New Tennessee Opinion on Foreclosure Deficiency Follows Creditor-Friendly Precedent

One of my greatest victories was the favorable opinion I obtained for a client in GreenBank v. Sterling Ventures, et. al. , decided on December 7, 2012.

I blogged about it here, but to recap: That case was the first consideration of a foreclosure deficiency attack under Tenn. Code Ann. §35-5- 118(c). Under that statute, a borrower can argue that a foreclosed property sold for “materially less” than fair market value and, under §35-5- 118(c), a court can deny a deficiency judgment to the foreclosing creditor.

In an opinion issued this past Friday, the Court of Appeals revisited the statute in Capital Bank v. Oscar Brock, No. E2013-01140-COA-R3-CV – Filed June 30, 2014 (see full text here).  The case followed the established precedent of Sterling Ventures and its progeny.

This new case is notable in two respects:

  1. Courts can and will resolve §35-5- 118(c) issues at the Summary Judgment level,  where it is only a matter of applying the valuations against the foreclosure bid price. In fact, this new opinion weighs some of the evidence, in finding that the defendants valuations were were “formed
    months or even years before or after the time the Property was sold at foreclosure.” This was a major victory in the original Sterling Ventures case, since borrowers want to make these issues a “fact” question, forcing a trial and delay of judgent.
  2. Courts continue to look at percentages when determining what “materially less” means. Sterling  Ventures and the later opinions all say the courts want to avoid setting a “bright-line percentage, above or below which the statutory presumption is rebutted.” That has basis in the legistlative history of the statute, where the lawmakers used “material” based on its usage in child custody cases. Nevertheless, the courts continue to apply a percentage test; in this case, spread was 15.8% and the sale was upheld.

This Court shot down a number of other arguments, including: those based on the amounts of several post-foreclosure appraisals; based on the Bank’s ultimate sale-listing price; and an argument that the Bank committed “fraud” by bidding a lower amount when it planned  to market the property at a higher amount.

The ultimate take-away on this remains the same as in the past.

  • Get an appraisal at or near the time of the proposed sale.
  • Bid an amount that is reasonably tied to the amount of your appraisal (or other reliable/admissible valuation).
  • Summary Judgment is a proper way to proceed, provided the foreclosing creditor was cautious and acted with this statute in mind.

 

Employers Who Provide False Garnishment Answers May End Up Owing the Money Themselves

I got a judgment a few months ago, and, having found out where the judgment debtor works, I issued a wage garnishment against the debtor’s wages.

And, oh man, did I ever have that guy. Not only did he work there, but he was listed (and pictured) on their website as an executive. It was only a matter of days until I got my money, right?

Well, not exactly. The employer filed a response that said “Terminated.” That was a surprise. I checked the website. The guy was gone.   Did my garnishment get him fired?  Strange.

So, out of curiosity, I called the employer and got the company directory. The debtor was still listed. So, I waited a few weeks, and they were still listed. I tried the extension and, within seconds, I had the debtor on the phone.

Long story short, I think this employer is lying. What do you do?

Tenn. Code Ann. § 26-2-204 requires garnishment responses to be under oath. The law even anticipates that an employer might lie: “The answer of the garnishee is not conclusive.” Tenn. Code Ann. § 26-2-205. To that end, Tenn. Code Ann. § 26-2-206 allows a creditor to get a judgment against the employer if they actually have assets of the debtor in their possession.

So, in the end, a creditor has rights against a dishonest employer, but there are hoops to jump through. Though the statutes don’t lay this out, the procedure would be to subpoena the payroll records or otherwise get testimony from the employer to establish the veracity of the response. Then, the creditor must take the employer back to Court under § 26-2-206 to get a judgment.

It’s a hassle. But, if you lie, employers, I’m happy to take a judgment against you.

The $25,000 General Sessions Judgment Limits May Apply on Appeal, Unless the Claims are Amended

I enjoy practice in General Sessions Courts. Once you get past the utter chaos, unpredictability, and potentially long lines at the elevators, you may be able to obtain an enforceable judgment in less than 4-6 weeks after filing your lawsuit. That’s the fastest justice in the State.

Remember, though, that the monetary limit in General Sessions is $25,000.

Given the speed advantages, some lawyers will sue for a lesser amount to have their lawsuits heard in Sessions (i.e. the debt is $27,0000, and they sue for $24,999.99).  Then, if they lose the case or if it’s appealed to Circuit Court, the lawyers know they can always increase the action to the full amount in Circuit Court.

Such amendments are allowed under Tenn. Code Ann. § 16-15-729, which says the Circuit Court “shall allow all amendments in the form of action, the parties thereto, or the statement of the cause of action, necessary to reach the merits, upon such terms as may be deemed just and proper. The trial shall be de novo, including damages.”

But, don’t think the informality of Sessions practice carries over into Circuit Court.  The Tennessee Supreme Court’s opinion in Brown v. Roland, 357 S.W.3d 614, 616 (Tenn. 2012) held that a party is limited to their damages sought until and unless an actual amendment is made to the complaint. 
This is an interesting case, because, by implication, an amended complaint may also be required to add parties and causes of action.
In Sessions Court, it can feel like “anything goes.” It’s not a court of record, and the Judges let litigants have some procedural leeway in presenting their claims. Under the Brown case, that leeway stops upon appeal.

You’ve Got the Escalade, Now What? A Reminder of What Slow Pay Motions Can’t Do

With the economy in shambles, I’ve come to learn that, sometimes, people are broke.

When I ask that they pay me $250 a month on a judgment, they turn around and file a “slow pay” motion asking to pay me $20 a month.  I talked about Slow Pay Motions (a.k.a. Motion to Pay Judgment by Installments) a few years ago.

Let me revisit one aspect I left out in that earlier post:  What exactly does a Slow Pay Motion stop you from doing?

Tenn. Code Ann. § 26-2-216 does not stay garnishments against real or personal property; it only stays garnishments against wages or salaries due to the debtors:

The filing of such motion by the debtor shall stay the issuance, execution or return of any writ of garnishment against wages or salary due the judgment debtor or any other funds belonging to the judgment debtor …

Tennessee cases support this conclusion: “No such installment payments are to be ordered unless the debtor has filed an affidavit stating that no other assets are available for payment of the judgment except the wages or salary of the debtor and that any other funds receivable by the debtor are so limited that installment payments are appropriate.” Harrington v. Harrington, 759 S.W.2d 664, 668 (Tenn. 1988).

So, let’s say you execute against a Cadillac Escalade (congratulations), and the borrower files a Slow Pay. In that case, the Court may enter a Slow Pay Order and set payments. But, that Order will prevent Wage Garnishments;  it will not stop collections on real or personal property.

Tour of Tennessee Courts: Tips for Rutherford County General Sessions

I enjoy hitting the road and going to courts all over middle Tennessee. But, at the same time, it can be disconcerting to go to court in a new county, which generally has its own Local Rules and customs of practice. No matter how long you’ve been practicing, you never want to embarrass yourself in front of a foreign court.

So, I’m starting a “Tour of Tennessee” blog series, which discusses the different Courts that I go to, along with some tips and tricks for appearances.

First stop, Rutherford County General Sessions Court. Here is a link to the General Sessions Court’s website, which has updated, good information about the Court, including phone number, address, and Clerk information.

Note that the Rutherford County Courts, including General Sessions, post a variety of their  dockets online.  Be sure to print out a copy of the docket before you go to court.

Their Local Rules are also posted online, and read those before you go.

Here are some helpful tips to know from the Local Rules:

  • The Court presumes cases will be tried on the the date they are set, but, on the first setting in civil actions, the  “court may liberally grant a continuance on the first setting of a case.”
  • The Court does not allow “indefinite” continuances. Under Local Rule 5.01, the Court only allows continuances of less than 60 days.
  • The Court will only allow 3 continuances, absent good cause.
  • The Court caps attorney fees at 25%, unless good cause is shown.

Here are a few other things to know:

  • The Judge, Larry Brandon, is sharp, both in his legal acumen, as well as his wit and the way he runs the Courtroom. Stay on his good side by being early, paying attention, and reading the Local Rules before you go.
  • Seriously, that’s important: stay on his good side across the board.
  • Many Clerks are liberal and let you use any old Civil Warrant  forms, but, if you’re in doubt about your form, be sure to use the official Civil Warrant forms from the Rutherford County General Sessions Clerk.  Using the standard form is an important part of staying on the Judge’s and the Clerk’s good side.
  • On street parking is plentiful all around the Courthouse, and there are a number free lots available.
  • General Sessions Court takes place on the third floor of the Courthouse. The General Sessions Clerk is on the first floor.
  • The security line can get long, particularly if you’re running late. Be prepared to remove watches, belts, and other metal items. Attorneys can purchase “pre-screened” pass cards for $5, which allow you to by-pass security. If you go there a lot, keep that in mind.
  • The elevator  gets backed up, and, if you’re running late, head to the stairs in the back of the building.
  • Judge Brandon starts promptly, at 9AM.
  • It’s about a 45 minute drive from downtown Nashville, so give yourself an hour.
  • Cases are generally called in batches, organized by the Plaintiff’s attorney’s name, meaning all of an attorney’s cases are generally bundled together and called at the same time (and then that attorney is allowed time to go to the hall and review the matters or write them up).

Rutherford County General Sessions Court is an active court, often with a large number of cases (40-50) set on one docket. Be early, be prepared, and read the Local Rules, and your court appearance will go fine.

Confessions of Judgment aren’t Valid in Tennessee: Here’s Why

All kinds of search terms that lead visitors to this site. I routinely look at them, because it’s a great insight into what creditor rights issues people want to learn about. (And, sometimes, it’s pretty funny.)

A common query is whether confessions of judgments are valid in Tennessee. Frankly, after nearly 15 years of practice in Tennessee, I’ve never dealt with a confession of judgment, so, as a practical matter, I don’t think they are valid in Tennessee. But, recently, I actually came across the answer.

As background, a confession of judgment is a contract provision (or a stand-alone contract) in which one party agrees on the front-end of a transaction to let the other party enter a judgment against him if the deal goes bad.  You agree, in advance and before any default or dispute arises, that the other party can get a judgment, even without a lawsuit pending and despite any legitimate defenses that may ultimately exist.

You can imagine why a creditor would include such a provision in their contracts.

Tennessee doesn’t allow such provisions. Tenn. Code Ann. § 25-2-101(a) says:

Any power of attorney or authority to confess judgment which is given before an action is instituted and before the service of process in such action, is declared void; and any judgment based on such power of attorney or authority is likewise declared void.

But, an agreement to allow a judgment may be allowed after a lawsuit is filed and after the party is served (when, it would be assumed, the party has received due process of the law and the issues are defined).  § 25-2-101(b) says:

This section shall not affect any power of attorney or authority given after an action is instituted and after the service of process in such action.

So, even though Confessions of Judgment are not valid in Tennessee at the time of the contract, such provisions will be enforceable after the filing of the lawsuit, such as in a forbearance or settlement agreement.

New Opinion Analyzes Common Defenses to Domestication of Foreign Judgments in Tennessee

A good rule of thumb in Tennessee is that a valid foreign judgment will be enforceable here, provided the plaintiffs comply with the procedural requirements of Tennessee Code Annotated § 26-6-101, et seq.

A new Tennessee Court of Appeals opinion, in Bancorpsouth Bank v. David J. Johnson, et. al. (July 16, 2013), examined both the general law, as well as the potential defenses to domestication. This is a good case to know, since it reviews all aspects of the foreign judgment enrollment process.

First, it presents the three “standard” defenses to domestication:

a forum state may decline to accord full faith and credit to the judgment or public act of another state if it is (1) void due to a lack of personal or subject matter jurisdiction, (2) based upon fraud, or (3) “where enforcement of the judgment would violate the public policy of the forum state.” …  Tennessee courts have recognized and adopted all three of these exceptions. … (citations omitted)

These defenses aren’t easy to establish, and the Court notes  “a party who seeks to show that a foreign judgment should not be enforced in Tennessee must meet a ‘stern and heavy‘ burden.”

Most attacks on a foreign judgment are under Defense No. 1 (that the judgment is void); this new case is interesting in that is that the Court provides a good analysis of Defense Nos. 2 and 3 (which no other case that I’ve seen has done).

Defense No. 2, Fraud:  “[T]o deny full faith and credit on the basis of fraud, there must be allegations of extrinsic fraud, that is, fraud that is collateral to questions which were either determined or which could have been determined in the underlying action. Extrinsic fraud is contrasted with intrinsic fraud, which pertains to an issue involved in the underlying action or where the acts allegedly constituting fraud were or could have been litigated…”

“‘[E]xtrinsic fraud ‘consists of conduct that is extrinsic or collateral to the issues examined and determined in the action,’. . . while intrinsic fraud is fraud within the subject matter of the litigation, such as forged  documents produced at trial or perjury by a witness.”

An example of extrinsic fraud is a party lying to the other party about the court date or committing some fraud regarding the litigation (something beyond the allegations of the lawsuit). Intrinsic fraud would be some fraud related to or contained in the allegations of the lawsuit, such as a fraudulent signature on the note at issue.

Defense No. 3, Public Policy:  “Under the public-policy exception to full faith and credit, “Tennessee courts are not obligated to give full faith and credit to any judgment of a state which we hold to be violative of Tennessee’s public policy or the Federal Constitution.”

This is rare, however: “The principle of giving full faith and credit to the judgments of sister states will “almost invariably” outweigh the interest of an individual state; the public-policy exception to full faith and credit is applied only on ‘extremely rare occasions.'”

While the Court doesn’t provide examples, the Defendants’ argument is illustrative. Here, they argued that the foreclosure that resulted in the deficiency balance at issue in the lawsuit was improper, and it was an issue that Tennessee has a defense for, under Tenn. Code Ann. § 35-5-118.

The Court saw this as an improper attempt to re-litigate potential defenses under the underlying judgment, not some public policy that rendered the out-of-state judgment unenforceable.

Most cases cite the three major defenses, and this new opinion is significant because it provides helpful analysis of what constitutes those defenses.

New Trial Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting “Materially Less”

A few months ago, I argued the first appellate case construing Tenn. Code Ann.  § 35-5-118, which is the new Tennessee post-foreclosure deficiency judgment statute. As you may recall from my blog post about the new law, the statute provides a possible defense to a deficiency action, where the debtor can show “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…”

In layman’s terms, a foreclosed borrower may be able to avoid a judgment for the remaining debt if he can show that the foreclosure buyer drastically under-bid at the foreclosure.

All across the state, this statute has resulted in two fights:

  1. What was the fair market value at the time of the foreclosure? and
  2. Was the foreclosure sale price “materially less” than the fair market value?

A big problem under the statute has been that “materially less” isn’t defined in the statute or anywhere else in Tennessee law.

In the resulting GreenBank v. Sterling Ventures  opinion, the Court of Appeals issued a bank-friendly interpretation,  offering guidance as to what “materially less”  means by saying that a sale price of 86% is not “materially less.”

I’ve heard from a number of bank lawyers since that opinion, complaining that 86% isn’t low enough. I’ve told them, just wait, the Sterling Ventures opinion didn’t set the “floor;” there is room in the statute for lower values, which will be established in future cases (in the Sterling Ventures case, the bid at issue was 88-91%, so it didn’t require the Court to define the lowest possible percentage).

This past week, my firm received another favorable  opinion from the Williamson County Chancery Court. In this Opinion (click to review), the Court recognized this issue, and rightfully upheld lower percentage bid amounts. The Court, following the lead of the Court of Appeals, cites the Holt v. Citizens Central Bank case, which recognized that a 50% recovery at foreclosure is a customary result.

While this doesn’t suggest that 50% is the magic number/floor percentage, this analysis shows a judicial tendency in interpreting the statute at a lower range than most debtors have argued.

With any new law, it takes a few decisions to “battle test” how it works. So far, the parameters of Tenn. Code Ann.  § 35-5-118 are being defined in a way that favors creditors.

Last Chance to Learn: Creditors’ Rights in Tennessee: 10 Collection Strategies

A quick reminder: Tomorrow, June 6, 2013, I’ll be teaching the CLE  presented by M. Lee Smith Legal Publishers called Creditors’Rights in Tennessee: 10 Collection Strategies.

This is a one hour audio seminar, that will cover the usual Tennessee collections lawyer song and dance. Things like:

  • Things to consider prior to declaring a loan in default and filing a collections lawsuit
  • Issues in deciding between Chancery Court and General Sessions Court
  • Importance of knowing your Statute of Limitations
  • Making sure you Sue the Right Party
  • Judgment Liens and why they work
  • Fraudulent Transfers
  • Overview of bankruptcy issues, including preferences and Trustee avoidance actions
  • Common roadblocks to collecting money, including domestication of foreign judgments

It’s one hour of CLE credit, and, hopefully, what I teach you during seminar will put some money in your clients’ pockets.