​In BB&T v. Smith et al. (COA14-554) issued on February 17, the Court of Appeals held that the so-called “fair market value defense” in lender deficiency actions applies not only to owner-obligors, but also to guarantors. This opinion represents a marked shift from precedent and comes ahead of the much-anticipated ruling by the Supreme Court in High Point Bank & Trust Co. v. Highmark Props, LLC, a case postured with potential for the Supreme Court to offer the final word on this same issue later this year.

The fair market value defense arises in the context of post-foreclosure deficiency actions by lenders. By statute, North Carolina provides an affirmative defense to borrowers based on the sale amount of the property and its fair market value. If the borrower proves the property was “fairly worth the amount of the debt” and the lender is the purchaser, the deficiency claim is defeated. Similarly, if the sale amount is determined to be “substantially less” than the true value of the property, the borrower is entitled to an offset against the deficiency claim. The policy behind the statute is to avoid windfall deficiency claims predicated on below market foreclosure sales.

For many years, the Court of Appeals has interpreted the fair market value defense to apply exclusively to owner-obligors. See, e.g., Wells Fargo v. Arlington Hills; Borg-Warner v. Johnston. This interpretation is based on the plain language of the statute and can be traced back at least as far as the Court’s 1979 opinion in First Citizens v. Martin. The propriety of this precedent, however, was questioned last year in the High Point Bank case. In that case, the lender strategically dismissed the owner-obligor from its deficiency action to avoid litigating the fair market value defense. The guarantors successfully re-joined the borrower prior to trial and a jury determined an offset was appropriate based on the parties’ valuation evidence.

High Point Bank appealed application of the fair market value defense to reduce the guarantors’ liability. Without reaching the issue of whether the defense applied personally to the guarantors, the Court of Appeals affirmed the trial court’s ruling. The Court found that the reduction of liability was not based on an application of the defense to the guarantors, but rather application of the defense to the owner-obligor and the corresponding reduction in the amount of the debt. In other words, the guarantors’ obligation was reduced under the principle that the guarantors’ obligation is based on the amount owed by the borrower, not a distinct application of the fair market value defense to the guarantors.

The Supreme Court granted discretionary review of the High Point Bank decision, leading many to speculate that the Court will take the opportunity to address the limits of the fair market value defense. The last time the Supreme Court weighed in on the subject was a 1937 opinion under a prior version of the statute—a version that was repealed before being reenacted in its current form. With the BB&T opinion, the Court of Appeals contradicted its own precedent and affirmatively held that the fair market value defense applies personally to guarantors. With precedent now on both sides of the issue, the law is in a state of uncertainty until the Supreme Court provides guidance.


On September 25, 2015, the Supreme Court issued its opinion in High Point Bank & Trust Co. v. Highmark Props, LLC, reversing the existing line of Court of Appeals cases and conclusively holding that § 45-21.36 is available to guarantors regardless of whether they own title to the underlying real property. This ruling represents a significant shift in guarantor liability under North Carolina law of which lenders should take note.

◀︎ Back to Thought Leadership