By Robert E. Hayes

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In cases where a mortgage on real estate constitutes all or a significant portion of a lender’s collateral, South Dakota’s anti-deficiency statutes can pose significant problems for a lender. South Dakota’s statutes for conventional mortgages and our statutes for 180-day redemption mortgages both provide for the same result: if a mortgage holder who is foreclosing intends to preserve a deficiency judgment because the value of the real estate collateral is not going to be sufficient to pay the whole indebtedness, the mortgage holder must, prior to entry of a judgment, establish “at the time of the trial by competent proof” the value of the property, net of prior liens, as being less than the amount of the mortgage holder’s debt. Failure to do so will result in the foreclosure sale operating as a complete satisfaction of the debt secured by the mortgage.

The statutes require that the mortgage holder obtain a valuation of the property, set a hearing to establish that value, and present evidence at that hearing to prove the value and to prove that value, less indebtedness secured by prior liens, is less than the amount of the debt owed the mortgage holder. Generally, proving the valuation will require testimony from a licensed appraiser, although some courts have been willing to accept the testimony of other parties who can be proven to be expert in the field of real estate valuation. Assuming that the lesser value is established, the Court will provide in its foreclosure judgment that the mortgage holder is authorized to bid that lesser value (net of prior liens) at sale and if there are no other bidders, or no bidders willing to bid a sum sufficient to pay the secured debt in full, the mortgage holder is entitled to a deficiency judgment for the remaining balance which can be collected against other assets of the borrower.

The issue becomes more complicated when one or more guarantors guarantee the debt and waive any defense based on the anti-deficiency statutes. The issue of that type of waiver is always open to a court determination of whether the waiver is against public policy. In South Dakota, however, statutory and case law has also established that the liability of a guarantor cannot be larger in amount or more burdensome in other respects than the liability of the principal, although there is some confusing case law in that regard. Nonetheless, it is likely that a mortgage holder who forecloses without complying with anti-deficiency statutes will be left with no claim against either the principal debtor or the guarantor for any shortfall which may result from the ultimate resale of the property.

For assistance, contact Bob Hayes at [email protected].

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit