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Change in Method of Foreclosure Deficiency Rejected

In a prior Alert, we described an April 2012 Missouri Supreme Court decision in which the Court refused the urging of a borrower to change the Missouri common law rule of basing the amount of loan obligation deficiency after real estate foreclosure on the foreclosure price paid, regardless of the fair market value of the foreclosed-upon real property.  In First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216 (Mo. banc 2012), borrower had urged that the rule should be changed such that the deficiency should be the amount of the obligation, minus the real property’s fair market value, regardless of the amount paid (which is typically “bid-in” by a credit bid by the foreclosing lender).  The Missouri Supreme Court in Frichtel upheld the established Missouri common law rule that the foreclosure price, not fair market value of the property, should be used as the measure of deficiency after a real estate foreclosure sale but left the door open at least a little by emphasizing that due to the facts of that case (a highly sophisticated, experienced real estate developer as borrower), that case was not the right case to reexamine the current rule.  The Chief Judge of the Missouri Supreme Court filed a dissenting opinion passionately urging adoption of the fair market value rule because that approach is used in determining damages in almost every circumstance other than determining the deficiency after a real estate foreclosure sale.

In June 2012, United States District Court for the Western District of Missouri in M&I Marshal & Ilsey Bank v. Sunrise Farms Development, LLC, 2012 WL 252 2671 (W.D. Mo. June 28, 2012), the Court interpreted Frichtel as indicating a willingness of the Missouri Supreme Court, in the right case, to reexamine the strict standard for voiding a foreclosure sale and the District Court, surprisingly, characterized the Missouri Supreme Court in Frichtel as willing to adopt some form of the fair market value approach in measuring deficiencies.  The Court went so far as to conclude that if the Missouri Supreme Court were to address the issue currently in the “right case,” it would follow the fair market value method of determining loan deficiency.  The Court in Sunrise Farms could not on the available record determine the fair market value of the property and ordered briefing on the issue. 

On March 27, 2013, in LNV Corporation v. Robb, 2013 WL 1289862 (W.D. Mo.), the U.S. District Court for the Western District of Missouri (by a different District Judge than the judge in Sunrise Farms), clearly rejected the approach of the same court in Sunrise Farms and held that the lender had not been unjustly enriched under existing Missouri law by bidding-in at the foreclosure sale, purchasing the property admittedly (for purpose of its motion for summary judgment) for less than fair market value and bringing an action for the deficiency.  The Court, citing Frichtel, left no doubt that its view was that under existing Missouri law “¼ the issue of fair market value is not relevant to the calculation of the deficiency amount owed” and that “[t]he debt owed is calculated by subtracting from the debt the foreclosure sale price, not the fair market value of the real property being sold.”  The Court also recited the holding in Frichtel that precluded the debtor from even attacking the sufficiency of the foreclosure sale price as part of the deficiency suit and requiring a debtor who believed that the foreclosure sale price was inadequate to bring a separate action to void the foreclosure sale itself – an extremely difficult task because, to prevail in such a suit the debtor must show the foreclosure sale amount was so low as to shock the conscience..

The attempts of borrowers or guarantors to change the Missouri common law on the method of determining the amount of loan deficiency hopefully will be quieted by the decisions of both the Missouri Supreme Court and the United States District Court refusing to change Missouri’s common law rule regarding determining loan deficiency after foreclosure.