-----Original
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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.
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