Category: Foreclosure

A Creditor Doesn’t Have to Foreclose First: New Court of Appeals Case Answers This Common Question

When a loan goes into default, the lender has many options. Sometimes, they go straight to foreclosure. Other times, they’ll file a lawsuit first. Maybe the collateral isn’t worth repossessing; maybe the secured creditor wants to be the first to get to a judgment, in order to execute on other assets or take a judgment lien.

When a bank files a collection lawsuit prior to foreclosing, the borrower always yells in defense: “But you haven’t sold the collateral yet!” and argues that the lawsuit is premature or that the borrower is entitled to some sort of credit or offset to the ultimate judgment.

The defendant is wrong, and the Tennessee Court of Appeals reminded us of that in an opinion issued yesterday in Eastman Credit Union v. Hodges. This was the exact argument the defendant made: “that the judgment of the trial court should be reversed because Eastman did not repossess a motorcycle that served as collateral for one of Hodges’ loan obligations [and that] the value of this motorcycle should have been deducted from the outstanding balance of his loan.”

The Court of Appeals’ response? “His position has no merit.”

The Court held that Tennessee Code Annotated § 47-9-601 does not require a lender to foreclose on its collateral prior to obtaining a judgment. That statute provides that a secured party “[m]ay reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure[.]”  Specifically, the Court wrote: “These rights, in addition to others provided by the section, are ‘cumulative[,]’ and the statute expressly allows them to be exercised simultaneously. The statute, however, does not require that a secured party foreclose on collateral prior to or simultaneous to seeking a judgment.”

It’s a good case to remember the next time a defendant raises these issues, and, trust me, they will.

New Tennessee Opinion on Foreclosure Deficiency Follows Creditor-Friendly Precedent

One of my greatest victories was the favorable opinion I obtained for a client in GreenBank v. Sterling Ventures, et. al. , decided on December 7, 2012.

I blogged about it here, but to recap: That case was the first consideration of a foreclosure deficiency attack under Tenn. Code Ann. §35-5- 118(c). Under that statute, a borrower can argue that a foreclosed property sold for “materially less” than fair market value and, under §35-5- 118(c), a court can deny a deficiency judgment to the foreclosing creditor.

In an opinion issued this past Friday, the Court of Appeals revisited the statute in Capital Bank v. Oscar Brock, No. E2013-01140-COA-R3-CV – Filed June 30, 2014 (see full text here).  The case followed the established precedent of Sterling Ventures and its progeny.

This new case is notable in two respects:

  1. Courts can and will resolve §35-5- 118(c) issues at the Summary Judgment level,  where it is only a matter of applying the valuations against the foreclosure bid price. In fact, this new opinion weighs some of the evidence, in finding that the defendants valuations were were “formed
    months or even years before or after the time the Property was sold at foreclosure.” This was a major victory in the original Sterling Ventures case, since borrowers want to make these issues a “fact” question, forcing a trial and delay of judgent.
  2. Courts continue to look at percentages when determining what “materially less” means. Sterling  Ventures and the later opinions all say the courts want to avoid setting a “bright-line percentage, above or below which the statutory presumption is rebutted.” That has basis in the legistlative history of the statute, where the lawmakers used “material” based on its usage in child custody cases. Nevertheless, the courts continue to apply a percentage test; in this case, spread was 15.8% and the sale was upheld.

This Court shot down a number of other arguments, including: those based on the amounts of several post-foreclosure appraisals; based on the Bank’s ultimate sale-listing price; and an argument that the Bank committed “fraud” by bidding a lower amount when it planned  to market the property at a higher amount.

The ultimate take-away on this remains the same as in the past.

  • Get an appraisal at or near the time of the proposed sale.
  • Bid an amount that is reasonably tied to the amount of your appraisal (or other reliable/admissible valuation).
  • Summary Judgment is a proper way to proceed, provided the foreclosing creditor was cautious and acted with this statute in mind.

 

New Trial Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting “Materially Less”

A few months ago, I argued the first appellate case construing Tenn. Code Ann.  § 35-5-118, which is the new Tennessee post-foreclosure deficiency judgment statute. As you may recall from my blog post about the new law, the statute provides a possible defense to a deficiency action, where the debtor can show “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…”

In layman’s terms, a foreclosed borrower may be able to avoid a judgment for the remaining debt if he can show that the foreclosure buyer drastically under-bid at the foreclosure.

All across the state, this statute has resulted in two fights:

  1. What was the fair market value at the time of the foreclosure? and
  2. Was the foreclosure sale price “materially less” than the fair market value?

A big problem under the statute has been that “materially less” isn’t defined in the statute or anywhere else in Tennessee law.

In the resulting GreenBank v. Sterling Ventures  opinion, the Court of Appeals issued a bank-friendly interpretation,  offering guidance as to what “materially less”  means by saying that a sale price of 86% is not “materially less.”

I’ve heard from a number of bank lawyers since that opinion, complaining that 86% isn’t low enough. I’ve told them, just wait, the Sterling Ventures opinion didn’t set the “floor;” there is room in the statute for lower values, which will be established in future cases (in the Sterling Ventures case, the bid at issue was 88-91%, so it didn’t require the Court to define the lowest possible percentage).

This past week, my firm received another favorable  opinion from the Williamson County Chancery Court. In this Opinion (click to review), the Court recognized this issue, and rightfully upheld lower percentage bid amounts. The Court, following the lead of the Court of Appeals, cites the Holt v. Citizens Central Bank case, which recognized that a 50% recovery at foreclosure is a customary result.

While this doesn’t suggest that 50% is the magic number/floor percentage, this analysis shows a judicial tendency in interpreting the statute at a lower range than most debtors have argued.

With any new law, it takes a few decisions to “battle test” how it works. So far, the parameters of Tenn. Code Ann.  § 35-5-118 are being defined in a way that favors creditors.

Don’t Forget that Tenn. Code Ann. § 35-5-118(d) Also Has a Two Year Statute Limitations on Collection of Foreclosure Deficiency

Earlier in the month, I talked about the new Tennessee Court of Appeals decision on Tenn. Code Ann.  § 35-5-118, which provided some guidelines on analyzing the adequacy of foreclosure bid prices in Tennessee.

In the Court’s deep analysis of the potential defenses to a foreclosure deficiency lawsuit in the statute, don’t forget my advice from an even earlier post about the new two year statute of limitations.

In Tennessee, a creditor can sue for breach of contract (i.e. to recover unpaid debt) for up to 6 years from the date of the default in payment.

This Tenn. Code Ann.  § 35-5-118(d) provides that a post-foreclosure action to obtain a deficiency judgment “shall be brought not later than the earlier of:

(A) Two (2) years after the date of the trustee’s or foreclosure sale, exclusive of any period of time in which a petition for bankruptcy is pending; or
(B) The time for enforcing the indebtedness as provided for under §§ 28-1-102 and 28-2-111.
So, the creditor has to sue on the earlier of two years or within the original 6 year statute of limitations. Two years is generally going to be the earlier of those two.
For many creditors, waiting a few years after a foreclosure is a reasonable move, to see if the debtor’s fortunes turn around. But, under this statute, a creditor can’t wait too long, and no later than 2 years.
Also, a creditor should be especially careful about a forbearance agreement on the deficiency debt.  If those voluntary payments extend more than 2 years, then a debtor could argue that the creditor’s cause of action on the debt expires. Long story short, be sure to document either a tolling of the statute or do any sort of long-term payment arrangement as a new Deficiency Note (which, itself, has a new 6 year statute of limitations from default).

What Does “Materially Less” Mean in Tennessee Foreclosure Sales?

The Nashville Post interviewed me on what constitutes “materially less” in bank foreclosure sales in a December 14 article titled “Appeals court clarifies just what ‘materially less’ means in foreclosure auctions“. This clarification gives banks some guidance in determining what amount must be bid at a creditor’s foreclosure sale in order to preserve their deficiency balance.

Tennessee Court of Appeals Issues First Opinion Examining Text of Tennessee Deficiency Statute

Remember two years ago, when I wrote about the new Tennessee deficiency judgment statute? That statute, Tenn. Code Ann.  § 35-5-118, was designed to provide a defense to post-foreclosure deficiency lawsuits where the creditor failed to bid the actual “fair market value” of property at foreclosure. At the time, I said:

For most lenders, this new law should not have any practical impact. While you might imagine there would be various horror stories of lenders bidding $10,000 to buy a half-million property, in reality, most lenders were already calculating their foreclosure bids by starting at what the fair market value of the property is, and then subtracting sale expenses and carrying costs. The most prudent lenders have a standard procedure in place for all foreclosures, and many go the expense to order pre-foreclosure appraisals.

The reason I’m quoting myself so much is because the Tennessee Court of Appeals decided last week that my interpretation is correct. I take credit for this opinion, because I argued this case before the Court.

The case is GreenBank v. Sterling Ventures, et. al. , decided on December 7, 2012, (full text here). If you represent banks and creditors, particularly in foreclosures and collections, you must read this case and consider how your clients’ foreclosure bidding strategies compare with the Court’s decision.

This opinion is significant because it’s the first decision critically examining the text of Tenn. Code Ann. §35-5- 118 and deciding what “materially less” means.  While that term sounds official, the phrase “materially less” has never been used in any other Tennessee statute or court opinion. Ever. As a result, a court deciding whether a foreclosure sale price is “materially less” than fair market value is faced with a completely blank slate.

At the trial court level, the Chancery Court had found, at summary judgment and as a matter of law, that a foreclosure sale price ranging between 88% and 91% of the Defendants’ highest alleged value was not “materially less.”  On appeal, the Court agreed, explaining that the legislative history and goals of the new statute clearly indicated that a foreclosure bid price at 89% of the highest property value was not “materially less.”  (The Court actually went a step further, based on a prior decision, and found that 86% would suffice.)

The matter was appropriate for decision at the summary judgment stage, because, even accepting the Defendants’ facts as true, the foreclosure sale price was still 89% of the Defendants’ highest values and, thus, was not “materially less” than fair market value under Tenn. Code Ann. §35-5- 118(c).

Here are my two take-aways from this decision:

  1. A foreclosure bid of 86% is going to withstand this defense, so tell your bank clients to bid at least 86% of the highest alleged value (whether that be your appraisal, the defendant’s appraisal, or the tax card value).
  2. Under the right facts, a creditor can prevail over a §35-5-118(c) defense at the summary judgment stage.  The first time I saw this statute, my greatest concern wasn’t that my client would win or lose on this argument, but, instead, that this statute created a factual issue that would cause delay and require a trial (and, thus, I couldn’t prevail on a motion for summary judgment). This case shows that you can win such a motion.

This opinion is creditor-friendly, but not overly so. Keep in mind, a bank conducting a foreclosure must still bid at least 86% of a property’s highest value. Taking into account costs of the foreclosure, the costs of “owning” property, and other administrative costs associated with foreclosure, I question whether we’ll see a later opinion on different facts that affirms a lower percentage (65%-75%).

Your Next Landlord Could be A Hedgefund: Are Rental Properties Making a Comeback as a Good Investment?

I’ve said for years that the contractors and investors who got burned by the economic downturn will eventually hit rock bottom, dust themselves off, and end up making as much money on the backside of the recession as they lost on the front end. This is because the same market inefficiencies that were exploited in the past are being replaced by equally exploitable new ones.

The builders who once built speculative homes on inflated market appraisals are going to be the contractors who do the work for the investors who buy the properties from the banks at 40 cents on the dollar.

The Las Vegas Sun did a story last week on how hedge funds are buying Las Vegas real properties at bargain rates, making minimal investments/improvements, and renting the properties for an 8% to 12% annual return.  Then, once the economy rebounds, the investors could expect appreciation to add more value to the investment.

As far as investments go, being a landlord is fairly labor-intensive. And, if the past 4 years has shown us anything, it’s hardly a fool-proof move.

Potential landlords would be smart to read this excellent article in the Wall Street Journal, Do You Really Want to be Landlord? The article has both horror stories and advice, as well as a forecast that rents are likely to increase over the next few years.

I got out of the landlord business two years ago, when my tenant couldn’t unclog her drains and called me every other day.  The 30 minute drive, coupled with time spent waiting on plumbers, gave me all the time to reconsider the pros and cons.

 

Construction Lenders: Don’t Wait to Visit the Construction Site to Check the Status of Work Progress

Not too long ago, even bad loans got repaid. With so much new money in the pipeline and refinance transactions always around the corner, errors in loan documents or lapses in lending oversight didn’t matter, because undiscovered issues never had time to blossom into problems.  As a result, some lenders got lazy.

As this story from Memphis’ Commercial Appeal shows, Rusty Hyneman’s banker was really lazy. The worst part is the bank didn’t catch the issues until after approving the loans and, worse, advancing an incredible amount of money. When the bank did some basic post-transaction due diligence, the horses were already out of the barn.

After a customary review of active loans, the banker “hit the road to eyeball properties.” On this random visit to the construction site–11 months after loaning a total of $14 million–the banker must have been shocked to find that absolutely no work was being done on the project. Nothing.

That’s when the bank knew, obviously, there was a problem.

Here’s my advice to creditors: Take time to know your customers and know their projects. On a construction loan, occasionally drive past and make sure work is being done. Especially if you are actively advancing money to fund work at the site. Here, $4.9 million of the bank’s advances were to be used exclusively for construction at the project, and a quick drive-by could have saved millions of dollars.

New CLE Speaking Engagement: The Essentials of Foreclosure Defense, September 22, 2011

My law partner, Tucker Herndon, and I have been invited by LawReviewCLE to speak at their upcoming seminar The Essentials of Foreclosure Defense. This seminar will be on September 22, 2011, in Nashville at the DoubleTree Hilton.

While we generally represent foreclosing creditors in the foreclosure process, the seminar organizers recognized that “bank lawyers” are probably some of the most knowledgeable about avenues to attack, stop, or stay a foreclosure. They’re right: after probably 500 foreclosures over the past 4 years, we’ve seen it all.

As a result, we’ll be speaking about trends in foreclosure litigation, including lawsuits to stay or enjoin foreclosures, as well as well consensual agreements to avoid foreclosures, like loan modifications, short sales, and deeds in lieu of foreclosure.

Finally, we’ll review the powers of Bankruptcy Courts to stop a foreclosure and, in some cases, attack a creditor’s lien rights.

This should be a lively seminar on an obviously topical area of law. We hope you’ll consider signing up. There will be a Q & A session at the end, and, if you ever wanted to ask a bank lawyer about foreclosures, this is your chance.

Nashville Bankruptcy Court Ruling Finds That Delay in Foreclosure Can Lead to Waiver of Rights

The Tennessean wrote about Nashville Bankruptcy Judge Paine’s recent opinion that subordinated a senior lien-holder’s Deed of Trust where the bank delayed foreclosure on the property. The debtor sued the bank for resolution, because homeowners’ association dues were continuing to accrue in her name and, under the Bankruptcy Code, a debtor can remain liable for post-petition HOA dues on property.

In the case, In re Sheryl Lynn Pigg, U.S. Bankr. Adv. Case No. 10-00642A, BAC Home Loans took possession of and secured a flood damaged vacant home by changing the locks and posting notice of the possession. In her Chapter 7 Bankruptcy, the Debtor surrendered all interest in the property to the Bank. But, despite all that, the Bank never actually foreclosed–the property just sat vacant.

During that time, however, the HOA continued to accrue post-petition unpaid dues, which the Debtor continues to be liable for under 11 U.S.C. § 523(a)(16).

The Debtor filed the Bankruptcy lawsuit in order to cut off her liability for the dues, either by having the Judge rule that BOA is liable by virtue of its possession or by forcing BOA to foreclose.

The Bankruptcy Court ruled that the Bank had taken possession of the property and, as a result, was liable for the accruing HOA dues. But, rather than just using the text of the HOA obligations under the Master Deed (which supported the same result), the Court used its equitable powers under the Bankruptcy Code  to order a sale, under Section 363, of the property, with the Bank’s lien claim subordinated to the costs of the Trustee’s sale and to the HOA debts owed (and HOA attorney fees).  The Court expressly found that “the Bank and the HOA have consented to the sale by their inaction.”

This is an interesting ruling, because nothing in the Bankruptcy Code allows a Court to subvert the priority of a valid and properly perfected property lien. Here, using only its equitable powers, the Court fashioned a fair outcome, but a clear departure from state law lien priority statutes.

In light of this opinion, lenders may need to be aware of any delays in initiating the foreclosure process. Nothing in state law expressly requires that banks foreclose under any time deadline, but this opinion suggests that lenders open themselves up to attack where they wait. This is dangerous new precedent.

A copy of the full opinion is here: Pigg Opinion Bankruptcy Court