Lenders and borrowers, take note, because within the next six to twelve months, Missouri’s Supreme Court could dramatically alter existing Missouri law on the calculation of deficiency judgments after a foreclosure sale. Or, conversely, the Missouri Supreme Court could choose to confirm Missouri’s traditional common law approach which has been the existing precedent for over seventy years, subject to the General Assembly providing definitive guidance to change the law. Either way, the Missouri Supreme Court’s decision in First Bank v. Fischer & Frichtel, Inc. (Case No. SC91951) will be important.
In First Bank v. Fischer & Frichtel, Inc., First Bank (the “Lender”) loaned Fischer & Frichtel (the “Borrower”) $2,576,000 for the Borrower’s purchase of twenty-one lots in the St. Albans subdivision/development in Franklin County, Missouri. The deed of trust relating to the loan included a “power of sale” provision in the event of Borrower’s default. 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. But, after the Borrower failed to pay the balance due, the Lender hired a company to conduct 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 of St. Louis County (Case No. 08SL-CC04789) admitted certain evidence regarding the value of the foreclosed property, which reflected an appraised value of each lot of approximately $100,000, as opposed to the bid made by the Lender at the foreclosure sale which was almost half that. Instruction 7 to the jury 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 Instruction 7 to the jury 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.
On August 9, 2011, the Eastern District Court of Appeals, per curiam, transferred the case to the Missouri Supreme Court, under Rule 83.02, finding that the case “presents issues of general interest and importance and for the purpose of reexamining existing law.” The Eastern District judges felt it was time for the Missouri Supreme Court to reevaluate Missouri’s common law approach to calculating a deficiency judgment which dates back to the early twentieth century, an approach which a growing majority of states have abandoned either by statute or judicial decision. Missouri law currently provides that, absent unfair dealing in the conduct of a foreclosure sale, a lender is entitled to a deficiency judgment against a borrower in the amount by which the debt, costs and other legal charges exceed the price paid at the sale. Reed v. Inness, 102 S.W.2d 711 (Mo. Ct. App. 1937).
The Borrower invoked a strong public policy argument against this traditional approach and asked the Court to “stop banks from abusing the foreclosure process and to protect borrowers at foreclosure sales from windfall-seeking lenders.” The Borrower has requested that the Missouri Supreme Court adopt the rule followed by a growing number of jurisdictions, such as Nebraska (76-1013) and Colorado (38-38-106), which provides that the proper measure of damages in a suit on a note following a foreclosure sale is the difference between the fair market value of the property on the date of the sale and the amount due on the note.
The Missouri Supreme Court has not yet docketed First Bank v. Fischer & Frichtel, Inc. (Case No. SC91951) for oral arguments. While the fair market value approach may be forthcoming, do not be surprised if the Missouri Supreme Court resists changing the law through its decision. It may conclude that under the particular facts of the case which include extensive internal appraisal and valuation, the Lender did not bid fairly at the sale, but refuse to overturn nearly a century of precedent, absent clear legislative direction.