Earlier in the month, I talked about the new Tennessee Court of Appeals decision on Tenn. Code Ann. § 35-5-118, which provided some guidelines on analyzing the adequacy of foreclosure bid prices in Tennessee.
In the Court’s deep analysis of the potential defenses to a foreclosure deficiency lawsuit in the statute, don’t forget my advice from an even earlier post about the new two year statute of limitations.
In Tennessee, a creditor can sue for breach of contract (i.e. to recover unpaid debt) for up to 6 years from the date of the default in payment.
This Tenn. Code Ann. § 35-5-118(d) provides that a post-foreclosure action to obtain a deficiency judgment “shall be brought not later than the earlier of:
(A) Two (2) years after the date of the trustee’s or foreclosure sale, exclusive of any period of time in which a petition for bankruptcy is pending; or
(B) The time for enforcing the indebtedness as provided for under §§ 28-1-102 and 28-2-111.
So, the creditor has to sue on the earlier of two years or within the original 6 year statute of limitations. Two years is generally going to be the earlier of those two.
For many creditors, waiting a few years after a foreclosure is a reasonable move, to see if the debtor’s fortunes turn around. But, under this statute, a creditor can’t wait too long, and no later than 2 years.
Also, a creditor should be especially careful about a forbearance agreement on the deficiency debt. If those voluntary payments extend more than 2 years, then a debtor could argue that the creditor’s cause of action on the debt expires. Long story short, be sure to document either a tolling of the statute or do any sort of long-term payment arrangement as a new Deficiency Note (which, itself, has a new 6 year statute of limitations from default).
The Nashville Post interviewed me on what constitutes “materially less” in bank foreclosure sales in a December 14 article titled “Appeals court clarifies just what ‘materially less’ means in foreclosure auctions“. This clarification gives banks some guidance in determining what amount must be bid at a creditor’s foreclosure sale in order to preserve their deficiency balance.