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Federal Court Puts to Rest Challenges to the Method of Determining the Amount of Foreclosure Deficiency

In prior Alerts we described appellate court decisions addressing challenges to the Missouri common law rule of basing the amount of loan deficiency after real estate foreclosure on the foreclosure price paid, regardless of the fair market value of the affected real property. Challengers have pressed for adoption of a rule that would establish the amount of deficiency as the difference between the unpaid loan obligation and the fair market value of the real property subject to the foreclosure sale. By statute that is the rule in several states, including Kansas.

In 2012, a Missouri appellate court upheld the established Missouri common law rule. In First Bank v. Fischer and Frichtel, Inc., 364 S.W. 3d 216 (Mo. banc. 2012), however, the court appeared to leave the door open slightly by stating that, due to the facts of the case (a highly sophisticated, experienced real estate developer as borrower), such case was not the right case to reexamine the current rule.

Taking what it saw as a cue from the language in Frichtel, the U. S. 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), 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.

Subsequent to the Sunrise Farms opinion, the Missouri Court of Appeals clearly rejected Sunrise Farms and upheld the established Missouri common law rule stating 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.” LNV Corporation v. Robb, 2013 WL 1289862 (W.D. Mo.).

On December 13, the Eighth Circuit U. S. Court of Appeals reversed the District Court’s holding in Sunrise Farms and held that the Missouri courts (in Frichtel and LNV) have clearly declined to change to a fair-market-value approach the well-settled, long-standing Missouri common law of calculating deficiencies. 213 WL6510332 (8th Cir.). The Court of Appeals noted that many of the states adopting the fair-market-value approach have chosen to deal with the issue by statute rather than by a common law change by the courts.

Absent a statutory change in the common law, this latest appellate opinion should put to rest in Missouri the movement to change to a fair-market-value computation the established common law rule for determining loan deficiencies.