Distressed Assets – Creditors Rights 101

Are the Nashville Construction Defaults a Leading Indicator that the Nashville Market has finally turned?

I saw something at a Nashville foreclosure yesterday that I hadn’t seen in years.

A luxury, high end house in a great neighborhood was auctioned, and nobody showed up to bid. The Lender bought it back at a credit bid. (In the spirit of disclosure, it was a $2MM+ credit bid. They weren’t quite giving it away, but this is Nashville).

It reminded me of foreclosures in the Great Recession, when you’d stand on the courthouse steps, reading a foreclosure sale notice to nobody and, invariably, your bank would become the new owner of the property.

Back in 2008, lenders were dealing with the after-effects of an easy-money market. Builders with good credit built too many houses, too fast, and the market had a glut of inventory, with no buyers in sight.

The lack of buyer-credit meant that new sales couldn’t keep up with the builder’s debt obligations. It was sort of a ponzi scheme, as sales of today’s houses were necessary to pay for yesterday’s construction costs. When the money level dipped, lots of partially built spec homes got foreclosed, after the builder’s new money ran out and they were defaulted or simply gave up.

I thought about 2008 yesterday.

As much free-flowing money as there’s been in the Nashville retail-buyer and foreclosure market over the last 4-5 years, it was a surprise to see that sale fall flat yesterday. In the last year, I’ve done foreclosures in Nashville with 20-30 bidders present. But, on a sunny Thursday, with a Belmont-Hillsboro Village house on the block, and there are no bidders, buyers, or bankers willing to refinance?

Could this be a leading indicator of a larger problem in Middle Tennessee?

The signs are there. This exuberant builder refurbished a modest 1920s bungalow, to construct a 8,712 square foot, 2 car garage, 5 bedroom, 8 bath outlier, originally offered for $3,675,000 (estimated monthly payment of $20,012). The house isn’t entirely finished–it looks like contractor work on the new backyard pool and outdoor area has stopped.

The builder has more than a dozen projects throughout Nashville, in similar stages of “in progress” construction. The builder also has a number of pending foreclosures and twice as many pending lawsuits. The construction on a number of the sites seems to have simply stopped.

Just a few years ago, just one high-end property selling for top-dollar would have bought an over-extended builder a few months, finished another project, and lead to another sale, but it seems like the buyer market has waned as well. When both buyers and banks get cautious, risky bets come due.

There are a number of peculiarities here that may make a broad-takeaway unreliable. But, with that caveat, I’m seeing lots of the same issues and patterns that we saw in 2008.

Plus, by mid-morning, I’d learned that the developer filed a Bankruptcy. Just like they did in 2008.

Don’t Mess with HOAs in Tennessee

The short version of today’s post is: Always pay your homeowner’s association assessments in Tennessee.

In general, an HOA is created by the recording of a Master Deed for the community, and this Master Deed imposes a number of duties and responsibilities on the lots, generally via declarations and by-laws.

Because the Master Deed is recorded before any properties are conveyed to owners, it pre-dates those deeds and, to be doubly certain, the deeds to the lots generally contain language that expressly state that the transfer is subject to the obligations in the Master Deeds and By-Laws.

Every Master Deed you’ll ever see allows the HOA to make monetary assessments against the lots, assert liens against the lots for any unpaid assessments, and foreclose the property as a way to enforce the lien.

In some cases, the HOA’s lien rights relate back all the way to the recording of the Master Deed.

HOA foreclosures used to be rare, but, in this awful economy, I’m starting to see more of them. As a result, I’ve been spending more time with Tenn. Code Ann. § 66-27-415, a little-known (and very confusing) statute that provides the broad outline of the foreclosure process for homeowner’s association liens.

In short, the process is similar to the standard “deed of trust” foreclosure process found at Tenn. Code Ann. § 35-5-101, et. seq., but with some notable exceptions.

Notice. Per Tenn. Code Ann. §§ 66-27-415(a)(3) and (4), the HOA must provide notice of the sale via “United States mail, postage prepaid,” with that notice “deemed received three (3) days after deposit” in the mail. The notice is to be sent to “the unit” unless the owner has provided an alternate address to the HOA. (Note: A deed of trust foreclosure requires notice to be sent via certified mail, return receipt requested.)

Priority. Per §§ 66-27-415(b)(1), the HOA lien will be ahead of “all other liens and encumbrances” except: (A) liens that pre-date the Master Deed; (B) a “first” mortgage on the unit; and (C) ad valorem taxes. To be clear, a HOA lien may be able to jump ahead of second mortgages and judgment liens, even where those liens were recorded before the assessment came due.

Limited Super-Priority. Notwithstanding the carve-out for first mortgages, under § 66-27-415(b)(2), a owner’s association may claim a super-priority of six months’ of assessments from a first mortgage’s foreclosure.

Rights of redemption are statutorily waived. Per § 415(b)(3), the HOA lien “is not subject to the statutory or other right of redemption, homestead, or any other exemption, unless specifically reserved in the declaration.”

No Notice of Lien is Required. Under § 415(d)(1), the notice to the world of the lien is in the Master Deed.

Sure, the first step is to look at what the Declarations and By-laws say about foreclosure. Most likely, you’ll find a broad and inconsistent range of requirements. That’s why Tenn. Code Ann. § 66-27-415 is so useful. It is designed to impose a level of uniformity to the process.

Lender Groups ask Tennessee Supreme Court to weigh in on conflicting authority on wrongful foreclosures

In July, I wrote about a July 2022 Court of Appeals opinion holding that even a defective foreclosure sale conveys valid title to real property. That’s because Tenn. Code Ann. §§ 35-5-106 and 35-5-107 expressly say that title is not impacted by a defective sale and, instead, the foreclosing trustee is liable for monetary damages.

Within a few minutes, a local banker commented on the post and asked: Yeah, but did you see this one from last month?

He was talking about Terry Case v. Wilmington Tr., N.A. as Tr. for Tr. MFRA 2014-2, No. E202100378COAR3CV, 2022 WL 2313548 (Tenn. Ct. App. June 28, 2022)– issued less than a month earlier–which held (sort of) exactly the opposite: “[A] trustee’s mere failure to comply with the terms of a deed of trust will render the foreclosure sale invalid.” Id. at *8.

How does the law reconcile these drastically different outcomes, based on the same wrongful foreclosure allegations?

Tennessee is a non-judicial foreclosure state, but don’t be lulled into a sense that foreclosures are simple (i.e. just “paperwork”). Instead, a foreclosing lender must simultaneously adhere to two separate processes, one of which is found in Tennessee statutes and the other in the underlying deed of trust.

Sometimes, they match; sometimes, they don’t.

If the lender doesn’t comply with any of the requirements of both tracks in full, though, this developing caselaw imposes drastically different remedies for non-compliance. Fail to satisfy the statutes? No big deal. Fail to satisfy the deed of trust? Here’s a nuclear bomb to your title.

Needless to say, this is confusing to creditors, borrowers, and buyers at foreclosure sales.

The plaintiff in the June 2022 case has filed an Application for Permission to Appeal to the Supreme Court (a full copy is attached below), seeking clarification on the splintered issues of law surrounding wrongful foreclosure claims. The Application opens with a direct message: “Tennessee wrongful foreclosure law is in a state of disarray.”

On behalf of the Tennessee Bankers Association and the Tennessee Mortgage Bankers Association, my office filed an Amicus Brief in support of the request to have the Supreme Court step in (also below).

This is a big deal. If this caselaw stands, title to foreclosed real properties will remain clouded until the wrongful foreclosure claims expire (6 years from the sale date). And, sure, a title company can vet the sale process, but title companies don’t like any risk, no matter how small.

This will render post-foreclosure title completely uninsurable. This isn’t good for anybody. Borrowers, lenders, buyers–everybody loses here.

application-for-permission-to-appeal-4878-4945-6182-v.1 Download

filed-amicus-brief-in-wilmington-v-case-4884-8705-5926-v.1 Download

Commercial Foreclosure Opportunity in Dickson!

Despite all the doom and gloom predictions, foreclosures haven’t skyrocketed in 2022.

Having said that, in the Middle Tennessee area, there remains a surprising amount of interest (and money) in the foreclosures that do happen. In June, I wrote about four foreclosure sales that were pending and, for every single one, at least 10 people showed up and, in the end, I had excess proceeds (meaning my lender client got paid and had money left over).

Long story short, the days of reading a foreclosure sale notice to nobody on the courthouse steps are, at least temporarily, over.

I’ve got a sale set tomorrow, September 8, 2022, for a commercial property at 110 Livestock Road, Dickson, Tennessee 37055.

Based on the photos pulled from an old Loopnet listing, it’s right in the “off-interstate” commercial district, behind Bojangles Chicken (please note: my legal description, not these photos, controls what the buyer is buying).

At one point, the owner planned to build and operate a Taco John’s restaurant on the site. A complicated Chapter 11 later, however, and this commercial property is back on selling block.

Let me know if you would like additional information on this. I am the attorney for a creditor involved, and, as a result, I will be limited in what information and guidance that I can provide.

As with all distressed real estate sales, buyer beware, and hire a lawyer.

New TN Court of Appeals Opinion: Even a defective foreclosure conveys good title

Tennessee is a non-judicial foreclosure state. In order to foreclose on somebody’s house or commercial property, all a lender must do is mail the proper paperwork to the proper parties. A lawsuit or other court involvement is not necessary.

That’s a drastic over-simplification, but, basically, it’s true.

In fact, when I did my first-ever foreclosure 20 years ago, I was so nervous about not having a court involved in such a complex and significant process that I filed a judicial foreclosure action. That way, at the end, I’d have a Judge’s blessing that “This was done correctly.”

What happens to a sale if the foreclosure attorney doesn’t do the paperwork correctly? Is it a valid sale? Can it be challenged?

Yesterday, the Tennessee Court of Appeals reminded us all that even a defective sale can convey good title, at Brady L. Daniels Et Al. v. Vince Trotter, E2020-01452-COA-R3-CV (Tenn. Ct. App. July 20, 2022).

In the case, it was alleged that the creditor did not provide proper notice of the sale, per Tenn. Code Ann. § 35-5-101(e). In the opinion, the Court discussed what, if any, impact of a failure to get the paperwork correct would have on the sale and cited two statutes.

The first, Tenn. Code Ann. § 35-5-106, provides that “[s]hould the officer, or other person making the sale, proceed to sell without pursuing the provisions of this chapter, the sale shall not, on that account, be either void or voidable.”

The second, Tenn. Code Ann. § 35-5-107, provides that the officer or other individual making the sale who fails to comply with the requirements in this chapter of conducting a private foreclosure sale is guilty of a class C misdemeanor and is liable for all damages incurred by the party injured due to his or her noncompliance.

These two statutes, the Court noted, are “intended to eliminate the uncertainty with land titles resulting from foreclosure sales.” Citing the Tennessee Supreme Court, the Court later wrote that a defect in a foreclosure process would not result in the sale being set aside but, instead, the damaged party would simply be entitled to compensatory damages.

Are Foreclosures Coming Back? Here are some notable Middle Tennessee Foreclosures set this Week

I’m involved in a number of Nashville foreclosures right now, and here are some details for some pending sales for anyone looking to buy. (As always, the typical disclaimer: Nothing in this post, of course, is designed to give you legal or factual advice about these sales.)

(1) 1018 Riverwood Boulevard, Hermitage TN: June 21, 2022 at 10 am (this Tuesday). Sale to be conducted by Republic Bank, from an alleged second lien position, subject to a first from 2011 in the original amount of $178,837. Zillow Value: $490,600.

(2) 810 Bellevue Road, Unit 214, Nashville, TN 37221: June 22, 2022 at 10 am (this Wednesday). Sale to be conducted by HOA, from an alleged second lien position, subject to a first from 2003 in the original amount of $76,500. Zillow Value: $222,400.

(3) 1011 Murfreesboro Road, #A-4, Franklin, Tennessee 37064: June 22, 2022 at 1 pm (this Wednesday). Sale to be conducted by HOA, from an alleged second lien position, subject to a first from 2012 in the original amount of $56,500. Zillow Value:$359,500.

Please let me know if you would like additional information on any of these. I am the attorney for a creditor involved, and, as a result, I will be limited in what information and guidance that I can provide.

As with all distressed real estate sales, buyer beware, and hire a lawyer.

Zillow’s Failure Hasn’t Slowed the Torrid Pace of All-Cash / No-Fuss Property Sales in Nashville

In the depths of the COVID-19 pandemic in June 2020, I bought a truck. And not just any truck, but a brand new 4×4 that was way bigger than the late model Nissan Leaf that I traded in.

When we returned to a semblance of normal life in the spring of 2021 (i.e. when Courts began to require in-person appearances), I realized how much I hated driving a truck on downtown streets.

Well, the actual realization occurred at the top level of the Williamson County Judicial Center parking lot, when there were no parking spots and I had to turn my giant truck around in a tight space and find street parking. I’ll yada yada the parts about me backing into a tree while parallel parking a few minutes later and, by the end of the day, getting a Carvana purchase offer.

But, long story short, Carvana gave me a no-questions/no-fuss offer on my (fixed) truck, in a process that was weirdly easy. I was used to having to run a newspaper ad and have strangers come to my house for test drives (or, worse, dealing with a used car salesman).

That’s their business model–disrupt the traditional market by making an onerous process so easy.

Which is exactly what Zillow was doing in real estate, and which ended in failure.

But don’t think that Zillow’s failure is an indictment of the business model. It’s alive and well in the Nashville market.

When I look at the recent property transactions in the Nashville Ledger, all I see are weird LLCs, buying lots and lots of properties. Look at the picture below. Sfr Xii Nashville Owner 1 LP. Opendoor Property Trust I. Mile High Borrower 1 Value LLC.

My personal favorite is the buyer named “Rich af LLC,” the new owner of some prime real estate on 1st Avenue.

The business model is straight-forward. These buyers approach owners with a quick, no-fuss, cash offer, and, then, they hope to flip the properties (after renovations or maybe not), safe in the assumption that the Nashville real estate market is going to justify their confidence.

Zillow’s failure drew a lot of national attention, but, if the past 60 days of transactions are any indication, the business model is alive and well in Middle Tennessee. In fact, Zillow’s crash and burn appears to be good for Nashville property investors–not only is there one less competitor, but there’s an assumption (among property owners) that “buying low/selling high” isn’t a viable business, and they’re lucky to get quick-cash offers on their properties.

When Carvana offered me nearly 95% of retail value for my 10 month old truck, I was surprised (and couldn’t get it there fast enough). I kept waiting to find out what the catch was–would there be some secondary negotiation or some other trick? (There wasn’t.)

I suspect Carvana was confident that they’d easily find a buyer in a great selling market, and I’m betting that’s what these Nashville property investors are doing too.

Pending Judicial Foreclosure: Williamson County residential property

This isn’t going to turn into a real estate listing blog, but a number of you have asked me to keep you posted when I set interesting properties for sale.

Well, I’ve got an interesting one coming up for a Williamson County residential property in Concord Hunt (a very nice neighborhood) that will be sold on November 4, 2021.

The property is 9185 Monarch Court, Brentwood, Tennessee 37027, which Zillow says is worth $1,323,100. Who knows if that is accurate, but I can’t wait for an actual property owner to use the “Sell your home to Zillow” feature and we see if Zillow puts their money where their site is.

Per the Zillow information, the house was built in 2005, is in a phenomenal school district, and, based on my site visit, is vacant.

My bank client is the second priority lien holder. This is a “judicial foreclosure” because the third-priority lien holder is the United States government. As a result, any sale will be subject to the approval and confirmation of the Williamson County Chancery Court. Per my Sale Order, I’ll handle getting the sale approved.

The sale will occur on Thursday, November 4, 2021 at 11:00 o’clock a.m., at the property address.

Please let me know if you would like additional information on this property. I am the attorney for the creditor, and, as a result, I will be limited in what information and guidance that I can provide, but I am available to answer questions about the judicial foreclosure sale and the court approval process. Nothing in this post, of course, is designed to give you legal or factual advice about these sales.

As with all distressed real estate sales, buyer beware, and hire a lawyer.

Two More Sheriffs Sales set for August: Williamson County Commercial Properties

Last week, I wrote about a pending Sheriff’s Sale that I have scheduled for August 3, 2021 on 2137 Maricourt Street, Old Hickory, Tennessee.

A number of you reached out for information on any other sales that I may have pending. Here is information on two Williamson County commercial properties that will be sold at the end of August.

This will be via a Sheriff’s Sale set for August 31, 2021, at 12pm, at the Williamson County Judicial Center, 135 South 4th Avenue, Franklin.

(1) Approximately 2.43 acres, South Carothers Road, Franklin, Tennessee, Map/Parcel No. 079-082.00. This is a wooded lot, immediately next to the Soar Adventure Tower ropes course.

This is an image of the property available from the Williamson County GIS mapping site.

Per the Sale Order, bidding for this tract will start at $51,500.00. The 2020 tax appraisal for this property is $103,000.

(2) Approximately 4.29 acres, Royal Oaks Boulevard, Franklin, Tennessee Map/Parcel 079-023.00. This is also a wooded lot, right off Highway 96, on Royal Oaks Boulevard.

The neighboring property to lot was in the news recently, in the Nashville Post article titled “Franklin apartment property sells for $100M.” In case you’re not a subscriber, my interpretation of the article is that a Los Angeles-based real estate group bought the property immediately next this 4.29 acre lot for One Hundred Million Dollars.

I am not suggesting that this property is worth $100,000,000 (or anywhere close to that number), but, per the Court Order, the opening bid will be $100,000.

Please let me know if you would like additional information on either of these two properties. I am the attorney for the creditor, and, as a result, I will be limited in what information and guidance that I can provide, but I am available to answer questions about the Sheriff’s Sale and the Sheriff’s Sale process. Nothing in this post, of course, is designed to give you legal or factual advice about these sales.

As with all distressed real estate sales, buyer beware, and hire a lawyer.

Homebuyer Beware: Some of the property listings on Zillow are Foreclosures and Sheriff’s Sales

Last year, I had a foreclosure scheduled for a Williamson County property in an “in demand” neighborhood and, somehow, Zillow picked up my Foreclosure Sale Notice and listed my sale on the property’s Zillow page. In April, I wrote a post about the 500 phone calls and emails I received from all over the world, asking about the property.

In fact, I got one today from Detroit.

But, a few minutes later, I got a call about another Zillow listing, this time on a Sheriff’s Sale I’m conducting in August on 2137 Maricourt Street, Old Hickory, Tennessee 37138.

The full Notice of Sheriff’s Sale of Real Property can be found on The Wilson Post’s Public Announcements page. I have no idea how it ended up on Zillow, but anything that generates more potential bidders is good.

As indicated in the Sheriff’s Sale Notice, the property is scheduled for auction at 11:00AM, on August 3, 2021. The Sale Notice contains the terms of sale, including opening bid and the bidding process.

I post here in order provide a quick link to the Notice of Sale, which I’m planning to forward to potential bidders. This should present a great opportunity to a bidder.

In this strong real estate market, there are limited opportunities to find good deals on Middle Tennessee real property. The investors have long figured out foreclosure sales, then they figured out tax sales, and, now, Sheriff’s Sales are the next frontier. Sheriff’s Sales used to be rare–given that the process is fairly complex and confusing (even to lawyers)–but these are becoming more common, given the rise in property values and the unyielding demand for residential real estate.

As Zillow continues to grow into a trusted resource, though, I worry that a typical homebuyer may be lulled into seeing only the upsides of the potential deals listed on Zillow, without fully exploring the risks that distressed asset sales present.

I’m not suggesting that a buyer shouldn’t consider participating in a sheriff’s sale (seriously, please come on August 3), but I am encouraging every caller to educate themselves on the process and to consult with a real estate lawyer in advance.