The Court hands down a decision today affirming that a bond-holder cannot get a deficiency judgment on a defaulted revenue bond. Brainerd’s Housing and Redevelopment Authority sold a $2.1 million revenue bond in 2005 to kick-start development of Brainerd Oaks, slated to be a 96-house development. Not surprisingly, the 10 houses built with the bond proceeds didn’t sell well, and the bond went into default with about $1.9 million due. The bank that bought the bond brought foreclosure on the 7 lots that remained unsold, as the bond included a mortgage on the lots among its securities. The bank also sought a deficiency judgment – typical in mortgage foreclosure, but something that clearly reached for assets outside the revenue sources identified in the bond. The HRA opposed the deficiency judgment, and the district court agreed, granting summary judgment against the deficiency request.
The Court of Appeals affirmed the decision, finding that recovery on a revenue bond is strictly limited to the sources of revenue identified in the bond. A bond is not the same as a promissory note. Going through the bond terms itself and the statute, this seems painfully obvious, but what about the mortgages? The ability to obtain a deficiency judgment in foreclosure is tied to the entitlement to recover in the underlying contract – such as the promissory note signed with a standard house mortgage. Here, though, the mortgages are attached to a revenue bond, which identified four (thoroughly depleted) sources of revenue, and limited payment to proceeds from those assets. The mortgage foreclosure does not allow an end run around the normal operation of revenue bonds.