-----Original Message----- From: DIRT - Real Estate Lawyers Listserv [mailto:DIRT@LISTSERV.UMKC.EDU]On Behalf Of Patrick Randolph Sent: Tuesday, October 10, 2006 11:56 AM To: DIRT@LISTSERV.UMKC.EDU Subject: [DIRT] DD 10/10/06 Relevance of Subsequent Foreclosure Price to FMV Determination for Breach of Earlier Sale. Daily Development for Tuesday, October 10, 2006 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu VENDOR/PURCHASER; REMEDIES; DAMAGES; FAIR MARKET VALUE: Bank cannot use price bid at later foreclosure sale to establish fair market value in damages claim resulting from first sale if it cannot show that circumstances motivating the bids were the same. Bancorpsouth Bank, Inc. v. Hatchel, 2006 WL 1767757 (Ten. Ct. App. 2006). Bank planned to auction off a parcel of distressed real estate at a foreclosure sale. One day prior to the sale, Hatchel met with a representative from Bank to discuss the property. Hatchel agreed to bid $575,000 for the property in return for Bank's agreement to (i) pay the taxes, filing fees, and other incidental expenses associated with the sale, (ii) allow Hatchel to keep all rents generated from the property, (iii) finance his purchase of the property, (iv) make all necessary repairs to the property, and (v) extend Hatchel a line of credit to use as he pleased. At the foreclosure sale, the Bank placed a bid in the amount of $570,000. Hatchel then placed his successful bid in the amount of $575,000 and signed a "Confirmation of Bid and Agreement" regarding the property. A few days later, however, Hatchel stated that he would not sign any transfer documents until he had the property inspected, which he had not done prior to the foreclosure sale. Upon inspection, Hatchel felt that he had overbid on the property in light of the damage to the residential dwelling units located thereon and refused to consummate the transaction. Bank filed suit against Hatchel in the chancery court seeking specific performance of the bid agreement, or in the alternative, sought damages for breach of contract. Hatchel counterclaimed that if the Bank succeeded in its specific performance action, he was entitled to $5,000 in damages for improvements he made to the property following the foreclosure sale. The chancery court denied the specific performance claim and therefore dismissed Hatchel's counterclaim for damages. The court did hold, however, that Hatchel breached the parties' contract. The court reserved its ruling on damages. The court noted that the proper measure of damages is the difference between the contract price and fair market value of the property at the time of the breach, and because the Bank failed to present sufficient evidence of the fair market value during the trial, the court could not enter its final order regarding damages. The Bank then presented evidence that the Bank conducted a second foreclosure sale of the property at which it successfully bid $400,000 and asserted that this represented the fair market value of the property at the time of the breach, entitling the Bank to $175,000 in damages. The trial court held that the Bank could not establish the fair market value of the property by relying on the amount received at a subsequent foreclosure sale of the property conducted by the Bank post-trial. In its discussion, the court noted that the Bank initially bid $570,000 at the first foreclosure sale but did not point to any other reason for its conclusion. It did award the bank special damages caused by Hatchel's breach. The Bank appealed. On appeal, the Court of Appeals affirmed the decision of the trial court but rejected its reasoning because Tennessee law holds that previous offers to purchase cannot be used to establish the value of the property on the date of the breach of a contract to real estate. The court, instead, pointed to the fact that in order for the price received at a subsequent sale to represent the fair market value of the property, both sales must have been conducted under similar circumstances and in an arms-length fashion. The court noted that there was a drastic change in the circumstances and motivations of the Bank between the first and second foreclosure sale because (i) the Bank was clearly motivated at the first sale to achieve the highest possible price for the property and (ii) the Bank offered Hatchel certain incentives to place the highest bid at the first sale. As the Bank was unable to prove damages, the court affirmed the trial court's refusal to award general damages, and thus denied the Bank's attorney's fees on appeal, as it had not prevailed. Comment: The factors motivating the parties in the first foreclosure demonstrated that the first price was not a market price. But this doesn't mean necessarily that the price bid at the second sale, which did not involve these factors, was not relevant to the determination of market at the first sale. Note that the price bid at the first sale did not have to be a market price. Hatchel agreed to pay that price in light of special incentives, and then defaulted. Although the price Hatchel agreed to pay did not represent the market, neither should it influence the court's evaluation of the second price at the later foreclosure. The conundrum is resolved by understanding that what the court was really getting at was the fact that the "market" at the time of the first sale was the market for a certain kind of property - one supported by a financing pledge and other incentives from the Bank. These incentives were not present at the second sale, and consequently the price at the second sale was not relevant to the price of the property at the first sale, as something quite different was sold at the first sale. Without any hard evidence of value at the time of the first sale, the case of the Bank, which had the burden of proof, simply fizzled. Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. 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Because real estate brokers generally find this service more valuable, it is named "BrokerDIRT." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT traffic in addition to the residential discussions. To subscribe to BrokerDIRT, send the message subscribe BrokerDIRT [your name] to listserv@listserv.umkc.edu To cancel your subscription to BrokerDIRT, send the message signoff BrokerDIRT to the address: listserv@listserv.umkc.edu DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. 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