot for the current year. [Regions] Bank also paid $2,270.55 in ad valorem taxes."