On Tuesday, April 17, 2012, the Missouri Supreme Court handed down its decision in First Bank v. Fischer & Frichtel, Inc. (Case No. SC91951), a case which we originally discussed in early-October. The Court’s 6-1 decision (with Justice Draper and Justice Price not participating and Justice Teitelman dissenting in a separate opinion) upheld Missouri’s common law approach to calculating the amount of a deficiency judgment resulting from a foreclosure. Missouri courts have long held that the measure of a deficiency is the difference between the debt owed and the price paid at a foreclosure sale. The Court stated that any change to that law should be made by statute.
First Bank (the “Lender”) loaned Fischer & Frichtel (the “Borrower”) $2,576,000 for the Borrower’s purchase of twenty-one lots in Franklin County, Missouri. Over the next eight years, the Borrower sold twelve of the twenty-one lots and made payments toward the principal on its loan, which, after several modifications, was to become due on September 1, 2008. After the Borrower failed to pay the balance due, the Lender conducted a foreclosure sale for the nine remaining lots. After adhering to Missouri’s foreclosure procedures, the Lender made the only bid at the sale and purchased the lots for $466,000, leaving a balance due on the note of $667,875.75, which the Lender then sued to collect.
At trial, the Circuit Court admitted certain evidence regarding the value of the foreclosed property, which reflected an appraised value of each lot of approximately $100,000. The Lender’s bid at the foreclosure sale which was almost half that. The jury instruction stated: “If you find in favor of [Lender], then you must award [Lender] the balance due [Lender] on the promissory note on the date of maturity, less the fair market value of the property at the time of the foreclosure sale, plus interest.” The trial court overruled the Lender’s objection to this instruction and the jury awarded the Lender $215,875 for its deficiency judgment and $37,500 for interest. The Lender, claiming it was due a deficiency judgment in the amount due on the note less the price bid at the foreclosure sale, filed a motion for new trial, arguing that the circuit court erred in submitting the jury instruction since it misstated Missouri law. After the circuit court granted the Lender’s motion, the Borrower appealed to the Missouri Court of Appeals for the Eastern District, which subsequently transferred the case to the Missouri Supreme Court.
The Borrower asked the Missouri Supreme Court to overrule Missouri’s common law approach to measuring deficiency judgments by adopting the Restatement (Third) of Property fair value approach. This approach limits a lender’s deficiency damages to the difference between the fair market value of the property on the date of the sale and the amount due on the note. During oral argument, counsel for the Borrower stated that 35 states have incorporated a fair market value approach. However, the Court’s opinion notes that all of the states that follow the fair market value approach have either always done so or have done so in accordance with state statute.
While lenders may take comfort from the status quo ruling as to the measure of deficiency judgments, be forewarned that the Court certainly seems willing to revisit another aspect of the foreclosure process – a challenge to the strict standard for voiding a foreclosure sale based upon an inadequate sales price. A borrower must show that the price paid at the sale is “so gross that it shocks the conscience…and is in itself evidence of fraud.” Cockrell v. Taylor, 145 S.W.2d 416, 422 (Mo. 1940). Although the Borrower argued that this standard is so strict that it provides an illusory remedy, it did not ask the Court to revisit this onerous standard. However, the Court found this surprising in light of the fact that the Court has not reexamined the standard for voiding a foreclosure sale in more than sixty years, and even then, the Court apparently did not consider whether its standard for setting aside a sale was out of step with that used in other states at the time.
In light of the Court’s analysis in this case, we advise you to carefully assess your credit bid at a foreclosure sale. This case may prompt disgruntled borrowers to challenge the validity of the price paid at a sale and the Court seems willing to revisit its ancient standard.