When Tenn. Code Ann. § 35-5-117 (originally § 35-5-118) was enacted in 2010, foreclosure lawyers were terrified.
This was the first time that the Tennessee legislature limited a creditor’s collection rights after a foreclosure. And the text was pretty ambiguous.
The statute created two general scenarios where a debtor could fight efforts by a creditor to obtain a deficiency judgment after a foreclosure:
- Where the debtor can make “a showing of fraud, collusion, misconduct, or irregularity in the sale process” (see Tenn. Code Ann. § 35-5-117(b)); or
- Where the debtor can “prove by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of property at the time of the foreclosure sale” (see Tenn. Code Ann. § 35-5-117(c)).
At the time, foreclosure attorneys focused on what “materially less” than “fair market value” meant. The legislative history of the statute revealed that the lawmakers pulled that phrase from divorce law, where a “material change in circumstances” could impact child custody decisions. (Not much guidance on foreclosure cases.)
Ultimately, the appellate courts found that 88%-90% of the last known appraisal was sufficient, with later opinions approving 80% bids. With this “mathematical” clarity, foreclosing lenders had some guidance to avoid traps under 117(c).
But what about the part we all overlooked, Tenn. Code Ann. § 35-5-117(b)? We took that part for granted because, seriously, does any lender or foreclosure attorney commit fraud, collusion, misconduct, or irregularity in the sale process?
I don’t ask this in a rhetorical way. It’s an interesting question, and, in light of customary foreclosure practices in Tennessee, I think it’s ripe for litigation.
Here’s an example, which you can try at home. Grab your local newspaper (assuming one still exists in your area), and look for the foreclosure notices. Pick the first one you see, and call the foreclosure attorney and see what happens.
In my experience, it’s likely that:
- The attorney/staff will never answer your call/email.
- The attorney/staff will not call/email you back.
- If you do hear back, you will not be provided with any information other than what is in the sale notice.
- In many situations, you will not even get confirmation whether the sale is proceeding or not.
- There will be sale terms announced in the minutes before the sale, but those are only rarely shared with interested parties in advance. Things like: Whether buyers need to bring cash. If so, how much. When will closing happen. Whether buyers need be pre-qualified.
These are fundamental questions that any reasonable bidder would expect to be provided. If an interested party doesn’t get these answers in advance, then they simply will not show up or, if they do, will be unprepared to bid. This uncertainty and failure to communicate leaves foreclosure bidding to the low-ball bidders, who make their money by exploiting the ambiguity (and low bid prices).
The failure to respond to interested parties’ reasonable questions will chill interest in a sale and will reduce the number of potential bidders. This could rise to the level of a violation of the foreclosure trustee’s duties under the Deed of Trust and could, possibly, render the sale “irregular.”
Foreclosing lenders in Tennessee should consider subpart 117(b) and how they or their counsel handle sales. Sure, no lender thinks their sale is “irregular,” but, on the right facts, you never know how a court will rule.
Creditors Rights 101 