Category: Lien Litigation

2012 Tennessee Legislature is Considering an Absolute Homestead that Would Eliminate a Creditor’s Ability to Collect Against Residential Real Property

Recording a judgment in the county’s Register of Deed’s Office creates a lien on any real property owned in that county by the Debtor pursuant to Tenn. Code Ann. § 25-5-101.

A judgment lien is the single most effective tool in the collection process. Plus, it’s cheap: for less than $20, a creditor can get a lien on any property owned (or owned in the future) by the Debtor, and that property cannot be sold, refinanced, or transferred without dealing with the creditor.

As a creditor rights lawyer, you can guess my concern over two Bills being considered by the Tennessee Legislature in 2012, House Bill 2887 by Glen Casada and HB 2930 by Mike Bell.

These Bills seek increase the “homestead” exemption in Tennessee. “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.

H.B. 2887 proposes an absolute exemption that would exempt a debtor’s residence from any execution or judicial sale. Essentially, no matter how much equity a debtor has in his or her house, that equity would be completely untouchable by creditors.  A debtor could live in a $1,000,000 lien-free house without paying a penny to creditors. This legislation would completely abolish the concept of a judgment lien.

Currently, Tenn. Code Ann. § 26-2-301 allows a single individual to exempt $5,000 of equity, a married couple $7,500, and a married couple with minor children living in the house up to $50,000.

The other proposed legislation, HB 2930 by Mike Bell, seeks to simply increase the homestead exemption amount to $50,000 across the board.

From a creditor’s perspective, the proposed legislation is both too broad and unfair.  I understand the importance of protecting peoples’ homes, but, at the same time, the law should operate fairly as to creditors and debtors.

Frankly, I think it’s unfair that the law would shield $50,000 of equity from the reach of creditors.  Think about it from a creditor’s perspective: if you loaned somebody $200,000 and weren’t getting paid any of it, wouldn’t you be mad to see them keep $50,000 of equity?

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.

Mechanic’s Lien Statutes are to be Liberally Construed: New Tennessee Court of Appeals Opinion Allows Valid Lien Claim in the Face of “Non-Prejudicial” Defects

Once upon a time, a mechanic’s and materialmen’s lien lawsuit was akin to walking a tight-rope. In order to have a valid lien claim, you had to comply with each and every deadline, notice, and other requirement of the statute. Just one mistake rendered the lien claim ineffective.

The Tennessee lien statutes (Tenn. Code Ann. § 66-11-101 et. seq.) were revised in 2007. A notable change was that, under Tenn. Code Ann. § 66-11-148, the statutes were to be “liberally construed” in the lien claimant’s favor and that “[s]ubstantial compliance” with the lien laws is “sufficient for the validity” of lien claims.

The recent case of Tri Am Construction, Inc. v. J & V Development, Inc. (Aug. 30, 2011) is the first case to discuss this new statute on liberal construction. In that case, the claimant: failed to file its Complaint under oath; didn’t add claims against the Deed of Trust trustee; didn’t have an attachment issued; and used a defective notary acknowledgment.  All of these would have been fatal errors under the old statutes.

Under the new statute, however, the Court overlooked all of these defects, finding that the errors were “nonprejudicial” and fell within the scope of the liberal construction of the statutes.

I ask the obvious question: If a court is to overlook these defects, exactly what defects would be considered “prejudicial” and would prevent a valid lien claim?

I don’t know. Here, the exceptions appear to eliminate the rule. Surely, a court would dismiss a late-filed lien claim. Right?

To Pay or Not to Pay: Auto Mechanic’s Liens in Tennessee

As a creditors rights attorney, you can guess that I’m frugal and don’t spend lots of money on new cars.  My Acura is over 7 years old, and I’ve been very lucky: no big expenses or repairs. Until today, when I took it in to get a funny noise checked out.  I learned that, in car talk, “funny” is synonymous with “expensive.” Yikes.

So, today, I’m talking about auto mechanic’s liens on cars in Tennessee.

Tenn. Code Ann. § 66-19-101 allows a mechanic to assert a lien for repairs performed on”any type of conveyance used in the transportation of persons or merchandise either by land or by water or through the air” that are performed at the request of the owner. Under T.C.A. § 66-19-102, this lien lasts 12 months or until the end of the lawsuit to enforce the lien.

Under the common law, mechanics had to retain possession of the vehicle in order to maintain this lien. Give the car back to the customer, the cases said, and you lose your lien.  Ask any mechanic, and they all think they have to retain the car or lose the lien.

That’s incorrect, as under the above statutes, possession is no longer required to preserve the lien, but here’s the catch: in order to preserve the priority of the lien against existing lien-holders, the mechanic has to retain possession of the vehicle and not return it to the owner after the repairs.  This part of the law comes from Tennessee’s Article 9, at Tenn. Code Ann. § 47-9-310, which determines priority between competing liens.

Retain the car, and you jump ahead of the title lender; turn it over, and you go to the back of the line.

Two more interesting points. First, even if the owner files Bankruptcy, the repairman can retain possession and not violate the stay, because under 11 U.S.C. 362(b)(3), any action to “maintain or continue” your lien’s perfection is not stayed.  See In re Hamby, 360 B.R. 657, 662 (Bkrtcy.E.D.Tenn.,2007).

Second, if the owner comes on to your lot and takes the car back, without your consent, the law does not deem the repairman to have relinquished his rights: “[A] possessory lienholder does not lose his lien where a property is taken from his possession without his consent.” Associates Commercial Corp. v. Francisco, 667 S.W. 2d 481, 482 (Tenn. Ct. App. 1984).

So, auto mechanics do indeed have lien rights on cars they repair, whether or not they maintain possession.  Of course, none of this is any help to me, because the very big bill waiting for me later today is still far cheaper than the 2011’s sitting out there on the lot.

New Teaching Engagement: Liens and Security Interests in Tennessee

On Thursday, February 24, 2011, I’m teaching a webinar for the Tennessee Attorneys Memo called Liens and Security Interests in Tennessee: Brush Up on the Basics.

The webinar will provide an overview of liens against real property, and it’s designed to cover the basics but also emphasize the legal issues that you really need to know.

And by “really need to know,” I’m talking about the types of liens that will get your debts paid–judgment liens, mechanic’s liens, security interests–and I’ll also cover a variety of bankruptcy issues that you can try to avoid.

TAM does a great job with these, and I encourage you to tune in and check it out.  Plus, they offer a money-back guarantee.  (How much pressure is that on me?)

Recession is Over, But Bank Caution Remains

The report from the National Bureau of Economic Research that the Great Recession had ended in June 2009 comes at a time when commercial construction projects are perfectly positioned to pick back up.

Labor is readily available. Materials are available (and for discount). Land for construction has never been this cheap.

Ask any builder or general contractor what’s the hold-up, and they’re most likely to point to their bank. From what I’m hearing from contractors, the number one impediment to new growth appears to be the banks’ resistance to fund new deals, especially those with any element of risk.

Maybe the market will gain some confidence in response to this report, and then the banks will look again to the construction sector for growth. Until then, we’re all waiting.

Update: The Nashville Business Journal just posted an online article on this issue, noting that Tennessee construction projects are down 32% from this time last year.

Lien Litigation takes a Starring Role in “Holmes on Homes: Lien on Me”

The HGTV show Holmes on Homes aired a two hour special episode called “Lien on Me,” in which the host and his crew do remedial work on a house after the contractor has abandoned all work and filed a lien lawsuit against the homeowners. Apparently, the bank had canceled all further contractor draws on the construction loan, due to the lack of sufficient progress on the construction.

Like any Holmes on Homes episode, host Mike Holmes did a thorough inspection of the work performed and found the work to be incomplete, unprofessional, and, in some instances, dangerously incompetent. During the course of the filming, over 100 subcontractors were brought in, and the entire remediation took 30 months to complete. All that time, the lien litigation continued.

To say that “most homeowners aren’t so lucky” is a huge understatement.  In these situations, an owner may not have the financial resources to bring in a second contractor to complete or repair the existing work. Then, in the rush to correct the deficiencies, the owners don’t keep sufficient evidence and records of the work in dispute to prove the problems.

Holmes had a TV crew and a team of experts taking detailed notes (and HD video of all the problems).  I pity the contractor who has its work subjected to the glare of the video cameras and a TV host who has made his living identifying shoddy work.

A Transfer Without Payment of Liens Does Not Eliminate A Lender’s Valid Lien

Yesterday’s post about Quitclaim Deeds of Real Property has spurred a few variations of the same question: what happens to liens on my property when I transfer it to somebody else?

With only a few exceptions, a sale of property is subject to any properly perfected lien that is attached to the property. So, if I quitclaim land to you, then any liens on that land remain attached to that property, and I take it subject to those unpaid liens. Long story short, conveying your house to your mother doesn’t make the mortgage go away…it just means your mother owns a house with your mortgage on it.

So, as a buyer, it’s my duty to investigate the status of liens on any property that I’m buying and make sure that those liens are paid off or otherwise released (or that I’m content taking the property with the liens). A smart buyer will not only investigate the status of his seller’s title to confirm it’s lien free, but will also look a few “sellers” back, to make sure there are no liens.

From a creditor’s perspective, there is comfort knowing that a valid and recorded lien serves as protection of its rights, and the creditor doesn’t need to watch the property transactions on a daily basis.

For a buyer, only a complete review of the title records can provide comfort.

Tennessee Lien Laws: Are Flood Related Claims on the Horizon?

Tennessee lien laws are fairly complicated, but a general rule of thumb is that contractors dealing directly with owners (i.e. “prime contractors”) have a year to assert lien rights and sub-contractors (i.e. “remote contractors”) need to take action in about 90 days.

Now that it’s been about ninety days after the historic floods in Nashville and Middle Tennessee, there may be an increase in flood related lien claims. Under the lien laws, Tenn. Code Ann. 66-11-101, et. seq., “excavation, cleanup, or removal or hazardous and nonhazardous material or waste from real property” is a lien-able “Improvement.”

Obviously, these economic times will impact the homeowners’ ability to pay, especially where they’ve lost everything. But, another factor may be insurance companies’ slow processing and payment of repair claims.

Faced with a potentially expiring lien deadline and an insurance payment that is always “pending,” the flood relief contractors may be forced to rely on the Tennessee lien statutes to protect their work.