New Tennessee Court of Appeals decision provides advice for foreclosures of real property developments

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.

How to Get Rich in Distressed Assets in Nashville? (You probably won’t like my answer)

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.

TL;DR: You have to know what you’re doing. Otherwise, you’re buying your dream house for pennies on the dollar, only to learn that you’re not getting what you thought you were.

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.

Foreclosure Buyer Buys a Billion Dollar Property for $100k! (Sort of.)

If you’re looking to get rich off foreclosures, let me tell you about the guy in California who bought a billion dollar property for $100k…. 

I’m talking about this New York Times story, subtitled: “Did someone really walk into an auction and buy the priciest piece of real estate in California for $100,000? Well, yes and no.

5d5e699fadbcf8151123d244-750-563If you’ve dealt with foreclosures, then you’ve heard the story about the guy who happened to walk past the courthouse foreclosure with no bidders, knew the property being sold, bid $100 for the house, and won a house. Great story, right?

The reason the New York Times is talking about this famous 157-acre plot of land in California is that it was initially listed for sale for one billion dollars and then was cut to a more reasonable $650 million asking price. Jeff Bezos, Tom Cruise, and Brad Pitt have all kicked the tires on buying this property.

So, on August 20, when the the property sold at a foreclosure sale for the high bid of a mere $100,000, people noticed.

What a steal, right?  Not so fast, the story continues:

That seemingly bargain-basement price came with a condition: that the estate forgive the $200 million loan. Any other buyer would have had to pay at least $200 million at auction to cover the debt.

This reminds me of my “buyer-beware” foreclosure post from 2010.

As a general rule, foreclosure sales wipe out liens behind the foreclosing instrument, but they are subject to any senior liens (liens recorded before the lien being foreclosed).

With this in mind, always remember that a foreclosure sale will be subject to senior liens.

For that California property discussed above, the $100,000 bidder was buying the property, but subject to that $200 million lien.

To be clear, the buyer didn’t become obligated or assume that debt; it just means that the first mortgage still has a valid claim and lien on the property, and the foreclosure bidder had better make arrangements to pay off that debt…or the property gets foreclosed a second time.

But, on paper, it’s still a pretty good deal. I mean, the buyer can frantically try to sell it and, if they can sell it for half of the last list price (i.e. $325,000,000), that’s still a great day at the office.

 

 

Economic Loss Doctrine Prevents Double-Dipping in Damages

Sometimes I use this blog as a notepad for obscure legal theories that I’m going to use later.

Like this one, on the “economic loss doctrine.”

If you have a plaintiff who sues you both for breach of contract damages and for tort damages arising out of the same transaction, you may be able to get the tort claims dismissed, per a Tennessee Court of Appeals opinion released yesterday.

The case is Milan Supply Chain Solutions, Inc. v. Navistar Inc. et. al,  W201800084COAR3CV,  2019 WL 3812483 (Tenn. App. Aug. 14, 2019), and it discussed this rule, known as the “economic loss doctrine.” The theory was “created by the courts to avoid the ‘coming collision between warranty and contract on the one hand and the torts of strict liability, negligence, fraud and misrepresentation on the other’.”

The heart of the concept is stated as:

[C]ontract and tort are separate and distinct areas of the law that provide separate and distinct remedies. A party who enters into a contract which contains terms that limit recovery in the event of a breach [is] typically unable to circumvent such provisions by alleging a tort occurred as well. The warranty or contract’s terms and conditions set forth the rules governing the relationship, and tort law does not expand the remedies of the contract beyond the agreed-to terms. Absent personal injury or damage to other property, the sole remedy lies in contract.

The theory is that a party to a contract is free to contract for the terms of their purchase agreement, and this doctrine protects the right to allocate risk in a transaction.

A good “real life” example of this would be where a party limits the damages for breach in a real estate transaction, such as by providing that damages are limited to a return of the deposit to the buyer. Under this theory, the buyer would not be able to, later, subvert that contract provision by suing for damages in tort.

Tax Sale Buyers Beware: Your property could be Redeemed

Sure, one of the best deals in distressed real estate is to buy property at a county tax sale, where you can purchase a property–basically–at an opening bid that is generally the past due taxes.

But, that strategy has a number of down-sides. The biggest is the taxpayer / property owner’s ability to “redeem” the real property by coming back and paying the debt.

This redemption period is defined at Tenn. Code Ann. § 67-5-2701 and, generally, lasts a year.  And, trust me, if you’ve paid money for a distressed property that’s gone to a tax sale, you probably don’t want to wait an entire year to do anything with the property, especially where the property is abandoned or in disrepair.

Well, the Tennessee Legislature has some good news for you. In legislation sponsored by John Stevens in 2019, there are some changes to the redemption law that allows a shorter redemption period based on the number of years a property has been delinquent.

This is quickly summarized as follows: Continue reading “Tax Sale Buyers Beware: Your property could be Redeemed”

Tennessee Supreme Court provides deep analysis on elements of “novation”

The Tennessee Supreme Court issued a new opinion today, which is notable for a few different reasons.

First, it discusses a legal dispute over The Braxton, which was a luxury high-rise condo building in Ashland City, Tennessee, and which is considered by some to be one of the first big development “fails” of Great Recession Nashville.

Second, the case provides a comprehensive analysis of the law on novation.

The case is TWB Architects, Inc. v.  The Braxton, LLC  No. M2017-00423-SC-R11-CV (Tenn., July 22, 2019).

At its most basic, “novation” is when a party substitutes a new obligation for an existing obligation, such that, after the novation, the second obligation is the only legally binding remaining obligation. Continue reading “Tennessee Supreme Court provides deep analysis on elements of “novation””

Attend the Creditors Practice Annual Forum 2016, Learn Foreclosure in an Hour!

On September 28, 2016, some of the greatest creditor minds in Nashville will gather for the Creditors Practice Annual Forum 2016. Yes, I’m talking about foreclosures again.

Topics to be covered include:

  • Perfection and Enforcement of Liens for Prime and Remote Contractors
  • Non-Judicial Foreclosures in Tennessee
  • Ethical Issues Related to the Consumer Financial Protection Bureau
  • TBA Special Committee on the Evolving Legal Market Report

I’ll be presenting the Foreclosures portion of the seminar, which will give a one-hour overview all the laws, defenses, and issues facing lenders conducting foreclosures in Tennessee.

This should be a good seminar, so be sure to sign up to attend the live presentation, or use some of your free CLE credits from your Tennessee Bar Association membership to watch it online.