by Charles S Pullium

Millsap & Singer, LLC *

USFN Member (KS, KY, MO)

In a recent ruling, the Missouri Court of Appeals rejected borrowers’ attempt to set aside a foreclosure sale based upon allegation the foreclosure sale price was inadequate.  Missouri’s rule is well established:  Mere inadequacy of sale price alone is not enough reason to set aside a sale.  After all, a property sold on the courthouse steps will often not sell for a price approximating fair market value.  Because there is a policy interest in foreclosure sales being final, a person must allege a low sale price plus “something more” in order to set a sale aside.

That said, the Missouri Court of Appeals faced the question: What if the sale price is so insufficient that it allegedly “shocks the conscience”?  Can the low price be the “something more” simply because it’s so low?

The case of Arvest Bank v. Emerald Pointe, LLC, Missouri Court of Appeals, S.D. No. SD36959, involves the foreclosure of a loan to borrowers as well as non-borrower grantors of deed of trust (referred to as “borrowers” for convenience) for the development of a subdivision.  The borrowers defaulted and the bank foreclosed non-judicially.  The bank later sought a deficiency against the borrowers.  The borrowers successfully convinced the trial court to set aside the foreclosure due to insufficient sale price after finding the foreclosure sale price “shocked the conscience.”

In so finding, the trial court acknowledged a debtor cannot attack sufficiency of the foreclosure sale price as part of a deficiency proceeding, but instead must bring an action to void the foreclosure sale by showing that the inadequacy of the sale price is so gross that it shocks the conscience and is in itself evidence of fraud.   This has been referred to as the “something more” standard, i.e., “something more” than mere inadequacy of sale price.  The trial court looked at pre-sale appraisals obtained by the bank, questioned the validity of one of the appraisals, and determined the method used by the bank to document its file with the appraisal was the “something more” required under Missouri’s strict standards.

There was no allegation of fraud or partiality that impacted the opportunity for competitive bidding or impacted the bids received at auction.  Instead, the developers urged the Court of Appeals to reject binding precedent set forth by Missouri’s Supreme Court and adopt the Restatement (Third) of Property §8.4 because “the time is right” for change.  The Restatement (Third) standard allows a borrower facing a deficiency claim to challenge that claim by requesting a determination of fair market value.  If the court finds that the fair market value is more than the foreclosure sale price, then the borrower is entitled to offset against the deficiency.  The Missouri Supreme Court has described the Restatement (Third) approach as “the most liberal of these standards.”

In rejecting the adoption of the Restatement (Third), the Court of Appeals noted it is an “error-correcting court, not a policy making court.”  In reversing the trial court, the Court of Appeals observed that “so many states have chosen to deal with the issue by statute rather than by common law, as still is the case in Missouri.”

At time of writing, it is unclear whether borrowers will seek to transfer their challenge to the Missouri Supreme Court, which has previously rejected attempts to adopt the Restatement (Third) on this issue.

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USFN e-Update - February 2022