First Bank v. Fischer & Frichtel, Inc., SC 91951.

CourtUnited States State Supreme Court of Missouri
Citation364 S.W.3d 216
Decision Date12 April 2012
Docket NumberNo. SC 91951.,SC 91951.
PartiesFIRST BANK, Respondent, v. FISCHER & FRICHTEL, INC., Appellant.

364 S.W.3d 216

FIRST BANK, Respondent,
v.
FISCHER & FRICHTEL, INC., Appellant.

No. SC 91951.

Supreme Court of Missouri,
En Banc.

April 12, 2012.


[364 S.W.3d 217]


R. Thomas Avery, Robert D. Blitz, Jason K. Turk, Blitz, Bardgett & Deutsch LC, St. Louis, for Fischer & Frichtel.

Thomas B. Weaver, Matthew J. Reh, Sara Finan Melly, Armstrong Teasdale LLP, St. Louis, for First Bank.


Brian C. Walsh, K. Lucinda McRoberts, Bryan Cave LLP, St. Louis, for Missouri Bankers Association, which submitted a brief as a friend of the Court.

John L. Davidson, St. Louis, for Business Bank, which submitted a brief as a friend of the Court.

LAURA DENVIR STITH, Judge.

This case involves the question of whether the amount of the deficiency owed by Fischer & Frichtel Inc., a sophisticated commercial debtor, after a foreclosure sale of its property should be measured by the difference between the amount of the unpaid debt and the amount obtained at the foreclosure sale or, instead, by the difference between the amount of the unpaid debt and the fair market value of the property at the time of the foreclosure sale. The trial court submitted an instruction directing the jury to award the difference between the amount of the debt and the property's fair market value but then granted First Bank's motion for a new trial in light of its showing that Missouri case law instead requires the deficiency to be determined by the difference between the debt and the amount received at the foreclosure sale. Fischer & Frichtel appeals.

As discussed below, Missouri common law requires the deficiency to be measured by the amount received at the foreclosure sale, but if the sale price, alone or in combination with other factors, is so inadequate as to raise an inference of fraud, then the foreclosure sale can be voided. Missouri does not permit questions about the adequacy of the foreclosure price also to be raised in the deficiency action. Fischer & Frichtel argues that Missouri's traditional approach leads to unfairness where the debtor is unable to obtain alternative financing in time to submit a bid at the foreclosure sale and the lender is the only bidder. It says this concern has caused other jurisdictions to reject the traditional use of the foreclosure price to measure the deficiency and instead measure it by the fair market value of the property.

Each jurisdiction cited by Fischer & Frichtel that has changed from basing the deficiency on the foreclosure price to basing it on the property's fair market value made that change by statute. Further, the public policy rationales that Fischer & Frichtel offers as the basis to do so do not apply to a sophisticated commercial entity such as itself, which claims neither that it had inadequate notice to obtain alternative financing nor that the foreclosure sale itself had badges of fraud. The trial court's grant of a new trial to First Bank is affirmed, and the case is remanded.

I. FACTUAL AND PROCEDURAL BACKGROUND

First Bank is a privately owned company that provides both retail and commercial banking services to its clients. Fischer & Frichtel is a real-estate developer with more than sixty years of experience in the industry. From 2005 to the beginning

[364 S.W.3d 218]

of 2008, Fischer & Frichtel had hundreds of millions of dollars in revenue and earned tens of millions of dollars in profit. Among its business deals in June 2000 was the purchase of 21 lots in Franklin County for a residential development.

To finance the acquisition, Fischer & Frichtel borrowed $2,576 million from First Bank, in favor of which it executed a deed of trust pledging the lots as collateral for the loan. From 2000 to 2005, Fischer & Frichtel sold 12 of the 21 lots to homebuyers. Each time a lot was sold, Fischer & Frichtel made a principal payment of $126,000 to First Bank, which then released that lot from the deed of trust. Beginning in 2005, the housing market began to decline, and Fischer & Frichtel was unable to sell any of the nine remaining lots in this particular development.

Although the original maturity date on the loan from First Bank to Fischer & Frichtel was July 1, 2003, First Bank extended the maturity date six times. The final mutually agreed maturity date on the loan was September 1, 2008. In April 2008, First Bank and Fischer & Frichtel began to negotiate another extension of the maturity date, but due to the increased risk caused by the declining real estate market, First Bank sought a higher interest rate, a renewal fee, an increase in the amount of principal Fischer & Frichtel would pay on the loan each time it sold a lot, and either a $283,000 cash payment on the principal or a personal guaranty from John Fischer, the owner of Fischer & Frichtel. Fischer & Frichtel believed the new terms were too onerous, and the parties could not agree to an extension.

When the loan matured on September 1, 2008, Fischer & Frichtel was contractually obligated to pay First Bank the remaining principal on the loan, $1,133,875. Fischer & Frichtel chose instead to default on the loan, and First Bank foreclosed on the nine lots remaining unsold that were subject to the deed of trust. The foreclosure sale was held in December 2008, and First Bank acquired the nine unsold lots after making the sole bid of $466,000. Fischer & Frichtel did not bid and does not claim that the foreclosure sale was not properly noticed or conducted.

In November 2008, just prior to the foreclosure sale, First Bank filed suit against Fischer & Frichtel seeking to recover the unpaid principal and interest on the loan. At the trial in January 2010, Fischer & Frichtel presented expert testimony from an appraiser that, although First Bank paid only $466,000, the fair market value of the nine lots at the time of the foreclosure was nearly double that, $918,000. It also showed that internal First Bank documents valued the property at $1,134 million at the time of the default in September 2008. A First Bank employee testified that the bank determined the amount to bid in foreclosure by estimating that, in the declining real estate market, the value of the property to the bank was only $675,000, which should be discounted to $466,000 because First Bank needed to sell the property in bulk, not as individual lots, and the depressed real-estate market made finding a buyer extremely difficult.

At the close of trial, over First Bank's objection, the court instructed the jury that “[i]f you find in favor of [First Bank], then you must award [First Bank] the balance due [First Bank] on the [loan] on the date of maturity, less the fair market value of the property at the time of the foreclosure sale, plus interest.” Accordingly, the jury found that the fair market value of the lots was $918,000, the value testified to by Fischer & Frichtel's expert, and that Fischer & Frichtel therefore owed First Bank $215,875 (the difference between the amount of unpaid principal on the loan and the fair market value of the

[364 S.W.3d 219]

property at the time of the foreclosure sale) plus $37,500 in interest.

First Bank filed a motion for a new trial, arguing that the damage instruction was contrary to Missouri law because it directed the jury to base the amount of the deficiency on the fair market value of the property at the time of the foreclosure sale instead of on the amount obtained at the foreclosure sale. The trial court agreed and granted First Bank's motion for a new trial. Fischer & Frichtel appealed to the Missouri Court of Appeals, which transferred the case to this Court pursuant to Rule 83.02 to address the issue of how to determine the amount of the deficiency after a foreclosure sale. 1

II. STANDARD OF REVIEW

“Generally, an appellate court will be more liberal in upholding a trial court's decision to grant a new trial than it will be if the trial court denies a new trial.” Meyer v. McGarvie, 856 S.W.2d 904, 907 (Mo.App.1993). “However, a trial court's authority to grant a new trial is discretionary only as to questions of fact, not as to matters of law.” Id. “Whether a jury was instructed properly is a question of law that this Court reviews de novo. Klotz v. St. Anthony's Med. Ctr., 311 S.W.3d 752, 766 (Mo. banc 2010); Harvey v. Washington, 95 S.W.3d 93, 97 (Mo. banc 2003) (“This Court reviews de novo, as a question of law, whether a jury was properly instructed”). It is error for jury instructions not to follow the Missouri Approved Instructions (MAI), and “[s]uch errors are presumed to prejudice the defendant unless it is clearly established ... that the error did not result in prejudice.” State v. Westfall, 75 S.W.3d 278, 284 (Mo. banc 2002). Where, as here, there is no applicable MAI, the instruction will be reviewed to determine “ ‘whether the jury [could] understand the instruction and whether the instruction follows applicable substantive law by submitting the ultimate facts required to sustain a verdict.’ ” Seitz v. Lemay Bank and Trust Co., 959 S.W.2d 458, 462 (Mo. banc 1998), quotingBrown v. Van Noy, 879 S.W.2d 667, 672 (Mo.App.1994). If this Court finds that the instruction is erroneous, it must then determine whether the error misdirected, misled or confused the jury, resulting in prejudicial error and justifying the grant of a new trial. Harvey, 95 S.W.3d at 97;Kuzuf v. Gebhardt, 602 S.W.2d 446, 449 (Mo. banc 1980).

III. THE FORECLOSURE SALE PRICE IS THE MEASURE OF A DEFICIENCY

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...

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