A “conscience shocking, inadequate price” will not void an otherwise valid tennessee foreclosure

As long time readers know, Tennessee has a nearly ten year old foreclosure deficiency statute that closely scrutinizes real property foreclosure sale prices. The law is found at Tenn. Code Ann. §  35-5-118, and I argued the first opinion discussing the statute.

Long story short, a foreclosing creditor may be prohibited from pursuing its deficiency balance where the foreclosed property sells “for an amount materially less than the fair market value of property at the time of the foreclosure sale.”

Well, what about situations where there’s no deficiency balance owed? Does the foreclosure sale price have any impact on the validity of the sale?

The quick answer is “no,” says the Tennessee Court of Appeals in McKenzie v. Brandywine Homeowners’ Association (W2018-01859-COA-R3-CV, Tenn. Ct. Apps., June 12, 2019).

In that case, the HOA foreclosed on an otherwise lien-free piece of real property pursuant to its $4,445.90 HOA lien. Presumably, with no other liens and no other bidders, the HOA had no reason to outbid itself, and the HOA purchased the property for $4,445.90. After the owner challenged the validity of the sale (due to the low price), the trial court wrote:

The foreclosure sale price shocks the Court’s conscience; however, pursuant to Brooks v. Rivertown on the Island Homeowner Association, Inc., No. W2011-00326-COA-R3- CV, 2011 WL 6034781 (Tenn. Ct. App. Dec. 6, 2011), applying Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984), a conscience-shocking foreclosure sale price standing alone, absent some irregularity in the foreclosure sale, is not sufficient grounds for setting aside a lawful foreclosure sale.

In the end, the Court of Appeals followed this reasoning from Holt: “If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price, for a court of equity to set aside the sale. ”

The take-away is this: The “materially less than fair market” analysis under Tenn. Code Ann. §  35-5-118 only applies to attacks on deficiency judgments, not the validity of underlying sales. If the sale is valid in every other way (notice, timing, the publication, etc.), there is no express or implied requirement under the law that the foreclosure sale generate any minimum price.

This makes sense. If the HOA were required to artificially bid up the property (when no other party, including the owner, appeared), then the HOA would be simply paying that equity over to the owner. If the foreclosure is otherwise effective, the Tennessee statutes places the burden of protecting that equity on the property owner. There are a number of places under the Tennessee statutory schemes where actual protections like this are imposed, such as sheriff’s sales (which must generate 50% of fair market value). There are no such protections in the foreclosure statutes.

As this opinion acknowledges this: “If the rule is to be altered, it must be done by the High Court, not this Court.”

Divorce Cases are Great Places to Find Evidence Analysis

On March 7, 2019, I had two oral arguments at the Tennessee Court of Appeals. When these were first scheduled, I was really excited to tell everybody what an important litigator I am, having two monumentally important legal issues on appellate review on the same day.

Then, on or about March 1, I realized I was in for an absolutely awful week. (It was.)

Nevertheless, I got through it, was proud of the presentations, and was also very glad to be done with them. Now, I’m just waiting on the opinions, which will be issued any day now.

Part of this process is watching the appellate opinions that are issued daily by the Tennessee Court of Appeals on the Tennessee State Courts website, by clicking the “Opinions” tab.

I check every morning when I get to the office, and I check for opinions every afternoon before I leave. I’m still waiting.

By doing this, I’m also reading many of the latest opinions. Because of my practice area, I’m definitely reading any big case on commercial litigation, foreclosures, and similar creditor’s topics. And, if it’s a slow day, I’ll read the divorce opinions too.

I do this, mainly, because the facts are so interesting. And, before you accuse me of schadenfreude, I’ll say this: divorce cases have some really useful analysis of the laws of evidence.

Take the Pearson v. Pearson opinion from yesterday (W2018-01188-COA-R3-CV, Tenn. Ct. App. June 6, 2019), where the Court of Appeals does a deep dive on hearsay and the business records exception. It’s a great refresher. Here are some citable quotes:

What is the relevant definition of “hearsay”?

“Hearsay” is defined as “a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.” Tenn. R. Evid. 801; Toms v. Toms, 98 S.W.3d 140, 144 (Tenn. 2003). To be admissible, evidence must conform to the Tennessee Rules of Evidence. However, if a hearsay statement fits under one of the exceptions, the trial court may not use the hearsay rule to suppress the statement. Kendrick v. State, 454 S.W.3d 450, 479 (Tenn. 2015). The trial court has wide discretion in admitting or excluding evidence and will be reversed on appeal only upon on showing of abuse of discretion. See Otis v. Cambridge Mut. Fire Ins. Co., 850 S.W.2d 439, 442 (Tenn.1992).

What is the Business Records exception to “hearsay”?

Although generally inadmissible, hearsay is admissible as provided by the Tennessee Rules of Evidence or otherwise by law. Tenn. R. Evid. 802; see also Holder v. Westgate Resorts Ltd., 356 S.W.3d 373, 378 (Tenn. 2011). Tennessee Rule of Evidence 803(6) is the “exception” to the hearsay rule commonly known as the business records exception.

There are five criteria to establish this exception (citing Alexander v. Inman, 903 S.W. 2d 686, 700 (Tenn. Ct. App. 1995)):

  • The document must be made at or near the time of the event recorded;
  • The person providing the information in the document must have firsthand knowledge of the recorded events or facts;
  • The person providing the information in the document must be under a business duty to record or transmit the information;
  • The business involved must have a regular practice of making such documents; and
  • The manner in which the information was provided or the document was prepared must not indicate that the document lacks trustworthiness.

This analysis was provided in the context of a husband trying to prove that his pay was going to be cut (and, thus, his future alimony obligation should be lower), but it’s equally relevant to introducing testimony about payment histories in a bank lawsuit.

And, yes, many of these opinions are not going to be published and may not be cited in your future briefs. But, on the other hand, these are very up-to-date citations that the judicial law clerks and appellate judges are relying on as “The Law.”

So, even when my very important and monumental cases are decided, I’ll keep the Tennessee Courts website bookmarked.