A new opinion from the Tennessee Court of Appeals provides valuable guidance to attorneys foreclosing on commercial properties.
The matter is Tennessee Funding, LLC. v. William Worley (No. M2019-01099- COA-R-CV, Tenn. Ct. App. Nov. 26, 2019), and the issue was whether a foreclosing lender took ownership of the contract rights associated with the real property–specifically, whether the foreclosure sale of the entire residential development transfer ownership of the “developer’s” or “declarant’s” rights of the property.
The actual issue was more nuanced than that and, trust me, I know (I represented the prevailing party in both the trial and appellate courts). The full opinion can be found here.
For purposes of this blog post, I won’t bore you with the deep analysis, but here are the main takeaways from yesterday’s decision:
In many development loan/construction loan transactions, the lender will be granted both a lien on the real property and a UCC lien on all the “other stuff” associated with the development project.
A real property foreclosure pursuant to the Deed of Trust and Tenn. Code Ann. § 35-5-101, et. seq., transfers to the foreclosure buyer all of the dirt.
The real property foreclosure does not transfer ownership of all the “other stuff,” including contract rights associated with the development.
These contract rights can include plans, drawings, and, yes, developer’s rights under a Master Deed or Declarations (i.e. the right to manage the development/developed property).
The rights are personal property, and those rights must be transferred by a creditor’s UCC Sale under Article 9, including Tenn. Code Ann. § 47-9-610.
Ultimately, that was the critical factor in this case–that the foreclosing lender did a dual sale–a foreclosure under the Deed of Trust to purchase the dirt and a UCC sale under the Security Agreement to purchase the personal property.
Keep this case in mind the next time you represent a creditor contemplating a foreclosure on a property development. You may not be doing your job if you only foreclose on the land.
In that case, the Chapter 7 debtor was faced with $164,053.95 in unsecured debt, of which $82,000 was for medically necessary services. To avoid the “means test” and stay in Chapter 7, she argued that her debts were not “primarily consumer debts” under Section 707(b)(1). The US Trustee objected, arguing for a conversion to Chapter 13.
The debtor had an interesting argument: medical debts are not “consumer debt,” as defined under the Bankruptcy Code, because medical debts are not incurred voluntarily, and “similar to tax debts that have been held by several courts not to be consumer debts.” See In re Westberry, 215 F.3d 589 (6th Cir. 2000).
Ultimately, considering the purpose and nature of medical bills, this Bankruptcy Court found the debts to be consumer debt, subjecting the debtor to the means test and forcing the case into a Chapter 13.
It’s a well reasoned opinion, but it has some pretty harsh applications to debtors in places like Memphis, where medical debts can crush debtors.
Sure, relief under the Bankruptcy Code is still available to this debtor, but, in situations like this, a debtor will have to deal with those debts in a chapter 13 plan, which requires the debtor to make payments over a 3 to 5 year plan. The rate of success in those cases is low, meaning that the case could get dismissed and the debtor isn’t able to get the debts discharged.
From the Supreme Court to Nashville... I’m on a plane from Washington, DC, with about 7 Nashville lawyers riding with me, after yesterday’s United States Supreme Court oral arguments that featured Nashville bankruptcy lawyers on both sides.
This was a pretty obscure procedural issue, and I pity those poor student groups who sat through the animated back-and-forth about what a “proceeding” is in Bankruptcy Court.
It was a great day for the Nashville bankruptcy bar, and the lawyers on both sides really shined. It was also my first trip to the Big Courthouse, and I’m planning a longer post about the experience for early next week.
I’m impressed by the grass-roots activism from the Memphis bar, and I have to admit, the show makes the practice of law in Memphis look very exciting and scenic. I’m signing the petition.
The Daily Memphian interviewed me for their story, What comes next in James Wiseman’s eligibility saga?, about the various legal issues and strategies presented (which, I’ve been told, ESPN’s Jay Bilas quoted in an on air interview!)
No deed goes unpunished, and this involved me diving deep into federal court jurisdictional issues, whether a “nominal defendant” destroys complete diversity, and looking up the exact nuances of Injunctive relief procedure.
Trust me, this was the first time this 26 year old reporter ever cited Wright on Federal Procedure.
Regardless, I love the Daily Memphian, and it got me this close to appearing on the Geoff Calkins radio show as a legal expert. I was scheduled to appear on Monday, but a producer bumped my appearance.
It was with great shame that I notified my Memphis friends and family that I was bumped to make room for listener call-ins.
Speaking of great shame… I was alerted that the following blurb and text auto-posted over the weekend. To be clear, the words below this blurb are a quote from the advice column, not how I feel (at least not all the time).
The opening line? “I’m a litigation attorney and am absolutely miserable.”
The James Wiseman news ruined my Friday evening. It doesn’t get more ominous than this:
First, I’m a Memphis fan. This includes the University of Memphis, the basketball team, the football team, the people of Memphis, and the city itself.
(Side Note: As a Memphian For Life, how awesome was it to see my Memphis people representing on twitter last night? Don’t mess with Memphis.)
Second, I’m a commercial litigator, and, here I was, thinking through issues of complex legal procedure, exactly 45 minutes before I was planning to watch James Wiseman play basketball.
So, the Shelby County Chancery Court granted a Verified Complaint filed by James Wiseman, represented by Lesline Ballin, that requested a Temporary Restraining Order.
Story over, right? Not at all.
Legal analysis to follow:
Tennessee Rule of Civil Procedure 65 controls here. Tennessee Rule of Civil Procedure 65.03 provides, in part, that a court “may issue a temporary restraining order without written or oral notice to the adverse party or its attorney” when “an affidavit or verified complaint clearly show that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party can be heard in opposition [.]”
Here, this TRO was entered without notice to the NCAA. The NCAA didn’t have an opportunity to respond with factual or legal analysis…or even a one page “We Object!” filing.
The Shelby County Chancery Court simply reviewed the filed pleadings to make sure that the Verified Complaint, if assumed to be true, connected all the dots to satisfy the elements for getting a TRO issued. In a way, it’s just a matter of being good at paperwork at this stage.
And it helps if you probably have the Judge’s cell phone number.
Don’t get me wrong; it’s still savvy lawyering. Courts refer to any relief under Rule 65 as “extraordinary relief.” It’s a big deal, and a strong move by Memphis and Ballin.
But there is a long road ahead, with the first test coming up soon.
TROs only last 15 days. Under Rule 65.03(3), TROs have a limited life; they only last 15 days, unless they are extended by the Court. That’s the reason for the low proof threshold; TROs are designed to be temporary remedies.
The real fight will be over the Temporary Injunction. Under Rule 65.04, the court will replace the TRO with a Temporary Injunction, which is designed to provide longer injunctive relief to the plaintiff while the litigation proceeds.
Under Rule 65.04, a “temporary injunction may be granted during the pendency of an action if it is clearly shown by verified complaint, affidavit or other evidence that the movant’s rights are being or will be violated by an adverse party and the movant will suffer immediate and irreparable injury, loss or damage pending a final judgment in the action, or that the acts or omissions of the adverse party will tend to render such final judgment ineffectual. “
In deciding whether to grant the temporary injunction, the court will apply a “four-factor test: (1) the threat of irreparable harm to plaintiff if the injunction is not granted; (2) the balance between this harm and the injury that granting the injunction would inflict on the defendant; (3) the probability that plaintiff will succeed on the merits; and (4) the public interest.”
Here, James Wiseman’s case will rise and fall on item # 3, and the NCAA will want a mini-trial on the violation. Wiseman should have a fairly good argument on items 1 and 2, since he’ll lose valuable chunks of his college career if he has to sit out.
If I had to bet, I’d think a judge would let him play, while the matter is being litigated.
But, what Court will decide? There’s no way this matter stays in Shelby County Chancery Court.
Despite what Bluff City Law says (i.e. where every case they handle is in the Shelby County Courthouse), this case will be removed to federal court.
Pursuant to 28 U.S.C. § 1441, a case “may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.” Here, the District Court for the Western District Courts of Tennessee will likely get this case, unless the NCAA both removes the matter to district court and then asks for a change of venue (to a different district court in the US) at the same time.
Given the time challenges here, I’d bet the matter would stay in Memphis’ district courts.
There are a number of reasons a defendant would remove this. For one, a state court judge is popularly elected, and, while judges are generally not biased, an elected judge would face great public pressure from a rabid fan base. District Court judges are lifetime appointees by the President, and they are perceived to be free from bias.
In a strong economy like Nashville-2019, I get lots of calls from people looking for “good deals” on real estate.
First, I tell them to buy a time machine that will take them back to 2010.
Then, I commiserate with them about all the awesome deals that I watched other people pounce on over the last 7 years (with, of course, a quick reminder about all the awful deals that brought people to financial ruin in the 7 years before that).
After all that, I get serious and talk to them about buying distressed real estate, and all the forms and forums where that can happen. Bankruptcy Sales. Foreclosures. Sheriff’s Sales. Tax Sales.
It’s, literally, a path full of misery and heartbreak, but it’s probably the only realm in present-day Nashville where you can truly get a good deal.
And part of the reason that there’s so much upside is that there’s so much risk in these types of sales. There’s no way to avoid that risk, and, at best, your goal is to simply mitigate that risk.
I recently taught a CLE for OutkickCLE on distressed buying, and I’ll post that video link here when it goes live. In the meantime, I’ll be posting snippets from my CLE materials here. Stay tuned.
Creditors Rights 101 