First Bank v. FISCHER & FRICHTEL, INC.
364 S.W.3d 216, 2012 WL 1339437, 2012 Mo. LEXIS 92 (2012)
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Rule of Law:
Under Missouri common law, a deficiency judgment following a foreclosure is calculated as the difference between the outstanding debt and the price obtained at the foreclosure sale, not the property's fair market value.
Facts:
- In 2000, Fischer & Frichtel, Inc., a real-estate developer, borrowed $2.576 million from First Bank to finance the purchase of 21 residential lots, pledging the lots as collateral.
- From 2000 to 2005, Fischer & Frichtel sold 12 of the lots and made corresponding principal payments to First Bank.
- Beginning in 2005, a declining housing market prevented Fischer & Frichtel from selling the nine remaining lots.
- First Bank extended the loan's maturity date six times, with a final due date of September 1, 2008.
- The parties failed to agree on terms for a seventh extension, as First Bank sought more onerous conditions due to increased market risk.
- On September 1, 2008, Fischer & Frichtel defaulted on the loan, with an outstanding principal balance of $1,133,875.
- In December 2008, First Bank initiated a foreclosure sale for the nine remaining lots and was the sole bidder, acquiring the property for $466,000.
Procedural Posture:
- First Bank filed suit against Fischer & Frichtel in the trial court to recover the unpaid loan balance.
- At trial, over First Bank’s objection, the court instructed the jury to calculate the deficiency by subtracting the property's fair market value from the debt.
- The jury found the fair market value to be $918,000 and awarded First Bank a deficiency judgment of $215,875 plus interest.
- First Bank filed a motion for a new trial, arguing the jury instruction on damages was a misstatement of Missouri law.
- The trial court granted First Bank’s motion for a new trial.
- Fischer & Frichtel, as appellant, appealed the order for a new trial to the Missouri Court of Appeals.
- The Court of Appeals transferred the case to the Supreme Court of Missouri to resolve the legal question.
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Issue:
Does Missouri common law require a deficiency judgment to be calculated based on the foreclosure sale price rather than the property's fair market value?
Opinions:
Majority - Judge Laura Denvir Stith
Yes. Missouri common law requires a deficiency to be measured by the difference between the debt and the amount received at the foreclosure sale. The traditional remedy for a debtor who believes the foreclosure sale price was inadequate is to bring a separate action to void the sale itself, not to challenge the price in a subsequent deficiency action. The standard to void a sale is high, requiring a showing that the price is so grossly inadequate that it shocks the conscience and implies fraud. The court declined to judicially alter this century-old rule, noting that other states that have adopted a 'fair market value' standard have done so by statute, and that such public policy balancing is best left to the legislature, particularly where the debtor is a sophisticated commercial entity that did not allege fraud or improper notice.
Dissenting - Chief Justice Richard B. Teitelman
No. The purpose of damages is to make the injured party whole, not to create a windfall, and using the foreclosure sale price often unjustly enriches the lender. In nearly every other context, Missouri law measures damages by reference to fair market value. The foreclosure sale price is an anomaly because forced sales are not conducive to achieving fair market value, especially when the lender is the sole bidder. This Court should exercise its authority to modify an outmoded common law rule that is inconsistent with common knowledge and the fundamental principles of damages, rather than waiting for the legislature to act.
Analysis:
This decision reaffirms Missouri's traditional, lender-friendly approach to calculating deficiency judgments, cementing the foreclosure sale price as the definitive measure. It firmly places the burden on debtors to challenge the validity of the foreclosure sale itself if they believe the price is inadequate, a standard that is notoriously difficult to meet. The court's refusal to judicially adopt the 'fair market value' standard, deferring to the legislature, signals a strong adherence to stare decisis and judicial restraint, potentially solidifying Missouri's position as an outlier compared to many states that have statutorily provided greater protections for debtors in deficiency actions.
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