Opinion ID: 2547144
Heading Depth: 1
Heading Rank: 3

Heading: the forclosure sale price is the measure of a deficiency

Text: There are two general approaches to reviewing claims that the amount received for a property at a foreclosure sale is insufficient. One approach is to allow the foreclosure sale price to be used in determining the deficiency only if the debtor does not challenge the adequacy of the foreclosure sale price in the deficiency action. If there is such a challenge, states that use this approach rely on a variety of standards, usually set by statute, for determining whether to reject the foreclosure sale price in favor of fair market value as a measure of the deficiency, ranging from whether there is a difference between the two prices, [2] to whether the foreclosure sale price is substantially lower than the fair market value, [3] to whether the foreclosure sale price is so much lower than the fair market value that it shocks the conscience. [4] Fischer & Frichtel argues that Missouri should adopt the most liberal of these standardsthat recommended by section 8.4 of the Restatement (Third) of Property (1997)and always allow debtors to pay only the difference between the debt and the fair market value of the property at the time of the foreclosure if the debtor challenges the foreclosure price. [5] Missouri and many of the other states in which the method of measuring deficiencies is governed by the common law traditionally have followed a different approach, however. These states require a debtor to pay as a deficiency the full difference between the debt and the foreclosure sale price. [6] 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. This does not mean Missouri does not give a debtor a mechanism for attacking an inadequate foreclosure sale price. Rather, a debtor who believes that the foreclosure sale price was inadequate can bring an action to void the foreclosure sale itself. Roberts v. Murray, 232 S.W.2d 540, 546 (Mo.1950); Judah v. Pitts, 333 Mo. 301, 62 S.W.2d 715, 720 (1933). If the sale stands, then it has been thought fair to require the debtor to pay any deficiency remaining based on the foreclosure sale price. Drannek Realty Co. v. Nathan Frank Inc., 346 Mo. 187, 139 S.W.2d 926, 928 (1940). Since Roberts, the standard for voiding a foreclosure sale has been reaffirmed by numerous Missouri court decisions. [7] Fischer & Frichtel does not claim that this is not the current state of Missouri law, nor does it offer any reason why it failed to follow this approach and file an action attacking the validity of the foreclosure sale due to the inadequacy of the foreclosure sale price. Instead it argues that Missouri's standard for setting aside a foreclosure sale is so high that a debtor cannot realistically hope to meet it. Missouri permits the debtor to void a properly noticed and carried out foreclosure sale only by showing that the inadequacy. . . [of the sale price is] so gross that it shocks the conscience . . . and is in itself evidence of fraud. Cockrell v. Taylor, 347 Mo. 1, 145 S.W.2d 416, 422 (1940); Judah, 62 S.W.2d at 720. This is the predominant standard used by courts in determining whether to void the foreclosure sale, but what is sufficient to shock the conscience of a court seems to vary greatly. Some states, such as Oregon and Wisconsin, have found sale prices of more than half the fair market value sufficient to shock the conscience and set aside the sale, Teachers' Retirement Fund Ass'n of Sch. Dist. No. 1, Multnomah Cnty. v. Pirie, 150 Or. 435, 46 P.2d 105, 106-109 (1935); Gumz v. Chickering, 19 Wis.2d 625, 121 N.W.2d 279, 281-82 (1963), while others uphold sales for less than 40 percent of the fair market value. Cromer v. De Jarnette, 188 Va. 680, 51 S.E.2d 201, 204 (1949); Hurlock Food Processors, Inv. Assoc. v. Mercantile-Safe Deposit and Trust Co., 98 Md.App. 314, 633 A.2d 438, 452-54 (1993). Missouri's standard for proving that a foreclosure sale shocks the conscience is among the strictest in the country; more than one Missouri case has refused to set aside a sale that was only 20 to 30 percent of the fair market value because of Missouri's historical practice of requiring an inference of fraud in addition to a sale price that shocks the conscience. Cockrell, 145 S.W.2d at 422; Judah, 62 S.W.2d at 720; Harlin v. Nation, 126 Mo. 97, 27 S.W. 330, 331 (1894). Fischer & Frichtel argues that this standard for setting aside a foreclosure sale is so high that it is only an illusory remedy for an unfairly low sale price and that because the foreclosure process inherently produces artificially low sale prices, it almost inevitably leads to windfalls for lenders. Fischer & Frichtel suggests that the foreclosure process is unfair in part because cash must be offered for the property by the bidder. This is a problem for the ordinary bidder, particularly a homeowner or small business owner, because the statutory minimum time period between notice of foreclosure and the actual sale is often less than a month, [8] an insufficient amount of time to allow potential bidders to secure financing. Fischer & Frichtel notes that the lender does not have this financing problem, as it does not have to pay with cash, but instead simply may deduct the purchase price from the amount of principal the borrower owes. 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. [9] The lender receives both the benefit of buying the property for less than fair market value and also of only having to reduce the deficiency it is entitled to by the below fair market price paid at the foreclosure sale. First Bank offers factual and policy rebuttals to many of these arguments. [10] The policy debate presented by the parties may explain why so many states have chosen to deal with this issue by statute, rather than by the common law, as still is the case in Missouri. Cf. Powell v. Am. Motors Corp., 834 S.W.2d 184, 189-90 (Mo. banc 1992) (holding that the balancing of competing public policies is best left to the legislature). Even more importantly here, however, 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. Despite this, Fischer & Frichtel does not ask this Court to reexamine the strict standard for voiding a foreclosure sale, as one might expect in light of the settled Missouri law requiring inadequacy of the foreclosure sale price to be examined in the foreclosure sale itself. 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. Moreover, this Court has not reexamined the standard for voiding a foreclosure sale since its decision in Roberts, 232 S.W.2d at 546, decided more than 60 years ago, nor did this Court appear to consider at that time whether its very stringent standard for setting aside a sale was out of step with that used in other states. It may be that Fischer & Frichtel advocates an alternative approach because it did not file a timely challenge to the foreclosure sale and could not have met the traditional standard for setting aside a foreclosure sale had it done so. [11] Or perhaps it is that the policy reasons raised by Fischer & Frichtel for lowering the burden required to show inadequacy of the foreclosure sale price principally apply to individuals and small businesses that have no realistic ability to bid themselves, not to a sophisticated business entity such as Fischer & Frichtel, which has not shown or alleged that it did not have adequate notice of the foreclosure sale, that the sale was not fairly conducted or that it did not have the financial means to offer an alternative bid. So far as the record shows, Fischer & Frichtel simply made a strategic choice not to bid, not to attack the amount received as inadequate under the traditional standard for setting aside a foreclosure sale and not to ask this Court to adopt a less onerous standard. [12] Fischer & Frichtel's suggested alternative would make those decisions irrelevant. Moreover, Fischer & Frichtel has not identified any jurisdiction that has rejected the foreclosure sale price approach in favor of the fair market value approach based on the common law. [13] All of the cited states that follow the fair market value approach either have always done so or have made the change to that approach based on statute. [14] While the fact that this matter is not addressed by statute does allow this Court greater discretion than otherwise would be the case, [u]nder the doctrine of stare decisis, `a decision of this [C]ourt should not be lightly overruled, particularly where . . . the opinion has remained unchanged for many years.' Sw. Bell Yellow Pages, Inc. v. Dir. of Revenue, 94 S.W.3d 388, 390 (Mo. banc 2002), quoting Novak v. Kansas City Transit, Inc., 365 S.W.2d 539, 546 (Mo. banc 1963). Here, the public policy reasons that form the basis of Fischer & Frichtel's argument for modification of the more than century-old practice of using the foreclosure sale price have no application to a sophisticated debtor such as it. New York Store Mercantile Co. v. Thurmond, 186 Mo. 410, 85 S.W. 333, 336 (1905). While the foreclosure sale price was barely more than 50 percent of the fair market value later determined by the jury, the lender gave cogent reasons for its lower bid due to the depressed real estate market and the bulk nature of the sale, as of trial the lender had not been able to sell the property, and Fischer & Frichtel has not argued it could not have purchased the property at the foreclosure sale (or indeed thereafter while the property was still on the market for $675,000, a good deal less than Fischer & Frichtel says is its fair market value). This is not a case, therefore, in which to consider a modification of the standard for setting aside a foreclosure sale solely due to inadequacy of price or whether a change should be made in the manner of determining a deficiency where the foreclosure price is less than the fair market value.