Missouri Supreme Court Opines on Real Estate Foreclosure Practice

April 27, 2012 at 9:53 pm Leave a comment

Last week, the Missouri Supreme Court upheld the long-standing practice by which lenders in Missouri determine deficiency amounts following real estate foreclosure proceedings. In First Bank v. Fischer & Frichtel, Inc., the Court held that Missouri common law requires such deficiency amounts to be determined by taking the difference between the amount of the debt and the amount received at a foreclosure sale, rather than the difference between the amount of the debt and the property’s fair market value.

Summary of the Facts.  In June 2000, Fischer & Frichtel, Inc. (“FFI”) borrowed $2.5 million from First Bank to finance the acquisition of lots for residential development. After several extensions to the loan’s maturity date, the loan ultimately matured in September 2008 leaving First Bank with an unpaid principal balance of approximately $1.1 million.  First Bank foreclosed on the unsold lots and purchased the property at the foreclosure sale with a credit bid of $466,000.  In November 2008, First Bank filed suit against FFI to recover the deficiency.  Evidence presented by FFI at trial indicated that the fair market value of the property was $918,000.  At the conclusion of the lawsuit, the trial court instructed the jury to determine the amount of the deficiency based on the “fair market value” of the property at the time of the foreclosure sale.  The jury determined the deficiency to be the difference between the fair market value ($918,000) and the amount of the debt ($1.1 million).  First Bank appealed claiming that the jury instruction erroneously instructed the jury to calculate the deficiency using the fair market value rather than the foreclosure sale price.  The trial court granted First Bank’s motion for a new trial.  FFI appealed.  The Missouri Court of Appeals transferred the Case to the Missouri Supreme Court.

Decision of the Missouri Supreme Court.  The Missouri Supreme Court upheld the trial court’s decision to grant a new trial based upon the erroneous jury instruction and held that deficiencies are properly based upon the foreclosure sale price rather than the fair market value.  The opinion affirms a prior holding that debtors may void a properly noticed and carried out foreclosure sale only by showing that the sale price is so inadequate that “it shocks the conscience… and is in itself evidence of fraud.”  Missouri’s standard for voiding a foreclosure sale is very strict.  The Court, citing a previous decision, notes that “more than one Missouri case has refused to set aside a sale that was only 20 to 30 percent of the fair market value because of Missouri’s historical practice of requiring an inference of fraud in addition to a sale price that ‘shocks the conscience.'”

Does This Holding Put the Fair Market Value Debate to Bed for Good?

Not necessarily.  The Court considered the sophistication of the debtor in its analysis of FFIs argument.  In fact, the Court noted that the policy arguments asserted by FFI “principally apply to individuals and small businesses that have no realistic ability to bid themselves, not to a sophisticated entity such as Fischer & Frichtel…”  Would the Court have used a different standard if the debtor was an individual or small business?

Further, although the Court upheld the practice of using foreclosure sale price to determine deficiencies, it did acknowledge that the policy debate in favor of fair market value has merit.  “The policy debate presented by the parties may explain why so many states have chosen to deal with this issue by statute, rather than by the common law, as still is the case in Missouri.”  Will the Missouri legislature be persuaded by FFIs arguments and introduce legislation to change the way lenders calculate deficiencies?

Entry filed under: Financial Institutions, Uncategorized. Tags: , , , , .

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