A recent Missouri Supreme Court case, First Bank v. Fischer & Frichtel, Inc., decided April 12, in which the Court, en banc, refused the urging of a borrower to change the Missouri century-old common law rule of basing the amount of deficiency after real estate foreclosure on the price paid in the foreclosure sale. Borrower in that case asserted that the rule be changed to base the deficiency on the property’s fair market value, regardless of the amount paid (normally, “bid-in” by a credit bid by the foreclosing lender). The Missouri Supreme Court upheld the century-old precedent that the foreclosure price, not fair market value of the subject property, is to be used to measure the deficiency after a real estate foreclosure sale and the Court stated that, due to the facts of that case (a highly sophisticated, experienced real estate developer), the case was not the right vehicle to reexamine the common law rule. The Chief Judge of the Missouri Supreme Court filed a dissenting opinion in Fischer urging adoption of the fair market value rule because that approach is used in determining damages in almost every context other than determining the deficiency after a foreclosure sale.
On June 28, 2012, the United States District Court for the Western District of Missouri, in M&I Marshal & Ilsley Bank v. Sunrise Farms Development, LLC (Case No.: 10-0627-CV-W-SOW), surprisingly interpreted Fischer as indicating that the Missouri Supreme Court had expressed willingness to reexamine the strict standard for voiding a foreclosure sale and to adopt some form of the fair market value approach in measuring deficiencies. The District Court concluded that, if the Missouri Supreme Court were to address the issue today in the right case (such as an individual debtor or small business owner), it would follow the fair market value approach for valuing the deficiency. As the District Court saw it, there was “no rationale for prolonging the inevitable.” The Court also emphasized the fact that so many states have chosen to adopt some form of the fair market value approach (albeit by statute and not judicial action), that Missouri would likely soon make some form of change to the existing law and move to fair market valuation. Therefore, the District Court, predicting how Missouri courts would address the issue, held that it should determine the amount of indebtedness owed by the borrowers and guarantors in Sunrise Farm by deducting the fair market value of the mortgaged property from the amount due under the secured loan notes.
The Court ordered briefing on the issue of fair market value because on the record the Court was unable to determine fair market value of the foreclosed-upon property. The defendants submitted testimony that the fair market value of the mortgaged property was $6,050,000 but the Court was unable to discern the bank’s fair market value estimation from the record.
It is almost certain that the bank will appeal the ruling of the District Court which, somewhat surprisingly, presumes that Missouri courts would consider changing its rule to the fair market value basis within two months after the Missouri Supreme Court in Fischer clearly chose not to do so, with only one dissent, albeit the dissent of the chief judge of the Court. In addition, the Missouri Supreme Court in Fischer emphasized that no court had judicially adopted the fair market value principle but that the change had uniformly been made by statute. The District Court in Sunrise Farm did not address that distinction in predicting “the inevitable.”
Although the Sunrise Farm case should alert us to the possibility of a change in the rule, the future of the District Court’s holding is far from certain upon its inevitable appeal. We will continue to follow this saga and report.