Mr. Rubin has an active commercial transaction and litigation practice and has been a member of the Management Committee of the multi-state firm of McGlinchey Stafford, PLLC since 1993. He has been President of the American College of Real Estate Lawyers, the Louisiana State Bar Association, the Southern Conference of Bar Presidents (covering seventeen State Bar Associations), and the Bar Association of the U.S. Fifth Circuit Court of Appeals, and has served on the Board of the National Conference of Bar Presidents. He received the national Burton Award at the Library of Congress for outstanding legal writing and was honored as the 2007 Distinguished Alumnus of the LSU Law Center. He continues to serve as an Adjunct Professor at three law schools: the Paul M. Hebert Law Center at LSU, where he has taught real estate and finance since 1976; the Tulane Law School; and the Southern University Law Center.
Jamie D. Seymour is a former chemical engineer who is an associate with McGlinchey Stafford, PLLC; his practice focuses on commercial litigation, class action defense, and appeals.
At its most basic, a deficiency judgment is a procedural tool that allows a secured creditor who sells collateral for less than the total amount owed on a loan to collect the difference (the deficiency) from a defaulting borrower. The Louisiana Deficiency Judgment Act1 is not a solution unique to Louisiana, as many other states employ statutes and follow jurisprudential pronouncements that recognize deficiency judgments in some form or fashion,2 and numerous courts even use the phrase "deficiency judgment" when describing their state's rules.3 Page 786
The concept underlying all deficiency judgment rules represents a balancing of the interests of creditors (who desire to be paid in full), debtors (who desire to have the maximum value of the collateral which secures their obligation applied to their debt before they are pursued personally), and public policy (which seeks to prevent creditors from receiving a windfall either by under-valuing collateral or by selling collateral in a fashion that brings less than its true value). Each state balances these interests in a different fashion: some mandate procedural steps be followed,4others set time limits for obtaining a deficiency,5 and others look to the method by which the collateral was sold.6
This Article explores Louisiana's rules on deficiency judgment and how these rules have changed over time. The rules on deficiency judgment in Louisiana are statutory and flow from two separate sources-the Deficiency Judgment Act7 and the provisions of Louisiana's version of U.C.C. article 9.8
To fully appreciate Louisiana's rules on deficiency judgments, one must first take into account Louisiana's "title theory" of security devices and the fact that Louisiana, traditionally, has rejected self-help and has required creditors to use lawsuits to foreclose on the collateral that secures their loans.
As a civil law state, Louisiana has long-rejected the notion that the way a creditor obtains security for a loan is by a transfer (be it real or fictitious) of the ownership of collateral to the creditor.9 The Page 787 Louisiana approach recognizes that ownership of the collateral always remains with the debtor and that all the creditor can obtain is (1) a conventional security interest or mortgage10 that affects third parties, and (2) a right to seize and sell the collateral and obtain a privilege on the proceeds of the sale.11 The Louisiana rule is so strong that public policy forbids a debtor, at the time of giving a security interest in collateral, to agree that if the debtor ever defaults, the creditor automatically becomes owner of the collateral.12 Page 788
Louisiana's refusal to recognize real or fictional transfers of title to a creditor as a method of securing loans13 is different from the common law "deed of trust" theory (in which title is deemed to be transferred to the creditor until the loan is paid).14 In fact, the use of a "deed of trust" in Louisiana has been held to result not in a transfer of title but merely a Louisiana mortgage, with no transfer of title to the creditor, for Louisiana puts the substance of the transaction over the form when the substance is apparent on the face of the document.15 Page 789
The Restatement of the Law of Property, Mortgages has rejected the "title transfer" theory in deed of trust transactions and recognizes that the essence of a secured loan is that the ownership of the collateral should be seen as remaining with the debtor until default.16 Because title to the collateral always remains with the debtor, a default by the debtor does not result in an immediate transfer of ownership to the creditor in Louisiana. Rather, the creditor must take steps to seize and dispose of the collateral and seek to apply the proceeds of the sale to the debt. The secured creditor's rights to the proceeds are said to be a "privilege," because if the security interest is properly perfected, the secured creditor is entitled to the proceeds in preference to the claims of the debtor and all other third parties whose security interests are inferior to those of the foreclosing creditor.17
A Louisiana creditor is permitted to foreclose on collateral only upon the debtor's default.18 Louisiana has always rejected "self- Page 790 help"; with only a few limited exceptions,19 a creditor who attempts to take control of collateral outside of judicial process commits a tort.20 Thus, to distinguish these unlawful transactions from proper situations where the creditor does not commit a tort but where the question is the availability of a deficiency judgment, the remainder of this Article uses the phrase "private sale" only in reference to debtors who have voluntarily turned possession of the collateral over to the creditor for disposition.
Louisiana creditors may utilize one of three methods to recoup value from collateral: by judicial sale,21 by a private sale conducted Page 791 after the debtor has voluntarily turned over the collateral to the creditor,22 or by the debtor's voluntary transfer of ownership to the creditor after default.23 In each instance, the creditor must apply the proceeds realized from disposition of collateral to the debtor's outstanding debt. If a balance remains owing to the creditor after applying the sales proceeds to the debt, Louisiana law prevents the creditor from pursuing the debtor personally for the balance (the "deficiency") unless the creditor has followed certain procedures and complied with certain statutory conditions. Following these procedural and statutory requirements are key to the creditor's rights to a deficiency judgment.
The outline of the rules can be generally summarized as follows and are explored in detail in the rest of this Article:
- If the creditor forecloses by a judicial sale, the creditor is forbidden from pursing a deficiency unless the judicial sale strictly complies with the judicial appraisal procedures;24
- If the creditor conducts a private sale and the security interest is anything except a security interest under Louisiana's version of U.C.C. articles 825 or 9,26 the creditor is forbidden from pursuing a deficiency unless, after default, the debtor and creditor have reached a written agreement that meets Louisiana statutory requirements.27 A creditor, however, cannot use "self help" to seize the Page 792 collateral if the debtor does not voluntarily turn it over to the creditor. Louisiana historically has rejected "self help" remedies by creditors28 except in very limited statutorily- allowed circumstances.29
- If the creditor conducts a private sale and the security interest has been perfected under Louisiana's version of U.C.C. articles 830 or 9,31 then the sale will be presumed to satisfy the debt unless the creditor...