David

Tennessee Courts are Very Generous in Computing Six year Statute of Limitations

I sue borrowers on unpaid debts all the time. I generally calculate the six year statute of limitations in Tennessee on unpaid debts by working backwards from the date of default.

In doing that, I generally look for the first date of default, add 6 years to that date, and there’s your deadline to file the lawsuit.

A recent opinion from the Tennessee Court of Appeals suggests that there’s a more creditor-friendly way to do this.

The case is Deutsche Bank National Trust Company v. Stacy Lee, et. al., M201801479COAR3CV, 2019 WL 2482423 (Tenn. App. June 13, 2019).

In that case, the debtors had not made a payment on the debt for eight and a half years. The creditor, nevertheless, filed a collections lawsuit, but the creditor only sued for those installment payments that came due in the 6 years prior to the lawsuit (which included a final, fully matured balloon payment). Needless to say, this lawsuit was, essentially, for the entire amount owed (minus, of course, about 12 months of installment/interest payments).

The Court found that each installment missed was an independent cause of action, prompting a new, later statute of limitations deadline for each installment with each passing month. Specifically, the Court wrote:

“As it pertains to an installment note, the law is well settled that the cause of action accrues on each installment when it becomes due, and that the statutory period begins to run from that moment on that installment.” Consumer Credit Union v. Hite, 801 S.W.2d 822, 824 (Tenn. Ct. App. 1990). Here, Deutsche Bank sought missed monthly payments going back six years from the date of the filing of the complaint, which was January 20, 2017. Because a cause of action accrues with respect to each missed installment payment in an installment note, monthly payments that became due and owing since January 20, 2011 are not barred by the statute of limitations.

This is somewhat counter-intuitive, since you’d think a six year old, long defaulted debt would have expired, well, six years from the default. But, it’s not the case. In fact, the only debts that would have expired are the specific installments that came due beyond that six year period.

I’m as pro-creditor as anybody, but this seems like an unfair outcome.

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.

Constructive Service of Process: Not as Good as the Real Thing

One of the most frustrating parts of a lawsuit can be service of process. I know exactly (generally) how long it takes to prepare and to file a Complaint, but, after it’s in the Sheriff’s or private process server’s hands for service, who knows how long that part will take?

And, under current Tennessee law, valid and effective service of process is critical to getting an enforceable judgment.

Last week, the Tennessee Court of Appeals issued an opinion that emphasizes these issues. The case is Theophilus Ebulueme v. Fred E. Onoh (M2018-00742-COA-R3-CV, Tenn. Ct. App., May 24, 2019), and it has some great analysis on jurisdictional issues.

What is the standard of review for a trial court’s decision on relief from a final judgment under Tenn. R. Civ. P. 60.02(3) (i.e. the judgment is “void” due to lack of personal jurisdiction)? Tennessee Courts follow an “abuse of discretion standard” that will be reviewed de novo with no presumption of correctness. Discover Bank v. Morgan, 363 S.W.3d 479, 487 (Tenn. 2012).

A judgment rendered without proper and valid personal jurisdiction is void. “The lawful authority of a court to adjudicate a controversy brought before it depends upon that court having jurisdiction of the subject matter and jurisdiction of the parties.” Turner v. Turner, 473 S.W.3d 257, 268-69 (Tenn. 2015). “Personal jurisdiction refers to the power of a court over the parties to the controversy to render a binding judgment.” Id.

If you don’t have good personal service, then you can’t get a valid judgment. “A court obtains personal jurisdiction over a party defendant by service of process.” Turner, 473 S.W.3d at 271. “A judgment rendered by a court lacking either personal or subject matter jurisdiction is void.” Id.

What about personal service by “constructive service”? Tenn. R. Civ. P. 4.08 provides a limited exception to the requirements of actual, personal service of process, but be careful in dealing with those less favored methods.

For instance, in today’s case, Plaintiff relied on Tenn. Code Ann. § 21-1-203 and § 21-1-204 to obtain service by publication. If you’re going to follow the exception to the general rule, however, you had better strictly comply. (Here, the plaintiff didn’t–those statutes apparently apply only to chancery court disputes and, going a step further, plaintiff published the notices in Montgomery County to serve a defendant who lived in Davidson County.)

The Court of Appeals went on to discuss service by publication generally, noting that “constructive service by publication is permissible only if it is accomplished in a manner reasonably calculated to give a party defendant adequate notice of the pending judicial proceedings” Turner, 473 S.W.3d at 272.

Long story short, if you’re going to rely on the constructive notice provisions: (1) You’d better follow the statutes to the letter; (2) You should have a valid, legal reason for resorting to the disfavored method; and (3) Your constructive notice should be reasonably calculated to give your defendant notice of the suit.

Tennessee’s Non-Judicial Foreclosure Process Can be Intimidating

Tennessee is a non-judicial foreclosure state.

What that means is that, when conducting a foreclosure, there is no need to file a lawsuit or get a court involved. Instead, the foreclosure attorney can do it all via a variety of paperwork, without any court involvement.

As a lender or foreclosing creditor, that’s pretty awesome, since you may be able to avoid legal expense and, in some cases, third party scrutinty. (Well, I mean, I only enforce liens that are 100% valid, so I have no issues with this, but some might.)

As a foreclosure attorney, however, a non-judicial process can be a little scary, since the success of the process rises or falls based entirely on your compliance with the statutes, relevant provisions of the deed of trust, and your own paperwork.

In fact, on the first foreclosure I ever handled all on my own, I was terrified by the process. I was so uncertain about the process that I actually talked the client into the benefits of conducting a judicial foreclosure (both because the facts were a little weird, and also because it sure felt reassuring to have a Judge “bless” my process via a court order).

Since then, I’ve done hundreds more foreclosures, but I still remember that initial uncertainty about doing such a significant legal process, all without any court or third party involvement.

The point of today’s post is to: (1) remind you that Tennessee is a non-judicial foreclosure state; and (2) note that, despite that, a creditor always has the ability to file a Complaint for Judicial Foreclosure where the law or facts present a weird issue.

In the end, the real test of your compliance with all the requirements of the Deed of Trust and Tennessee statutes will the title company in the sale transaction when you go to sell the property to a later buyer. If you don’t get the process right, you’ll end up with a defective title and an unmarketable mess.

Good luck, new foreclosure attorneys.

Increase in Tennessee Homestead Exemption Fails. For Now.

Last month, the hot topic in the Tennessee creditor rights lawyer world was the rumored increase in the Tennessee homestead exemption.

Well, “rumor” is an understatement. This proposed change had real momentum and had a very strong chance of happening.

As you’d expect, this proposed change completely freaked out the creditor lawyers. I’m on the Tennessee Bar Association’s Creditor’s Practice Executive Committee, and here’s an excerpt of an email I received about it all:

This bill is bizarre. The exemption would go from the current $5,000.00-$25,000.00 to $150,000.00-$750,000.00 – a 3,000% increase!
This proposal should be officially opposed by the TBA. It would have a huge impact on banks’ and businesses’ ability to be repaid their just debts and judgments. Judgment debtors could hide any monetary assets they have in real estate and avoid having to repay what they promised to pay. This bill would legislatively tell debtors they do not have to repay their debts.
This sounds like something which Elizabeth Warren and Alexandria Ocasio-Cortez might suggest.
This is not a close call. This bill is off the charts bad.

So, yes, the creditor response was pretty clear, and a quick coalition formed involving the Tennessee Banker’s Association, the Tennessee Bar Association, and a handful of other similar groups.

In the end, the House Judiciary Committee deferred the homestead bill until next year. The bill will be moved to the committee’s first calendar of next year. When it comes up then, it will be in the form considered by the Committee in its last consideration, which was in the “flat” amount of $35,000.

Ultimately, this seems like a fair amendment. Tennessee is pretty squarely in the bottom, with one of the lowest homestead exemptions in the nation.

When it comes up, I hope the sponsors propose an increase that reflects an adjustment for inflation, and not some drastic increase designed to make Tennessee a haven for asset protection. The fatal flaw in this proposed change during this session was that there was no justification or supporting data for an increase to $750,000 or a million dollars, especially when exemptions are designed to provide a “fresh start” to broke judgment debtors. It all seemed arbitrary.

Oh well, stay tuned, and I’ll report back in 2020.

Collect Your Invoices Faster: Include a Due Date

You’d be surprised at how many invoices don’t have specific due dates. Instead, the invoices might say “due upon receipt” or “due within ___ days.”

Why leave the math to your customers? The better practice is to include a clearly labeled “due date” with a date certain by which the payment must be made.

If you really want to get their attention, you could also include a date on which you’ll take the next, clearly defined step.

This may be giving the account debtor a deadline to pay of July 18, and, then, in the next time, telling them that, if that amount isn’t paid, then you’ve been instructed to file a lawsuit on July 19.

Granted, some debtors simply don’t have the money to pay, and no deadline is going to put that money in their account.

But, for those debtors who have the funds to possibly pay but don’t have your debt prioritized, a clear and unmistakable deadline–with a specific threat of the next action–could do the trick.

2019 Tennessee Legislature is considering a new homestead that would eliminate a creditor’s ability to collect against residential real property

One of my most common phrases on this site is “Tennessee is a creditor friendly state.” Another is “Always file a Judgment Lien against real property.”

Well, that may change very soon. The Tennessee Legislature is considering a very debtor-friendly increase to the homestead exemption that will make Tennessee, literally, one of the most generous states in the country for debtors.

I’m specifically talking about House Bill 0236 and Senate Bill 0399, which would increase Tennessee’s homestead exemption to as high as $750,000. Except for those states that have an “unlimited” exemption, this would make Tennessee’s homestead the highest in the nation.

The Legislature considered a similar increase in 2012, which I wrote about back then, which didn’t pass.

“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, so that a downfallen debtor can keep the shirt on his back and rebuild his life.

Or, if this new law passes, the downfallen debtor can keep 100% of the equity in his $750,000 house entirely out of the reach of creditors.

Wait a second. Is this law designed to protect downtrodden debtors seeking a fresh start in life (who very probably do not have high value real property at all) or, maybe, is it designed to protect high income individuals whose businesses fail?

Because that’s all this proposed law does. It grants fairly absolute protection to the high value real property owned by judgment debtors in Tennessee, and all the garnishments, levies, liens, and bankruptcies will never touch a penny of that equity.

Double Check Your Served Summonses: Tennessee Legislature To Amend Service of Process Statute…Effective January 2020

A very terrifying issue has been circulating in Tennessee courts (well, terrifying to the Tennessee creditor’s rights bar) over the past year regarding service of process in Tennessee.

It all relates to 13 very plain, unambiguous words: “The process server must be identified by name and address on the return.”

That text is from Tenn. Code Ann. § 16-15-901(b), and, over the past ten months, courts throughout the State have been, rightfully so, throwing out lawsuits and setting aside default judgments where a served warrant lacks the process server’s name and address.

Note: When a statute uses the phrase “must be,” you’d better do what it says.

Here’s why: Where the warrant lacks this required information, it doesn’t comply with Tennessee law for valid service of process. Where there’s no valid service of process, there’s no jurisdiction over the defendant. Where there’s no jurisdiction, the Court can’t grant valid relief in a judgment in the proceeding.

This seems like a very low requirement to satisfy (name and address?), but it’s a big deal because, if you’ve ever dealt with process servers and/or you’ve seen a served Summons/Civil Warrant, you have to be diligent and watch for this defect.

Here’s the good news: Yesterday, the Tennessee Legislature took a big step toward amending this statute to give plaintiffs some relief. The Senate Judiciary Committee passed the proposed amendment (the House Bill is at 0393 (and the Senate Bill is at 0456). The proposed law would take effect on January 1, 2020.

Disclaimer: I’m the lead counsel–for the judgment debtor–on one of the two primary cases that brought this issue to a head in 2018.

Second Disclaimer: I’m one of the legislative liaisons with the Tennessee Bar Association who worked on this text and met with the Tennessee Legislators/sponsors a few weeks ago to change this statute.

Third Disclaimer: I’m arguing my case on the old law tomorrow in front of the Tennessee Court of Appeals.

All this reminds me of the old lawyer joke, the one where a lawyer sees a car crash, runs up, and says “I saw everything that happened, and I’ll take either side!”

It’s a funny joke, but, please know, for the next eight months…check your Summonses and Civil Warrants to make sure they comply with the existing law. If you don’t, that sound you’ll hear will probably sound like a car crash.

Property Owners Can Bond Over Mechanic’s Liens under Tennessee Law

A mechanic’s / materialman’s lien on real property in Tennessee is a very powerful tool. When a contractor asserts a lien, that lien, effectively, ties up the property until the contractor’s claims are resolved.

It’s a huge bargaining chip: The property owner can’t sell, transfer, pledge, or, generally, do anything with the property until the contractor’s lien is released.

That’s likely why the Tennessee Legislature passed
Tenn. Code Ann. § 66-21-108, which imposes harsh penalties on people who file invalid liens on real property.

So, if you’re a property owner who wants to fight a mechanic’s lien, is there anything you can do to get it removed, in lieu of payment or litigation?

Yes, you can record a bond to indemnify against the lien and get it discharged. That bond process is described at Tenn. Code Ann. § 66-11-142. In essence, the bond replaces the lien and ensures payment to the contractor, in the event the lien is deemed valid.

With a bond in place, the property can be transferred, and the lien claimant proceeds against the bond for cash, which is all they wanted in the first place.