Deficiency Judgment

A deficiency judgment is a money judgment for the difference between the debt outstanding (principal, interest, fees, costs) and the proceeds of foreclosure sale, where those proceeds are insufficient to satisfy the debt. On a recourse loan, the deficiency is the personal liability of the borrower (and any guarantors) that survives the foreclosure sale. Texas Property Code § 51.003 governs deficiency suits following nonjudicial foreclosure of real property and provides borrowers a critical fair-market-value offset right.

Two-year deficiency suit limitation

Section 51.003 imposes a two-year limitation on deficiency suits following nonjudicial foreclosure of real property, shorter than the periods that would otherwise govern a suit on the debt (four years for debt under § 16.004(a)(3), or six years on a note payable at a definite time under Tex. Bus. & Com. Code § 3.118(a)). The two-year clock runs from the date of the foreclosure sale. A lender that fails to file a deficiency action within two years loses the claim entirely.

Fair-market-value offset

Section 51.003(b)-(c) provides borrowers a critical defense to deficiency claims: the right to request a court determination of the fair market value of the foreclosed property at the time of the sale. If the fair market value exceeds the foreclosure sale price, the deficiency is offset by the amount by which the fair market value, less any lien on the property that the foreclosure did not extinguish, exceeds the sale price. The offset limits the deficiency when the property sells for less than its value. Under Texas law, inadequate price alone does not invalidate a foreclosure sale (Moayedi v. Interstate 35/Chisam Road, L.P., 438 S.W.3d 1 (Tex. 2014)).

Procedure for fair-market-value determination

The borrower must request fair-market-value determination in the deficiency suit. The finder of fact determines fair market value as of the sale date from competent evidence, which under § 51.003(b) may include (1) expert opinion testimony; (2) comparable sales; (3) anticipated marketing time and holding costs; (4) cost of sale; and (5) any discount needed to bring future sale proceeds or cash flow to present value. If no party requests the determination, or no competent evidence of value is introduced, the sale price is used to compute the deficiency (§ 51.003(c)). Successful fair-market-value challenges can substantially reduce or eliminate deficiency liability.

Guarantor liability

Section 51.003(b) lets any person against whom a deficiency is sought, including a guarantor, request a fair-market-value determination. Where the holder has already obtained a judgment against the guarantor, § 51.005 lets the guarantor sue for that determination within 90 days after the foreclosure sale or after receiving actual notice of it, whichever is later. The offset can be waived. In Moayedi, the Texas Supreme Court held that a guarantor's general waiver of defenses in the guaranty waived the § 51.003 offset.

UCC personal-property collateral

For personal property collateral disposed of under UCC Article 9, the deficiency framework is governed by Section 9.615 (rather than Property Code § 51.003). The UCC requires "commercially reasonable" disposition; a disposition that is not commercially reasonable can result in elimination or limitation of the deficiency under the rebuttable-presumption rule (§ 9.626). The "low-price" defense under UCC Article 9 and the fair-market-value defense under Property Code § 51.003 are conceptually similar but procedurally distinct.