Lien Litigation – Creditors Rights 101

Tennessee Court of Appeals makes it clear: When a lien is paid, the Lender must pay the release fee (limited exclusions apply)

When a mortgage or judgment gets paid off, the creditor has to release its lien. It’s not only common sense, but it’s a duty imposed by Tennessee statute (see Tenn. Code Ann. § 66-25-101).

It’s an easy process to prepare a Release of Lien and record it with the register of deeds. Also, it’s not particularly expensive. Depending on how many pages the release is, the fee can be as little as $12.00.

Not too onerous for a lender who just got paid in full, right?

Well, not so fast. Ask any of my creditor clients, and they’ll tell you that “paid in full” means “fully paid, including that release fee.” When I get a payoff request on a deed of trust or judgment lien, I generally include a line for the $12.00 release costs.

Not anymore, in light of a December 2022 Tennessee Court of Appeals opinion, Eudaley v. U.S. Bank Nat’l Ass’n, No. M202100344COAR3CV, 2022 WL 17751378 (Tenn. Ct. App. Dec. 19, 2022). In that case, the mortgage lender got paid in full, recorded the release, and sent a bill to the borrower for $12.00. In response, the borrower filed a class action lawsuit in Davidson County Circuit Court, arguing that, per Tenn. Code Ann. § 66-25-106, “[a]ll costs … for registering a formal release[ ] shall be paid by the holder of the debt secured by the … deed of trust.”

Despite the very clear statutory text, the trial court dismissed the case after finding that federal law allows such fees and preempts the state law. The Court of Appeals affirmed, but not before providing some useful guidance to other lienholders (who may not have a federal banking regulation to hide behind).

Specifically, the Court wrote that “§ 66-25-106 prohibits holders of debt from seeking reimbursement of costs associated with recording a release of a deed of trust” because “[t]he debt holder’s obligation to record a release only arises if the debt has been paid in full or satisfied, indicating that nothing further is owed to the debt holder.” In affirming the trial court’s dismissal, the opinion makes clear that the lienholder bears those costs and can’t seek reimbursement, but, nevertheless, “that prohibition is preempted by federal law when the debt holder seeking reimbursement is a national bank.”

So, what if you’re not a national bank? Tenn. Code Ann. § 66-25-106 applies, and the creditor must chalk up $12.00 as the cost of getting paid.

What about other sorts of liens, like judgment liens or mechanic’s liens? § 66-25-106 seems to apply to any lienholder, but the judgment creditor may nevertheless have an argument that the release fees are “costs of collection” or allowed court costs/discretionary costs.

Either way, this December 2022 opinion provides pretty compelling authority to support a lender’s decision to simply record the release and write off the $12.00. In a very creditor-friendly state like Tennessee, Tenn. Code Ann. § 66-25-106 is an outlier, but this case is a very good reminder that it exists.

Don’t Forget This Blog Post (I did): A local court can order an out of county Sheriff to conduct a sheriff’s sale of real property.

I need to pay more attention to this blog. (And not just posting to it.)

A few weeks ago, I had a pretty deep legal discussion with a lawyer for a nearby county on a complex creditor rights question. And, after a few days of comparing research, she sent me a link to my own blog post on the exact same topic.

The bad news is that I spent many hours re-researching the issue. The good news is that I came to the same conclusion.

The issue was whether a Chancery Court in County A can issue an order and a levy to the Sheriff in County B to sell real property located in County B. And this wasn’t just a theoretical discussion–this was my own levy seeking to collect on a judgment.

The issue doesn’t come up much, and my concern was a lingering recollection that, in fact, some actions related to real property *are* limited to the county where the real property is located. That’s the “local action rule,” which requires those actions with a direct and undeniable connection to the land to be brought in that county (examples: title dispute / quiet title actions; detainer actions affecting possession of land; actions seeking money damages for trespass or injury to land). The way that Tennessee cases apply it, however, the local action rule speaks more to a “cause of action” that relates to the specific land at issue, not a general execution against the land.

In the end, here’s why Sheriff B can do it:

(1) Execution Sales of Realty are governed by Rule 69.07 and Tenn. Code Ann. § 26-5-101, and neither contains any county limitations. My review of Tenn. Code Ann. § 26-1-101 (and all around those statutes) did not reveal any limitation of the Sheriff’s ability to sell real property. We know that a local sheriff can enforce an out-of-county judgment on all other assets (wages/personal property like cars/bank accounts)—if there were a distinction as to real property, wouldn’t it be in those same statutes?

In fact, not only does Rule 69 not contain any exclusions, but it lumps real property in there with the other categories. For instance, in setting what can be levied against, Rule 69.05(1) says that “Property includes a judgment debtor’s realty, personalty, money, wages, corporate stock, choses in action (whether due or not), and court judgments.” (Note that there’s no distinction between the different types of assets.)

For personal property (which we know an out of county Sheriff can do), Rule 69.06 makes no distinction or exception as to the sheriff’s powers (or identification of which county’s sheriff can act).

For real property, Rule 69.07 (the separate rule for “Execution on Realty”) makes no distinction or exception related to which sheriff can take action. Instead, that Rule creates a system by which the creditor “may move” for an order of sale and then, “the sheriff” conducts the sale.

(2) The Jones v. Helms I wrote about last year remains valid.

In Jones, the creditor held a judgment from Gibson County and filed a Rule 69.07 motion in Gibson County for a sale order, and the Gibson County Court granted the request and ordered the Weakley County Sheriff to sell the land to pay the Sessions judgment. Rather than recite all the opinion, I’ll just direct you to last year’s post. (And, also, check out: Jones v. Helms, 2020 Tenn. App. LEXIS 517, *8-12, 2020 WL 6806372.)

One of the reasons that I maintain this blog to curate a list of useful opinions for my own practice. Next time, I’ll be sure to check in here first.

Tennessee is set to increase homestead exemption in 2021

The Tennessee Legislature is, again, considering debtor-friendly changes to the homestead exemption statute.

The one most likely to pass is House Bill 1185, which seeks to increase Tennessee’s homestead exemption from the existing $5,000 to $35,000 for single homeowners and from $7,500 to $52,500 for jointly owned property.

Before you complain too much about that proposal, consider Senate Bill 566, which provides an unlimited exemption for a judgment debtor’s residential real property (and, after the debtor’s death, it passes to the heirs).

Similar proposals were made in 2019, in 2020, and also in 2012 (and a number of times in between). So far, all such efforts have failed, but I believe this is the year that the Tennessee homestead exemption is increased.

Back in 2019, I talked about the importance of exemptions for debtors, since exemptions can preserve and protect a basic necessity level of assets for debtors (picture the clothes on their back, a few thousand dollars in the bank, a car, tools).

As I wrote in 2019, though, “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.” I then said:

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.

I feel the same way about these new proposals. If we’re talking about protecting the working poor and preserving the necessities of life from garnishment, let’s start somewhere other than $750k of equity in a mansion. Let’s talk about debt relief measures, eviction support, access to justice, etc.

But, these new laws aren’t about basic necessities of life for poor people. Most poor people don’t live in lien-free mansions. Instead, these new measures are being lobbied for by the construction industry.

These are bad proposals. Unless you’re a debtors with big, lien-free McMansion. Then, sure, it’s a great new law.

Judgment Creditors can cross county lines in execution sales of real property, says TN Court of Appeals

Yesterday, the Tennessee Court of Appeals answered another longstanding creditor question: Whether a Court can order an execution sale on a debtor’s real property in a different county.

I get asked that all the time, and I’ve generally said you can. Now, I can cite the new opinion from the Court of Appeals in Ronald L. Jones v. Louise Helms, No. W2019-00864-COA-R3-CV, 2020 WL 6806372 (Tenn. Ct. App. Nov. 19, 2020).

The legal issue is whether the first county court has “subject matter jurisdiction” to order the sale of real property in another county. The Court looked first to Tenn. R. Civ. P. 69.07, which gives the judgment creditor a lien (per Rule 69.07(2) and provides that a creditor “may move for an order of sale. (per Rule 69.07(3)).” But, Rule 69.07 doesn’t provide any guidance on the process, procedure, or venue.

So, the question remains: In which county does the creditor make this request?

The Court wrote:

Rule 69.07(3) does not mandate which court or county a judgment creditor must file the motion in for the order of sale. Furthermore, circuit courts are courts of general jurisdiction, meaning that they have broad, rather than limited jurisdiction. Tenn. Code Ann. § 16-10-101 (“The circuit court is a court of general jurisdiction, and the judge of the circuit court shall administer right and justice according to law, in all cases where the jurisdiction is not conferred upon another tribunal.”). Therefore, it would appear that under the terms of the rule and the broad nature of the jurisdiction conferred upon circuit courts, Appellee was entitled to move for the order of sale in the circuit court for Gibson County. Indeed, it appears to be an accepted practice to file Rule 69.07 motions in circuit courts…. Moreover, Tennessee law generally provides that, with regard to sale of land for the payment of debts by decedents, courts of record “may decree a sale of lands lying in any part of the state.” Tenn. Code Ann. § 16-1-107.

The opinion makes fairly short order of this long-standing legal issue, and the certainty and procedure is good for creditors.

In the past, after my review of the chancery court statutes, I’d often wondered whether a court had jurisdiction to order and approve a sale of real property in a different county. I still have some lingering doubts whether a better challenge and legal argument in response could cast some doubt on this issue, particularly under the chancery jurisdiction statutes.

But, until then, save this opinion. It may save you having to file a Petition for Sheriff’s Sale in a different county to enforce your judgment.

Tennessee law doesn’t require judgment creditors to collect in any particular order. Seriously.

Is a judgment creditor required to exhaust its collection efforts against personal property before executing on real property?

If you asked 100 lawyers over the age of 60 this question, 80 of them would get the answer wrong. And every single one of them would be absolutely positive that they were right.

I’d guess that I have a argument with opposing counsel on this legal issue at least once a month, and it usually ends with them being absolutely certain that I am wrong.

What’s crazy is the answer is simple:

Execution against personalty need not precede execution against realty.
Tenn. R. Civ. P. 69.02

So, there you have it.

If you’re wondering, however, whether you should ever start the collection process with efforts to sell real property…well, that’s another blog post entirely.

Time is On Your Side: 4 Tips for Collections in a Sinking Economy

Things are looking bad for the economy, and there doesn’t appear to be any end in sight. As we enter Month Two of the COVID pandemic, banks and others creditors are bracing themselves for a very long winter.

I’m telling my creditor clients to be patient. While this good news doesn’t put money into hands today, here are some things I said the last time around, i.e. in 2010, that any creditor should bear in mind while we wait to see what the economy does.

There’s time to be patient. In Tennessee, the statute of limitations for collection on an unpaid debt is six (6) years, pursuant to Tenn. Code Ann. § 28-3-109. Then, once you sue and obtain a judgment (within six years from the date of the default), your judgment is valid for ten years, pursuant to Tenn. Code Ann. § 28-3-110. Plus, if your judgment remains unpaid at the end of the ten years, Tennessee judgments can be renewed pursuant to § 28-3-110 for another ten year period.

Don’t wait to act. In some instances, it may make sense to take no action on unpaid debt. Maybe the customer is a company that has gone out of business and has no remaining assets, or maybe they’ve filed a liquidation bankruptcy. This is where you make the “don’t throw good money after bad” decision and possibly decide to write this debt off.

But, remember, the first creditor to obtain a judgment is the first in line to seize assets. Granted, you could be the first in line and discover there are no assets, but you should nevertheless record your judgment as lien in the real property records. For less than $25 in filing fees, a creditor can record a certified copy of its judgment in any and all Tennessee counties where the debtor owns real property, and that judgment becomes a lien on any real property owned by the debtor.

Even if they don’t have any equity in their property today, the situation could well be different in ten years (judgment liens remain valid as long as the underlying judgment is valid). What’s more, your lien’s reach will capture any real property they obtain during the life of the lien. In the end, sooner or later, your debtor will have to deal with you, whether it be as part of a purchase of new property, a sale, or a refinance.

Bend, don’t break. Sometimes, it’s important to recognize when a debtor truly lacks any assets to pay toward your debt. When this is the case, aggressive collections—whether it be seizing a work truck or all funds out of a bank account—may put that debtor out of business and, possibly, into a bankruptcy filing. A judgment creditor can take depositions and request financials from their debtor, and this information may assist you in determining whether they aren’t paying anybody…or just aren’t paying you.

Bankruptcy doesn’t mean the process is over. If your debtor does file a bankruptcy case, there’s still a chance of monetary recovery. In addition to the benefits to the debtor, the secondary point of the bankruptcy process is to maximize return for creditors prior to granting the debtor a discharge of his or her debts. But, in most instances, a creditor in bankruptcy only receives pennies on the dollar in the process.

Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.

Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property survives the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.

In the end, collection is a process that rewards the patient, especially in a struggling economy. But, a successful creditor must be prepared, and being prepared means having a valid judgment in place and exhausting all enforcement remedies before giving up. It may be a long road to recovery, but, if a creditor is smart and strategic now, the steps you take today will help make sure you’re paid in the future.

Davidson County Chancery Court has scheduled an actual trial that will be conducted via Zoom.

Mark your calendars: On April 28, 2020, Chancellor Lyle of the Davidson County Chancery Courts has scheduled a trial to be conducted via Zoom! (Full text: Lyle Order re Zoom trial).

For the past 5 weeks, Tennessee courts have been closed for most in-person proceedings, but, during that time, many courts have conducted telephonic or video “non-evidentiary” hearings. This is the first instance that I’m aware of that a civil court is conducting a real bench trial with witnesses and exhibits.

The underlying facts are interesting, from a creditor’s rights perspective.

The lawsuit seeks a declaration of the validity of a mechanic’s lien asserted on a Gulfstream GV (a/k/a a “G5”) private jet, via both a recorded lien in the Davidson County Register of Deeds and with the Federal Aviation Administration Registry. Per the Complaint, the plaintiff bought the jet from an actual Sheikh.

gulfstream g5 (Note for the non-Sheikhs out there: Retail value for new G5s can be between $36MM and $48MM).

The Defendant / lien-claimant is a marketing firm in Kentucky that claimed a mechanic’s lien on the jet for sales marketing services provided to the Sheikh.

(I’ll reserve my thoughts on the validity of a mechanic’s lien when no actual physical improvements are provided, but I will note that, generally, the lien claimant has to show actual improvements to the property. Cases on aircraft liens have held that “gas for refueling” doesn’t even qualify, since gas doesn’t provide an actual improvement to the aircraft.)

This one will be really interesting, both substantively and procedurally.

Tennessee Legislature overreacted when they repealed Tenn. Code Ann. § 66-21-108.

If you’ve spent any time on this blog, you’ve know all about Tennessee’s wrongful lien statute, Tenn. Code Ann. § 66-21-108.

It’s a fairly new statute, enacted on May 21, 2018, and I’ve called it the scariest statute I’ve seen. That’s because the statute imposes broad (and automatic) penalties on lien claimants who lose a lien challenge, with the penalties being so harsh that it could have a chilling effect on lien claims.

So, having said that, I was glad to see that the Tennessee Legislature was going to walk back some of those automatic penalties with some proposed amendments to the statute for 2019. Specially, the changes to 66-21-108 would impose a “malice” requirement and would change the “shall recover” language to “may recover.” These changes would protect the mechanic’s liens with justifiable claims, but would preserve claims against those creditors who are looking for undue (and illegal) advantage.

In the end, I was glad to see some correction to the statute, but, candidly, I also thought that the changes took basically all the teeth out of the statute. From my time fighting in Bankruptcy Court, I know that “malice” isn’t an easy concept to prove.

I also know that some creditors’ philosophy is “when in doubt, why not file a lien”? Under the old statute, if those creditors weren’t careful, they would definitely get hit with damages. I’ve seen a lot of bad liens in my time, and this statute provided a remedy that homeowners legitimately needed.

So, it was with a lot of disappointment that I’ve discovered that, rather than amending the statute, the 2019 Legislature just repealed the entire statute.

The statute was designed to solve a very real problem. As it stands right now, there are no real remedies for a property owner to recover costs and expenses when challenging a wrongful lien on their property. As a result, there’s no real disincentive to keep a creditor from recording a questionable lien.

At some point, the cost, expense, and hassle of fighting over an invalid lien isn’t worth the fight. Lien creditors know that they get incredible leverage when they record a lien, and, under now existing law, there’s not much risk to them.

Honestly, I’d rather have the original version of the statute (which made lien claimants really evaluate their claims and think twice before encumbering a person’s property) than no statute at all.

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””

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.