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Frustrated by a Builder’s Insolvency Following the Financial Crisis? People’s Nat’l Bank v. Mark S. Mehlman Realty, Inc., 2013 WL 3971037 (Mo. Ct. App., E.D.)

Here we have a puzzling discussion of the defense of frustration of purpose.  A lender makes a $3.1 million loan, expecting the loan proceeds will be used to purchase lots for sale to a specific builder, who subsequently became insolvent, it appears.  The question involves a deficiency of $1.2 million following a foreclosure sale (the lender being the winning bidder).  The borrower’s brief claims:

In response, Appellants have asserted the doctrine of commercial frustration as an affirmative defense to Respondent Bank’s claim for deficiency judgment, because the parties agreed that the continued existence of a third party home builder was essential to Appellants’ performance of the Loan Agreement, and its failure has destroyed the purpose and object of the contract..

Even if the borrower’s performance of the loan agreement were frustrated, the lender would be entitled to recovery of the principal amount in restitution.  E.g., Far West Federal Bank, S.B. v. Director, Office of Thrift Supervision, 787 F.Supp. 952 (D. Or. 1992) (citing Restatement (First) of Restitution § 150 (1937)), aff’d, 119 F.3d 1358 (9th Cir. 1997). The borrower’s brief does not mention restitution at all (not particularly informative in this regard), so it is not clear from the brief whether this is a quibble about recovery of some part of accrued interest.

But, should the defense be available in any case?  One would think not ….

More after the break …

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