A large percentage of my asset protection clients are concerned about mortgage deficiency judgments . Many of these people hire attorneys other than myself to defend foreclosure actions in state court. One such client last week told me about his foreclosure attorney’s theory of defense against a deficiency claim asserted by a private party mortgagee who had sold a commercial property to my client with owner financing. In other words, the previous seller financed the purchase price and no third party lender was involved.
The client’s attorney believes that a lender cannot get a deficiency judgment based on owner financing when the lender takes back the property in a foreclosure. The attorney’s argument is that when the seller/lender takes back the property he has effected a recision of the sale contact. The seller is in the same or better position than he was when he sold the property and took back a mortgage; he has his same house back and the buyer’s payments to date. The seller cannot, the attorney contends, sue the buyer for additional money after he has been restored to his initial financial situation.
The equities are different when the lender is a third party. An the beginning of the transaction the lender has a sum of money no property; the lender is not restored to its initial position unless it gets back the money it loaned to the buyer. In deficiency proceedings the buyer argues that the value of the house acquired by the lender is equal to or more than the money loaned.
I am interested to find out whether this client and his attorney are successful using this argument to defeat the seller’s deficiency claim in their court case.
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