2012 Tennessee Legislature is Considering an Absolute Homestead that Would Eliminate a Creditor’s Ability to Collect Against Residential Real Property

Recording a judgment in the county’s Register of Deed’s Office creates a lien on any real property owned in that county by the Debtor pursuant to Tenn. Code Ann. § 25-5-101.

A judgment lien is the single most effective tool in the collection process. Plus, it’s cheap: for less than $20, a creditor can get a lien on any property owned (or owned in the future) by the Debtor, and that property cannot be sold, refinanced, or transferred without dealing with the creditor.

As a creditor rights lawyer, you can guess my concern over two Bills being considered by the Tennessee Legislature in 2012, House Bill 2887 by Glen Casada and HB 2930 by Mike Bell.

These Bills seek increase the “homestead” exemption in Tennessee. “Exemptions” allow a debtor to protect certain property from the reach of creditors. Exemptions are designed so that a judgment creditor can’t take everything, so household goods, retirement accounts, and other necessities can be exempted.

H.B. 2887 proposes an absolute exemption that would exempt a debtor’s residence from any execution or judicial sale. Essentially, no matter how much equity a debtor has in his or her house, that equity would be completely untouchable by creditors.  A debtor could live in a $1,000,000 lien-free house without paying a penny to creditors. This legislation would completely abolish the concept of a judgment lien.

Currently, Tenn. Code Ann. § 26-2-301 allows a single individual to exempt $5,000 of equity, a married couple $7,500, and a married couple with minor children living in the house up to $50,000.

The other proposed legislation, HB 2930 by Mike Bell, seeks to simply increase the homestead exemption amount to $50,000 across the board.

From a creditor’s perspective, the proposed legislation is both too broad and unfair.  I understand the importance of protecting peoples’ homes, but, at the same time, the law should operate fairly as to creditors and debtors.

Frankly, I think it’s unfair that the law would shield $50,000 of equity from the reach of creditors.  Think about it from a creditor’s perspective: if you loaned somebody $200,000 and weren’t getting paid any of it, wouldn’t you be mad to see them keep $50,000 of equity?

Your Next Landlord Could be A Hedgefund: Are Rental Properties Making a Comeback as a Good Investment?

I’ve said for years that the contractors and investors who got burned by the economic downturn will eventually hit rock bottom, dust themselves off, and end up making as much money on the backside of the recession as they lost on the front end. This is because the same market inefficiencies that were exploited in the past are being replaced by equally exploitable new ones.

The builders who once built speculative homes on inflated market appraisals are going to be the contractors who do the work for the investors who buy the properties from the banks at 40 cents on the dollar.

The Las Vegas Sun did a story last week on how hedge funds are buying Las Vegas real properties at bargain rates, making minimal investments/improvements, and renting the properties for an 8% to 12% annual return.  Then, once the economy rebounds, the investors could expect appreciation to add more value to the investment.

As far as investments go, being a landlord is fairly labor-intensive. And, if the past 4 years has shown us anything, it’s hardly a fool-proof move.

Potential landlords would be smart to read this excellent article in the Wall Street Journal, Do You Really Want to be Landlord? The article has both horror stories and advice, as well as a forecast that rents are likely to increase over the next few years.

I got out of the landlord business two years ago, when my tenant couldn’t unclog her drains and called me every other day.  The 30 minute drive, coupled with time spent waiting on plumbers, gave me all the time to reconsider the pros and cons.


Two Signatures Not Required: New Tennessee Supreme Court Decision Finds Personal Guarantees will be Enforced by Their Clear Text

Lately (i.e. in this economy), I’m constantly fighting over the enforceability of personal guarantees.

A personal guarantee is an agreement by which a third party agrees to personally repay another person’s/corporation’s debt. When a corporate entity doesn’t have a credit history or sufficient assets, a lender will generally ask for an individual to personally guarantee the debt. Creditors, obviously, want guarantees, because more parties obligated to repay your debt increases your chances for repayment. If a creditor files a lawsuit, it can obtain a judgment for the debt against all of the guarantors.

With the rise in defaults, guarantors are getting sued more than ever before. Their only defense is to attack the guarantee, and, as a result, the text of these agreements is constantly being tested. A common issue relates to the signature line(s): if a corporation’s president signs a contract that contains guarantee language, does the president need to sign twice, both as “Bob Smith, President” and then a second time as “Bob Smith?”

In the past, the overwhelming outcome was that there needed to be two signatures–one from the President and one from the Individual.

So, in that context, you’ll understand why I liked the recent Tennessee Supreme Court case of 84 Lumber Company v. Bryan Smith (Dec. 12, 2011). There, the Supreme Court looked only at the text of the contract. That text clearly said that the person signing the contract for the corporation was also personally obligating himself  to serve as the guarantor. When the text is crystal clear, it doesn’t matter that there is only one signature.

So, even though the only signature on the contract was by ““R. Bryan Smith, President,” the Court said “[t]he explicit and unambiguous language of the contract points to only one conclusion: Mr. Smith agreed to be personally responsible for the amounts due on the account.”

A good practice would still be to get two signatures, but, in light of this case, it’s certainly not fatal to only have one signature.