Resolution Trust Corp. v. Atchity

• Decision Date: 15 March 1996
• Docket Number: No. 73575,73575
• Parties: RESOLUTION TRUST CORPORATION, as Receiver of Madison County Federal Savings and Loan Association, Appellee/Cross-Appellant, v. Fred J. ATCHITY, Jr., Appellant/Cross-Appellee.
• Court: Kansas Supreme Court

Page 162

913 P.2d 162

259 Kan. 584

RESOLUTION TRUST CORPORATION, as Receiver of Madison County

Federal Savings and Loan Association, Appellee/Cross-Appellant, v. Fred J. ATCHITY, Jr., Appellant/Cross-Appellee.

No. 73575.

Supreme Court of Kansas.

March 15, 1996.

Syllabus by the Court

1. In order to set aside a foreclosure sale of Missouri real estate, the complaining party must show substantial evidence of sale irregularities.

2. The questions as to which state law applies and whether the state law has been properly interpreted are questions of law. This court has unlimited review of the district court's interpretation of law.

3. Choice of law problems occur when a transaction touches more than one state and the question arises as to which state's law will govern. To determine which state's laws govern, the forum court uses its own choice of law methodology.

4. The general rule is that foreclosure of a mortgage must be in accordance with the procedural law of the state where the property is located.

5. Under Missouri law, inadequacy of consideration alone will not justify setting aside a foreclosure sale that was otherwise fairly and lawfully conducted, without fraud or partiality and with full opportunity for competitive bidding. Missouri either affirms a foreclosure in whole or sets the entire foreclosure aside.

6. The substantive as well as the procedural law of the situs applies to a mortgage foreclosure.

Appeal from Johnson District Court; Larry McClain, Judge. Opinion filed March 15, 1996. Reversed and remanded with directions.

Teresa A. Reinking, of Husch & Eppenberger, Kansas City, Missouri, argued the cause, and Susan Linden McGreevy, of the same firm, was with her on the briefs, for appellant/cross-appellee.

Taylor Fields, of Fields & Brown, Kansas City, Missouri, argued the cause, and Brendon W. Webb and David Bowers, of the same firm, were with him on the briefs, for appellee/cross-appellant.

ABBOTT, Justice:

The appellee/cross-appellant, Resolution Trust Corporation (RTC), was awarded judgment against the appellant, Fred J. Atchity, Jr., in Illinois for $1,109,563.79. The basis of that judgment was a loan secured by a deed of trust on property located in Kansas City, Missouri. RTC sold this real estate in Missouri using a statutory procedure for a nonjudicial sale. At the foreclosure, RTC purchased the property for $340,000.

The Illinois judgment was then filed in Missouri and later in Kansas. The District Court of Johnson County reduced the judgment by $105,711, relying on equitable power under K.S.A. 60-260(b)(5), and holding the property in Missouri had not been sold for fair value.

The appellant appealed the trial court's decision, claiming the credit given was too low. RTC cross-appealed, contending that the trial court allowed the appellant to collaterally attack the foreign judgment and that the trial court used Kansas law rather than Missouri law in determining the adequacy of the foreclosure. (There were originally three defendants in this case. One of the defendants filed bankruptcy, and the other defendant settled with RTC. The only appellant in this case is the named defendant, Fred J. Atchity, Jr.)

By way of background, the original defendants in this case formed a partnership in 1983 known as the Jacob Loose Mansion. During his lifetime, Jacob Loose was a highly successful Kansas City businessman and community leader. He built a mansion commensurate with his wealth and position in the community in a neighborhood of his peers. Over the years, the neighborhood deteriorated and became run down. The sale of drugs and prostitution in the area were common. The mansion was uninhabited by humans. The windows were broken and a large hole was in the roof. Wild birds occupied the house.

The partnership purchased the mansion in 1984 for $225,000. The partnership then spent over $1,000,000 restoring and modernizing the mansion for commercial office space. Most of the purchase price and restoration-modernizing cost were financed by Madison County Federal Savings & Loan. The partnership had a high debt to equity ratio; it had only put down 10-15% of the loan as opposed to 25-30%, which was typical in this type of transaction.

When the original defendants bought the property, one of their reasons for doing so was historic tax credits. Further, the defendants were able to receive depreciation on the property and use any partnership losses as tax deductions.

However, the Tax Reform Act of 1986 made the investment less desirable, and all but one of the partners ceased making cash contributions to cover losses. The partnership slipped behind on its payments on the Madison loan. Madison was taken over by RTC. Shortly before oral argument, RTC sold its interest in the loan and judgment to the Asset Recovery and Management Company which has been substituted for RTC. For clarity, we will continue to refer to RTC, even though it is no longer the real party in interest.

On April 24, 1992, the RTC took judgment against the partnership, individual partners, and their spouses who had guaranteed the note in Madison County, Illinois, for $1,109,563 (the Illinois judgment). In order to collect this judgment, RTC decided to foreclose on the Missouri property. In order to prepare for the nonjudicial statutory foreclosure sale, RTC obtained a preforeclosure appraisal on the property from Bliss and Associates Incorporated. On August 10, 1992, Bliss appraised the property at $400,000. The partnership also had an appraisal of the property performed by H.V.A.C. Inc. The H.V.A.C. appraisal was not a complete appraisal with background information, but was an opinion letter which stated that the building was worth $1,071,000 in June 1992.

James Tippin was chosen as successor trustee to conduct the statutory foreclosure sale on the mansion property. The nonjudicial statutory foreclosure sale was conducted in Missouri on September 24, 1992. RTC bid $340,000 for the property at the foreclosure sale, which was 15% below the property's appraised value of $400,000. Tippin testified that he considered the price he accepted from RTC for the property as fair in light of the preforeclosure appraisal. The deficiency between the judgment and the property acting as security was $769,563, plus interest.

The Illinois judgment was registered in Jackson County, Missouri, on December 11, 1992. On January 19, 1993, RTC registered the Illinois judgment in the District Court of Johnson County, Kansas, under the Uniform Enforcement of Foreign Judgments Act, K.S.A. 60-3001 et seq.

Pursuant to K.S.A. 60-260(b)(5),the defendants asked the trial court to grant partial relief from the Illinois judgment, contending that it reflected an inequitable judgment because the property had been sold below value at the foreclosure sale, thereby leaving a large deficiency. The trial court ruled that it had broad discretion to grant equitable relief to the defendants under K.S.A. 60-260(b)(5). The trial court found that the property had not been sold for fair value because it had been undervalued by the trustee. Based on the trial court's determination of the value of the house and what would have been an appropriate RTC bid, the trial court credited an extra $105,711 to the Kansas (Illinois) judgment as the amount the property was undervalued. Under the trial court's ruling, the defendants' deficiency judgment was reduced to $663,812 plus interest.

One of the defendants, the appellant herein, appealed the trial court's equitable relief from the judgment and credit toward the deficiency judgment, claiming the credit given was too low. According to the appellant, the trial court used the wrong occupancy rate when determining the value of the property and improperly discounted the property's value, based on the neighborhood and environmental problems of the property and on the fact that RTC, the only bidder, was not in the business of managing property.

The plaintiff, RTC, cross-appeals. The plaintiff contends that the trial court erred by allowing the defendants to collaterally attack in equity the Illinois judgment and the Missouri foreclosure under K.S.A. 60-260(b)(5). Further, the plaintiff contends that the trial court erred by examining the adequacy of the foreclosure under the law of Kansas instead of under the law of Missouri, where the foreclosure occurred.

The plaintiff registered the Illinois judgment in Kansas under the Uniform Enforcement of Foreign Judgments Act. K.S.A. 60-3002 states in pertinent part:

"The clerk of the district court shall treat the foreign judgment in the same manner as a judgment of the district court of this state. A judgment so filed has the same effect and is subject to the same procedures, defenses and proceedings as a judgment of a district court of this state and may be enforced or satisfied in like manner."

Treating the Illinois judgment as a Kansas judgment, the defendants filed for equitable relief with the district court under K.S.A. 60-260(b)(5). This statute states:

"On motion and upon such terms as are just, the court may relieve a party or said party's legal representative from a final judgment, order, or proceeding for the following reasons: ... (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; ... The motion shall be made within a reasonable time ... A motion under this subsection (b) does not affect the finality of a judgment or suspend its operation. This section does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding, or to grant relief to a defendant not actually personally notified as provided in K.S.A. 60-309 or to set aside a judgment for fraud upon the court." (Emphasis added.)

Pursuant to K.S.A. 60-260(b)(5), the district...