Deed In Lieu Of Foreclosure - What's The Consideration?

As the effects of the recent recession continue to ripple through the economy, lenders are increasingly considering deed in lieu of foreclosure agreements instead of the traditional foreclosure process. One issue that arises under Kentucky law relating to deeds in lieu of foreclosures is how the parties are to reflect the required “consideration” statement in the accompanying deed transferring the property. This is a question that everyone should want to get right, as it may be a Class D felony to misstate the consideration exchanged. See KRS 382.990(8).

KRS 382.135(1)(b) requires a deed to contain a statement of the full consideration. What that means in practice will depend upon whether the transfer is “by gift, or with nominal or no consideration” or it is otherwise. KRS 382.135(1)(d). For the “gift” category the parties must state in a notarized certificate “the estimated fair cash value of the property.” Id. Otherwise, the parties must state “the full consideration paid for the property.” Id. As a starting point, a valid assumption may be stated that the typical deed in lieu of foreclosure is not a gift, nor is it being exchanged for only nominal or no consideration. The use of the statute’s language respecting “full consideration” may be argued to be the proper alternative for use in most deed in lieu situations, but we are quick to note that our research indicates that no Kentucky court has rendered a recorded decision on this question.

Three potential values might reasonably be considered for use in deeds that accompany the deed in lieu of foreclosure agreements. First, the deed might list as its full consideration the dollar amount of the debt forgiven as a result of the conveyance. To the parties participating in the transaction, we suspect that all would recognize the bargained for exchange as being the lender’s release of its contractual right to be made whole through its pursuit of a future collection action. However, while the record amount of the indebtedness is a number known to all, the ability of the lender to be made whole through foreclosure litigation is always speculative. A second possible value would be a value established in a recent appraisal of the property. While this might be the correct way to go for a “gift” type exchange, it appears that the public policy of the Commonwealth does not favor such treatment for non-gift exchanges, at least as reflected in the wording the legislators approved when they drafted KRS 382.135, particularly its sub-section (1)(d). It is even open to argument whether any appraiser’s estimate of the real property’s potential value is indicative of the consideration in a deed in lieu of foreclosure transaction, as the benefit of the bargain to all parties has much more to do with the debt memorialized in the loan documents at issue. A third potential consideration value that might be considered would be the most recently appraised value of the property as determined by the applicable Property Valuation Administrator. Like the second alternative above, this has similar drawbacks.

Having posted this question without a definitive resolution, we conclude by noting that no Kentucky court in a recorded decision has appeared to address this specific issue. We further speculate that the first of the valuation methods provides to all parties a more certain number and one that may not be subject to a future battle of competing expert appraisers. Nonetheless, each situation in which a deed in lieu of foreclosure arises may be factually unique and careful attention must be given to resolving the question, especially in light of the potential criminal penalty implications.

If you have any questions about these or any other issues regarding deeds in lieu of foreclosure agreements, please contact one of Frost Brown Todd’s attorneys.

Posted by: William T. Repasky

Categories: Foreclosures, Kentucky