Full Credit Bid Rule Bars Recovery for Wrongfully Enjoined Lender

On June 30, 2014, Judge James A. Teilborg, a Senior District Judge in Arizona, ruled that Tri City National Bank (“TCNB”) was not entitled to bond money posted by the plaintiffs after TCNB was wrongfully enjoined from executing a trustee sale.  Grady v. Bank of Elmwood, 2014 WL 2930510 (D. Ariz. June 30, 2014).

In Grady, the plaintiffs initially sought injunctive relief against Bank of Elmwood (“BOE”).  Plaintiffs signed a promissory note and a deed of trust with BOE for their home loan of just over $1.8M.  Less than a year later, the plaintiffs filed suit in Maricopa County Superior Court seeking to have the note voided for fraud.  They moved for, and were granted, a preliminary injunction barring BOE from foreclosing on the property.  Plaintiffs were ordered to post a bond in the amount of $165,000 to cover mortgage payments and future costs.  They posted the bond.

Just weeks later, BOE was closed by the FDIC and its assets were sold to TCNB.  TCNB intervened and later sought to modify the preliminary injunction.  The bond amount was also increased to cover additional mortgage payments and property taxes.  Plaintiffs posted the additional $103,330.00.

The FDIC was substituted in for BOE on several of the counts in the complaint on July 7, 2010 and the case was removed to federal court.  It was remanded back to state court after Plaintiffs agreed to dismiss the claims against the FDIC.  TCNB then moved again to increase the bond amount to cover additional mortgage payments and ongoing attorneys’ fees.  The Plaintiffs, however, did not post this additional $81,670.

The Plaintiffs then sought to amend their complaint and add TCNB as a defendant to the claims that were previously dismissed against the FDIC.  The FDIC intervened and removed the case again.

In April of 2012, the Court dissolved the preliminary injunction because the Plaintiffs did not post the additional security bond ordered by the superior court.  TCNB then held a trustee’s sale in October of 2012 and submitted a full credit bid for $1.9M.

The claims against TCNB were ultimately dismissed and then TCNB sought recovery of the security bond.  The Plaintiffs also sought recovery of the bond.

In resolving the dispute over which party is entitled to the security bond, the Court found that TCNB was wrongfully enjoined from proceeding with the trustee sale all along.  A party who is wrongfully enjoined is presumptively entitled to recover the security bond but a defendant is only entitled to recover provable damages as the result of a wrongful injunction.

TCNB sought recovery of missed mortgage payments and property taxes as its damages but the full credit bid rule got in the way of that recovery.  A full credit bid is when a lender, i.e. the beneficiary of a deed of trust, purchases a property by bidding the full amount of debt owed by the borrower and then crediting that towards the purchase price.  The market value of the property is the price it sold for at the foreclosure sale.  Because the lender bid the full amount of the debt owed, it has no damages from the loan itself.

Here, TCNB’s full credit bid was held to have extinguished its damages arising from the Plaintiffs’ debt, including the missed payments and the property taxes.  So, despite having been found to be wrongfully enjoined, TCNB had no damages and thus the Court denied its request to recover the security bond.

The bottom line:  full credit bids can have unintended consequences and care should be taken to ensure that the pros and cons of making a full credit bid are fully evaluated before the trustee’s sale is held.