Opinion handed down April 12, 2012
Fischer & Frichtel elected to default on their loan with First Bank. After First Bank purchased the property at a foreclosure sale, it filed suit against Fischer & Frichtel to recover the unpaid principal and interest on the loan. Over First Bank’s objection, the trial court instructed the jury to determine any deficiency owed by Fischer & Frichtel by using the fair market value of the property at the time of the foreclosure sale in its calculation. After a jury verdict, First Bank filed a motion for a new trial, arguing that Missouri law requires the damage instruction to be based on the amount obtained at the foreclosure sale instead of the fair market value. The trial court agreed and granted a new trial. On appeal, the Supreme Court of Missouri held the damage instruction shall be based on the amount obtained at the foreclosure sale, affirming the trial court’s judgment granting a new trial.
I. Facts & Holding
In June 2000, Fischer & Frichtel, a real-estate developer, financed the purchase of 21 residential lots in Franklin County by borrowing more than $2.5 million from First Bank.[2] Fischer & Frichtel executed a deed of trust, with the lots as collateral for the loan.[3] From 2000 to 2005, Fischer & Frichtel sold 12 of the 21 lots. But after the housing market began to decline in 2005, the developer was unable to sell the nine remaining lots.[4] After several extensions of the maturity date, the loan came due on September 1, 2008. Fischer elected to default after the parties had failed to reach an agreement on an additional extension.[5] After Fischer & Frichtel refused to pay the remaining principal of more than $1.1 million, First Bank foreclosed on the remaining nine lots.[6] The foreclosure sale took place in December 2008, and as the sole bidder, First Bank purchased the property for $466,000.[7]
Prior to the foreclosure sale, First Bank sued Fischer & Frichtel for the unpaid principal and interest on the loan.[8] Trial commenced in January 2010, and Fischer & Frichtel presented expert testimony that although First Bank had paid only $466,000, the fair market value of the foreclosed property was $918,000.[9] Fischer & Frichtel also presented documents establishing that First Bank valued the property at $1.134 million at the time of default.[10] First Bank responded to the evidence by stating that because the real estate market was declining, not only was the value of the property to the bank only $675,000, but it needed to be discounted to $466,000 because First Bank was going to have a difficult time finding a buyer for the property.[11]
Over First Bank’s objection, the trial court instructed the jury to determine any deficiency owed by Fischer & Frichtel by using the fair market value of the property at the time of the foreclosure sale.[12] Pursuant to this instruction, the jury found the fair market value of the property to be $918,000, and that Fischer & Frichtel owed First Bank $215,875.[13] In response, First Bank filed a motion for a new trial, arguing that Missouri law required the damage instruction to be based on the amount obtained at the foreclosure sale as opposed to the fair market value.[14] The trial court agreed and granted a new trial.[15]
Fischer & Frichtel appealed the judgment of a new trial and argued that the Missouri standard for setting aside a foreclosure sale was so stringent that it was merely an illusory remedy for an unfairly low sale price.[16] Because cash must be offered at the foreclosure sale, Fischer & Frichtel stated that the ordinary bidder is typically out of luck as they are unable to secure financing during the short time period between notice of the sale and the actual sale.[17] The developers argued that these artificially low sale prices lead to a windfall for lenders.[18]
While First Bank rebutted Fischer & Frichtel’s fairness contentions with factual and policy arguments, the Supreme Court of Missouri devoted little attention to First Bank’s concerns because “nearly all of the problems that Fischer & Frichtel alleges concern not the fairness of the deficiency determination itself but the fairness of the foreclosure sale price due to lack of sufficient notice to obtain alternative financing or other bidders.”[19] The Court was seemingly perturbed that Fischer & Frichtel did not ask the Court to reexamine Missouri’s 60-year-old strict standard for voiding a foreclosure sale.[20] In turn, the Court noted that 1) Fischer & Frichtel did not file a timely challenge to the foreclosure sale and could not have met the Missouri standard for setting aside the sale; 2) the policy reasons Fischer & Frichtel raised had no applicability to a sophisticated borrower like themselves and 3) hinted that the Missouri legislature may be in the best position to resolve the issue.
Consequently, the Court sided with First Bank and affirmed the judgment for a new trial.[21] Chief Justice Teitelman wrote a lone dissenting opinion in which he agreed with Fischer & Frichtel, noting that “[t]he purpose of a damage award is to make the injured party whole without creating a windfall” and claimed “there is no reason, except for tradition, to perpetuate this anomaly in Missouri law and continue measuring the deficiency with reference to the foreclosure sale price.”[22]
II. Legal Background
Courts have adopted two approaches to reviewing claims that the amount received at a foreclosure sale is insufficient to measure the amount of a deficiency.[23] One approach is to allow the foreclosure sale price to stand “only if the debtor does not challenge the adequacy of the foreclosure sale price in the deficiency action.”[24] When such a challenge arises under this approach, states use varying standards typically set out by statute for determining whether to accept the foreclosure sale price in determining the deficiency or reject it in favor of the fair market value.[25] Among these standards, the Restatement (Third) of Property recommends allowing debtors to simply pay the difference between the debt and the fair market value of the property at the time of the foreclosure if the foreclosure sale price is challenged.[26]
Missouri, however, is governed by the common law and has traditionally followed a different approach.[27] Missouri, and the other common law states, requires a debtor to pay the entire difference between the debt owed and the foreclosure sale price.[28] Further, “they do not permit a debtor to attack the sufficiency of the foreclosure sale price as part of the deficiency proceeding even if the debtor believes that the foreclosure sale price was inadequate.”[29] Instead, Missouri requires a debtor to bring an action to void the foreclosure entirely.[30] In order to void a properly noticed and carried out foreclosure sale the debtor must show that “the inadequacy … [of the sale price is] so gross that it shocks the conscience … and is in itself evidence of fraud.”[31] Missouri’s standard for proving that a foreclosure sale “‘shocks the conscience’ is among the strictest in the country.”[32] If the foreclosure sale survives such an action, Missouri courts have determined it fair to require the debtor to pay the deficiency with regard to the foreclosure sale price.[33]
III. Comment
The dissent makes a valid argument that the aim of damages is only to make a damaged party whole. But given the current economic climate, the Court correctly ruled that the deficiency should be based on the amount obtained at the foreclosure sale. The policy arguments offered by First Bank stress the fact that by using this figure, the risk does not fall as heavily on the lender. This is important during rough economic times. Too much risk on the lenders could lead to a lack of financing for stimulating investments and developments. In turn, the Court correctly left such an impactful economic decision to the legislature.
- Cody Reinberg
[1] No. SC91951 (Mo. April 12, 2012) (en banc), available at http://www.courts.mo.gov/file.jsp?id=53679. The West reporter citation is First Bank v. Fischer & Frichtel, Inc., 364 S.W.2d 216 (Mo. 2012) (en banc).
[2] Id. at 3.
[3] Id.
[4] Id.
[5] Id.
[6] Id. at 4.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id. at 5.
[15] Id.
[16] Id. at 10.
[17] Id.
[18] Id. (“Because realistically the lender often will be the sole bidder, it can buy the foreclosed property for far less than market value, sell the property at a profit and then collect a deficiency from the borrower based on the below-market value it paid for the property.”)
[19] Id.
[20] Id. at 11-12 (“This is surprising in one sense, for setting aside an unfair sale, rather than allowing it to stand unchallenged and then considering whether to adjust how to determine the deficiency, would avoid many of the policy concerns raised by both parties about forcing one or the other to accept an undue or unknown risk in not knowing whether the foreclosure price will remain standing in a later deficiency action.”)
[21] Id. at 15.
[22] Id. at 6 (Teitelman, C.J., dissenting).
[23] Id.
[24] Id.
[25] Id. Standards range from whether there is a difference between the two prices, to whether the foreclosure sale price is substantially lower than the fair market value, to whether the foreclosure sale price is so much lower than the fair market value that it shocks the conscience. Mich. Comp. Laws. Ann. § 600.3280 (West 2012); Tenn. Code Ann. § 35-5-118; R.K. Cooper Const. Co. v. Fulton, 216 So.2d 11, 13 (Fla. 1968).
[26] Restatement (Third) of Property § 8.4.
[27] Id. at 8.
[28] See, e.g., Rhode Island Depositors Econ. Prot. Corp. v. Macomber, 658 A.2d 511, 511- 12 (R.I. 1995); Fitch v. Buffalo Fed. Sav. and Loan Ass’n, 751 P.2d 1309, 1312-13 (Wyo. 1988); New England Sav. Bank v. Lopez, 630 A.2d 1010, 1015 (Conn. 1993) (power of sale only); Standard Bank & Trust Co. v. Callaghan, 177 Ill. App. 3d 973, 977-78 (Ill. Ct. App. 1988).
[29] Id.
[30] Roberts v. Murray, 232 S.W.2d 540, 546 (Mo. 1950); Judah v. Pitts, 62 S.W.2d 717, 720 (Mo. 1933).
[31] Cockrell v. Taylor, 145 S.W.2d 416, 422 (Mo. 1940); Judah, 62 S.W.2d at 720.
[32] Cockrell, 145 S.W.2d at 422; Judah, 62 S.W.2d at 720; Harlin v. Nation. 27 S.W. 330, 331 (Mo. 1894). The “shocks the conscience” standard varies throughout the country. See e.g., Teacher’s Retirement Fund Ass’n of Sch. Dist. No. 1, Multnomah Cnty. v. Pirie, 46 P.2d 105, 106-109 (Or. 1935) (finding sale prices more than half the fair market value sufficient to shock the conscience); Gumz v. Chickering, 121 N.W.2d 279, 281-82 (Wis. 1963); Cromer v. De Jarnette, 51 S.E.2d 201, 204 (Va. 1949) (upholding sales for less than 40 percent of the fair market value); Hurlock Food Processors, Inv. Assoc. v. Mercantile-Safe Deposit and Trust Co., 633 A.2d 438, 452-54 (Md. Ct. Spec. App. 1993).
[33] Drannek Realty Co. v. Nathan Frank Inc., 139 S.W.2d 926, 928 (Mo. 1940). Since Roberts, the standard for voiding a foreclosure sale has consistently been reaffirmed. See, e.g., Boatmen’s Bank of Jefferson Cnty. v. Community Interiors, Inc., 721 S.W.2d 72, 78 (Mo. App. E.D. 1986); Mueller v. Simmons, 634 S.W.2d 533, 536 (Mo. App. E.D. 1982); Carondelet Sav. & Loan Ass’n v. Boyer, 595 S.W.2d 744, 747 (Mo. App. E.D. 1980).
