Bankruptcy, Restructuring & Workouts

Missouri law has long upheld properly conducted foreclosure sales, even if the sale price seems unusually low. In good news for lenders, and indeed for all parties to a sale, another court of appeals has rejected a borrower’s effort to overturn this policy and upheld a challenged foreclosure sale. The Missouri Court of Appeals for the Southern District just confirmed that a borrower cannot void a foreclosure sale even if the foreclosure auction price is deemed to be so low as to “shock the conscience.” Arvest Bank v. Emerald Pointe, LLC, et al., Case No. SD36959 (Mo.Ct.App., Jan. 13, 2021).

Missouri law adheres to a strict standard for setting aside a foreclosure sale in connection with a purportedly inadequate sale price. To invalidate a sale, a challenger must prove not only that the foreclosure sale price “shocks the conscience” but also that some fraud was involved in the sale. Inadequacy of consideration alone is insufficient to set aside a fairly and lawfully conducted sale. First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216, 221 (Mo. banc 2012).

In the Arvest Bank case just decided, the borrower, Emerald Pointe, argued that Missouri’s strict standard for overturning foreclosure sales should be changed and that the Fischer precedent should be rejected. The sale at issue resulted in a $575,000 sale price. Arvest Bank, the lender, had obtained an appraisal about a year and a half prior to the sale of $2,430,000, and two appraisals a month before the sale of $1,300,000 and $860,000, respectively. The trial court disregarded the $860,000 appraisal as unduly influenced by the lender and not in compliance with professional standards, and the court concluded that the auction sale price shocked the conscience. When combined with the faulty appraisal, the trial court decided that the sale should be set aside even under Missouri’s strict standard.

The court of appeals reversed. The court found that there was no fraud or partiality that impacted the opportunity for competitive bidding, and there was no suggestion that any bank appraisal affected the bids at auction, nor any evidence that the trustee abused his discretion in the sale process. Under long-established law requiring inadequate sale price and a fraud showing to set aside a sale, the sale thus could not be set aside on the basis of the sale price, even when combined with an irregularity in an appraisal.

Recognizing that it would not be able to set aside a sale due to inadequate sale price alone under existing law, Emerald Pointe went further and argued for a complete change of Missouri foreclosure law – including the law established by the Missouri Supreme Court under Fischer and other cases – suggesting that the standard for setting aside sales is “unfair and is contrary to how damages are calculated and should therefore be changed.” In essence, Emerald Pointe wanted inadequate sale price alone to be a basis for voiding a sale. The court of appeals declined this invitation, noting that it is not a policy making court and that it is bound by controlling precedent.

The result is good news for lenders and buyers at properly conducted foreclosure sales. All parties need to have confidence that a lawfully conducted sale will be supported and recognized by the state. Otherwise, the costs of foreclosure sales will increase, with prospective buyers and other parties having to obtain and compare valuations of the property, likely with little increase in ultimate bid amounts, especially given that the lender typically is the foreclosure sale buyer. Notably, this would harm borrowers themselves because it increases their exposure for the remaining deficiency amount on the loan after application of foreclosure sale proceeds. All parties realize a benefit from a sale process that complies with the carefully constructed Missouri statute for foreclosure sales, and the court of appeals has reaffirmed that courts will not rewrite the statute or set aside a sale merely because a borrower is unhappy with the sale price.

And as a final note, following the foreclosure that was the subject of the Arvest Bank case, the lender listed the property for sale after foreclosure. Following 52 days of marketing, the lender received a lone offer to purchase the property for $550,000 – less than the foreclosure sale price – further highlighting the difficulty of applying a “shock the conscience” standard.