Opinion ID: 1790658
Heading Depth: 1
Heading Rank: 2

Heading: Deficiency Judgment

Text: The bank first contends that this action is not one against a debtor for a deficiency judgment, but is a suit against a guarantor based on a continuing guaranty. The bank argues that this action is not to recover the amount of the deficiency, but to recover the amount of the guaranty. The bank points out that it could have proceeded against the guarantor under the contract without ever pursuing recovery against the debtor. When a creditor seeks recovery from a debtor in an ordinary proceeding, the creditor must first obtain a judgment. After the judgment becomes executory, the creditor may proceed to execute on the judgment against the debtor's property. If one item of property is seized and sold for an amount insufficient to satisfy the judgment, the creditor may proceed against other property of the debtor to recover the remainder due after application of the proceeds of the sale by executing on the same judgment. However, when a creditor seeks recovery from a debtor in an executory proceeding, the creditor may, without obtaining a judgment, obtain a seizure and sale of any of the debtor's property which is subject to the mortgage importing a confession of judgment. If the proceeds of the sale are insufficient to satisfy the debt, the creditor must first obtain a judgment for the balance of the debt before seizing any of the debtor's other property. Such a judgment, which has come to be known as a deficiency judgment, is governed by La. Code Civ. Proc. arts. 2771-72 and La.Rev.Stat. 13:4106, and may be obtained against the debtor only if the property was sold under the executory proceeding after appraisal. Whether the present action which sought to recover the balance of the debtor's debt against the debtor's guarantor (up to the amount of the guaranty) is a deficiency judgment action under the strict definition of that term is of little moment. The critical issue is whether the creditor, if precluded from obtaining any further recovery against the debtor after foreclosure on the debtor's property under an executory proceeding, is likewise precluded from any further recover against the debtor's guarantor (whose obligation is an accessory obligation to that of the debtor). The ultimate issue (whether the guarantor's obligation to pay the debtor's debt up to the limits of the guaranty continues to exist after the debtor's obligation has been extinguished because of a defect in the executory proceeding) is presented, whether the action against the guarantor is characterized as a deficiency judgment action or some other type of action. The bank's contention that this is not a deficiency judgment action is not dispositive of the issue of the guarantor's obligation. The bank next contends that its failure to prove a specific interest rate on the notes in the executory proceeding or in the present proceeding does not affect its right to obtain a judgment against the guarantor for the amount of the guaranty. In the First Guaranty Bank, Hammond, Louisiana v. Baton Rouge Petroleum Center, Inc., 529 So.2d 834 (La.1987), the creditor in an executory proceeding failed to attach to its petition authentic evidence of a corporate resolution authorizing the corporation to grant a mortgage. This court held that while the creditor's failure may have been a defect in an essential link of proof which could defeat the creditor's right to use an executory proceeding, the debtor did not assert the defect in the authentic evidence in the executory proceeding by seeking to enjoin the judicial sale or by filing a suspensive appeal from the order of seizure and sale, and the creditor who had fully complied with the codal and statutory appraisal requirements in the executory proceeding was not barred from obtaining a deficiency judgment against the debtor in a subsequent ordinary proceeding. After a judicial sale under an executory proceeding, the creditor who seeks a deficiency judgment must plead and prove that the property was sold after appraisal in accordance with the codal and statutory laws and that the proceeds of the judicial sale were insufficient to satisfy the debt. First Guaranty Bank, Hammond, Louisiana v. Baton Rouge Petroleum Center, Inc., 529 So.2d at 842. This proof is necessary to establish that the creditor has not been barred from pursuing a deficiency judgment against the debtor by operation of La.Code Civ.Proc. art. 2771 and La.Rev.Stat. 13:4106 A. [2] Even if the creditor is entitled to pursue a deficiency judgment, however, the debtor still has all of the rights and defenses available to a defendant in an ordinary proceeding, because the creditor has not yet obtained a judgment against the debtor. Therefore, the creditor must additionally plead and prove the existence of the obligation giving rise to the debt and the grounds of non-performance on which the creditor bases the action. First Guaranty Bank, Hammond, Louisiana v. Baton Rouge Petroleum Center, Inc., 529 So.2d at 842. Here, the court of appeal, after examining the evidence in the executory proceeding and in the present proceeding, stated: The creditor's right to a deficiency judgment is based solely upon submission of evidence establishing the existence of the obligation, the amount of the deficiency due, and that the property has been sold with benefit of appraisal. First Acadiana Bank did not establish, either in this suit or in the suit under executory process, the variable interest rate of the notes sued upon. We find this omission to be fatal in a suit for deficiency judgment because the creditor has not established the amount of the deficiency due. 562 So.2d at 1029 (citation omitted, emphasis added). Thus, the court of appeal barred the bank from any recovery whatsoever, not because the bank failed to comply with the appraisal requirements in the executory proceeding, but because the bank failed to prove the amount of interest due as part of its order of evidence at the trial on the merits. The court of appeal apparently confused the evidence requisite to a creditor's entitlement to pursue any further recovery against a debtor after a judicial sale under executory proceeding (full compliance in the executory proceeding with the codal and statutory requirements for appraisal) with the evidence necessary to prove the existence and the amount of the debtor's obligation and the default thereon at the trial on the merits of the action seeking recovery of the remaining debt. Stated otherwise, the court of appeal erred in completely barring the bank from pursuing further recovery on the debt when the bank had fully complied with the appraisal requirements in the executory proceeding. It is a defect in the proof of compliance with the appraisal requirements in the executory proceeding, and not a defect in the proof of the obligation at the trial on the merits, which triggers La.Rev.Stat. 13:4106 A's prohibition against obtaining further any recovery against the debtor. The creditor's failure to prove the variable interest rate at the trial on the merits at most would preclude the creditor from collecting any interest, just as any other failure to prove a particular element of the debtor's obligation would preclude that part of the recovery. Such a failure does not affect the creditor's recovery of the principal due on the notes. Because the principal balance of the notes far exceeded the guarantor's obligation, the failure of proof relating to the amount of interest due has no effect on the creditor's recovery in this case. The decision by the court of appeal denying any recovery because of the creditor's failure to prove the variable interest rate must therefore be reversed. [3]