Stjepan Sostaric and his then wife, Nancy, borrowed $200,000 from Sally Marshall, signed a promissory note and gave a security interest in property they owned in Berkeley Springs, West Virginia. Because the Sostarics fell behind in their payments, Marshall accelerated the note. Eventually, the property was offered for sale at a trustee’s sale. It was purchased by Marshall herself for $60,000.
Thereafter, Marshall sued the Sostarics for the deficiency. With fees, costs, etc., the deficiency came to over $175,000. It appears that Marshall filed a “motion for judgment,” which the trial court treated as a motion for summary judgment. At that point the Sostarics filed a response, but without any affidavits or any other evidentiary materials. Basically, the Sostarics claimed that $60,000 did not represent the home’s fair market value. To prevent Marshall from being unjustly enriched, they argued that they should receive a credit equal to the home’s value. The trial court concluded that the summary judgment motion was properly supported and that the Sostarics had failed to meet their burden in opposing the motion. Accordingly, judgment was entered for the full amount that was alleged to be due and owing.
In a proceeding to recover a deficiency judgment, may a homeowner challenge the fair market value of the home?
There was a procedural issue raised involving the failure to authenticate exhibits and to otherwise provide sufficient proof under the summary judgment rule. The Supreme Court bypassed this issue entirely, choosing instead to address the substantive issue--i.e., in a proceeding to recover a deficiency judgment, may a homeowner challenge the fair market value of the home?
This issue had been addressed by the Supreme Court nearly 20 years ago in Fayette County National Bank v. Lilly, 199 W.Va. 349, 484 S.E.2d 232 (1997). Lilly acknowledged that the majority rule would, in fact, permit homeowners to challenge the fair market value. Where the value of the home was greater than the amount actually received as part of a mortgage sale, the homeowner would be entitled to a credit equal to the home’s value. This, in fact, is the position adopted by the Restatement (Third) of Property: Mortgages §8.4 (“the deficiency defendant [has] the right to insist that the greater of the fair market value or the foreclosure sale price be used in calculating the deficiency”).
Nevertheless, Lilly rejected the majority rule. Two reasons were cited. First, Lilly concluded that our mortgage enforcement procedures would be “unsettled” by adopting the majority rule. Second, it was believed that any change in this aspect of the mortgage law should be done legislatively, not judicially.
Of course, one of the bedrock principles of our legal system of stare decisis--i.e., rulings of the Supreme Court are binding and should be followed unless good and sufficient cause exists for departing from them. Justice Ketchum, writing for a four-member majority, concluded that Restatement’s approach was “better and more legally sound.” Therefore, Lilly was overruled.
To begin with, Justice Ketchum pointed out that Westy Virginia’s mortgage laws were silent on this subject. Enforcement of a mortgage is equitable in nature, and even Lilly acknowledged that the Supreme Court had previously applied equitable principles to fill holes in the statutory scheme. Furthermore, Justice Ketchum found no authority or data demonstrating that adopting the Restatement’s rule would have any kind of unsettling effect.
Justice Ketchum also noted that Lilly created an anomaly. In deficiency judgment proceedings involving personal property (including, e.g., a mobile home), the owner could challenge the fair market value. Leaving Lilly undisturbed created an absurd result--a mobile homeowner could receive the benefit of a full, fair credit for market value, but other homeowners could not. For this reason, too, Justice Ketchum believed that it was appropriate to depart from Lilly’s holding.
Justice Davis, the author of the original Lilly opinion, dissented. According to Justice Davis, “nothing has changed” warranting any departure from the law announced in Lilly. The gist of the dissent is captured by its two headings. First, Justice Davis noted that “the doctrine of stare decisis requires allegiance to this court’s prior opinions. Second, she stated that “a change of prevailing law requires legislative, not judicial, action.”
This case represents another win for West Virginia homeowners. As Justice Ketchum observed, Lilly made it possible for mortgage holders to receive an unfair and unjustified windfall. The holding in this case prevents any windfall and, instead, insures that homeowners will be fairly treated in any deficiency proceedings.