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Error doesn’t cancel foreclosure sale, court rules

Angela Riley//March 10, 2009//

Error doesn’t cancel foreclosure sale, court rules

Angela Riley//March 10, 2009//

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A creditor is not entitled to have a foreclosure sale set aside after it made a mistake during a foreclosure sale, a Missouri Appeals Court said last week.

The Missouri Court of Appeals Western District ruled that Vestin Realty Mortgage was not entitled for a relief in equity to have a foreclosure sale set aside, when it accidentally made a full credit bid extinguishing the debt on another property located in Oklahoma.

In 2004, Vestin Realty Mortgage loaned $4.4 million to entities associated with Jorge Newbery for the development of Monterrey Apartments in Oklahoma.

As security for the loan, Monterrey debtors granted Vestin a security interest in the Oklahoma real estate and also caused a related entity, Pickwick Partners, to grant a security interest in the Pickwick Plaza apartments in downtown Kansas City.

So Vestin held a senior lien on the Oklahoma property and a junior lien on the Kansas City property. Newbery also provided a personal guarantee to Vestin.

In 2006, Monterrey debtors were in default under the note held by Vestin, who gave notice to Monterrey debtors and to the Pickwick Partners that, due to the default, Vestin was going to proceed with foreclosure of the Pickwick property in Kansas City.

At the Jan. 24, 2007, sale of the Pickwick property, Vestin entered into a “full credit bid” of more than $5.8 million. The company realized later, however, that it made a mistake by entering into a full credit bid at the foreclosure sale. That bid extinguished the debt on the property located in Oklahoma. Vestin could no longer go on with foreclosure proceedings on that property because Pickwick Partners and the Monterrey debtors argued that there was no longer any debt on the property.

In June 2007, Vestin filed an action for relief in equity in Jackson County Circuit Court to have the foreclosure sale set aside. Pickwick filed a motion to dismiss, alleging that the petition failed to state a claim upon which relief could be granted. Judge Jay Daugherty granted that motion.

In the Court of Appeals opinion, the court determined that it could not grant relief in equity for a party who made a mistake.

“Though the error in bidding presumably was due to either a misunderstanding or a miscommunication, and is understandable, that is not the same thing as saying that a court applying equitable principles has an obligation to consider it legally excusable,” wrote Judge James Smart Jr. for the unanimous court.

While the court may have sympathized with Vestin, the facts in the case did not allow for it to set aside the sale.

“The opinion indicates the court empathized with the situation. But because it was our mistake, it was reluctant to grant the relief we requested,” said Vestin’s attorney, A. Bradley Bodamer, of Shook, Hardy & Bacon.

The court also noted that Vestin had failed to plead facts that the court would grant relief:

“Vestin thus, in effect, concedes that it is unable to plead, for instance, that it was weak-minded and unsophisticated, or that it was deceived by any fraudulent actions, or that its neglect was excusable due to factors outside its control.”

Pickwick’s attorney, Steven Braun, of Krigel & Krigel, said he was not only happy for this client but glad the court did not create bad precedent for future cases.

“It would have created an exception for creditors that doesn’t exist for borrowers and would have not have been consistent with Missouri law,” he said. “There have been numerous Missouri case setting out when equitable relief would have been available to borrowers and lenders, but this exact factual situation has not come up before. Vestin failed to present any reason for the court to exercise any equitable relief for their mistake.”

Bodamer said no decision has been made on whether the company will appeal or if it will continue litigation in Kansas City or in Oklahoma. The foreclosure proceedings on the Monterrey property were stayed once the action was filed in Kansas City.

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