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Highest bid at foreclosure auction was best indicator of market value.

When property sold at a foreclosure sale for less than twenty percent of the value claimed by the borrower, the Court of Appeals of Kentucky found that the auction price was more relevant on true market value.

In 2005, Eagle Cliff Resort, LLC (Eagle Cliff) obtained a $1.6 million commercial mortgage loan from KHBBJB, LLC (KHB) to purchase and develop a large tract in a rural area into a resort complex. After Eagle Cliff defaulted in 2006 and KHB foreclosed, the court ordered the lot to be auctioned based on an appraisal of $1,057,500, as valued by the court-appointed appraisers. At auction, KHB was the sole bidder and acquired the property for $710,000.

After the sale price was reported, Eagle Cliff exercised its right to a hearing on the appraisal, alleging that it lost its redemption right because the property was undervalued. In Kentucky, borrowers can redeem their property for a year following the foreclosure sale, but only if the sale price is less than two-thirds of the appraisal. The court conducted a lengthy evidentiary hearing, at which Eagle Cliff's appraiser testified that the property should have been valued at $4 million. The court ultimately found the original appraisal to be more credible and upheld the sale based on that value. Eagle Cliff appealed.

The appellate court began by noting that an appraisal adopted by the court must be upheld unless found to be irregular, erroneous, or unconscionable. The court acknowledged the large discrepancy between Eagle Cliff's appraisal and the court's, but found sufficient evidence to support the lower valuation. In particular, the court found Eagle Cliff's $4 million figure to be unreasonable for property in a remote mountain area that has never sold for more than $2 million; Eagle Cliff paid $1.5 million, the highest price to date.

The court also stressed the fact that no one bid against KHB, even though the auction was widely advertised at a cost exceeding $8,500 and Eagle Cliffhad its $4 million appraisal beforehand. Finally, the trial court appropriately "took judicial knowledge of prevailing economic conditions" in adopting the lower appraisal, according to the court. The court thus concluded that the appraisal was based on substantial evidence and was not irregular, erroneous, or unconscionable. The trial court decision was affirmed.

Eagle Cliff Resort, LLC v. KHBBJB, LLC

Court of Appeals of Kentucky

September 4, 2009

2009 WL 2855020 (Ky. App. Ct. 2009)

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Title Annotation:Recent Court Decisions
Publication:Appraisal Journal
Geographic Code:1U6KY
Date:Jan 1, 2010
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