UKRAINE LEGAL UPDATE
3 August 2022
Supreme Court decides a mortgagee may not seek a deficiency judgment after taking the collateral in payment. Doing so would amount to bad faith, thus precluding the remedy.
In this case the facts were straightforward and the Supreme Court’s decision uncontroversial.
A mortgagor, having defaulted on a debt, turned the collateral in payment over to the mortgagee. The mortgagee subsequently applied for a deficiency judgement, seeking a shortfall between the property’s value and the debt amount. The trial court found for the claimant. The appeal court quashed that decision and ruled for the mortgagor.
The Supreme Court upheld the appeal court’s decision. It opined that while the Civil Code requires a proper discharge of a debt to end an obligation, in this context, and given the express provisions of the mortgage law, the mortgagee’s taking the collateral was a proper discharge, even if its value was not be enough to pay off the debt in full.
What’s interesting is a rationale that the Court saw fit to supply for the statutory rule. According to the equities and nature of a security obligation, the Court said, the onus is on a mortgagee to see to it that the collateral’s value matches that of the debt. A mortgagee, if necessary, should take proper steps and seek suitable remedies to ensure the collateral’s good value. Otherwise a mortgagee is acting against good faith, a general duty of all parties to a contract, and so loses his remedies.