Sophisticated Guarantor May Waive Lender’s Good Faith Foreclosure Bid Obligations

Colorado’s C.R.S. §38-38-106(6) requires a bank to bid at least its good faith estimate of the property’s fair market value at foreclosure (if not bidding the full amount due). The purpose is to protect borrowers and guarantors from excessive deficiency claims. Although failure to bid the good faith FMV does not invalidate the foreclosure, it does provide at least a partial defense to a deficiency action; the borrower or guarantor may, if successful, at least limit the bank’s deficiency recovery.

On June 5, 2014, in Armed Forces Bank, N.A. v. Hicks, No. 13CA0875, the Colorado Court of Appeals held that a bank’s good faith foreclosure bid obligation may be waived by a guarantor as part of a guaranty agreement. Furthermore, typical guaranty boilerplate such as waivers of “anti-deficiency law” defenses and waivers of “any defenses given to guarantors at law or in equity other than actual payment and performance” are sufficient to accomplish the task.

In so holding, the Court of Appeals rejected arguments by the guarantors that such a waiver would be against public policy, at least where elements of overreaching or unfair bargaining position do not exist:

Public policy may override contract provisions when one party is in an unfairly superior bargaining position or overreaches in bargaining for a fees provision, such that its enforcement would be unconscionable. The [guarantors] have not suggested an absence of equal bargaining power or overreaching by the lender rendering the agreement unconscionable at the time it was made

Although the holding specifically deals with guarantors, there appears to be no reason why it would not also apply to borrowers. However, the holding may not be as broad as it seems. In rejecting the public policy argument based on a lack of traditional unconscionability factors and the experience and sophistication of the guarantors, Armed Forces Bank probably does not apply to consumer transactions and appears to leave a fairly wide door open for a borrower or guarantor to develop a viable defense. It does, however, provide lenders, most of which make their bids in good faith based on recent independent appraisals, a extra hurdle for obligors to overcome.