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.
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.
There’s a new lending device that’s gaining popularity across the country, and it’s coming to Tennessee soon.
As in, “to be considered by the 2020 Tennessee Legislature” soon.
It’s called an “online installment loan,” and it’s a new form of pay-day lending, but with a few extra bells and whistles that make it look more like a regular bank loan.
And while many people know the downsides of going to a title-lending place for a loan, this new device is being marketed to a broader group of American consumers, says Bloomberg News in an article published today, titled “America’s Middle Class is Addicted to a New Kind of Credit.” Per Bloomberg, these are:
…a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.
In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry … and have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.
[The] average online subprime installment loan customer has an annual income of about $52,000. About 80% have been to college and 30% own a home…[m]ore than 10% of the company’s core customer base makes over $100,000 a year.
These instruments generally have a longer repayment period, like 90 days to a year, but they have the same insanely high interest rates (ranging from 20% to 35% to, in some cases, 155%) as other title loans.
Not in Tennessee, right?
These lenders are targeting Tenn. Code Ann. § 47-14-104, and, specifically, that statute’s 10% cap on interest rates. The lenders hope to eliminate that cap entirely.
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”
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””
On December 9 and 10, 2010, I’ll be speaking at the 2010 Tennessee Real Estate Law Conference, presented by M. Lee Smith Publishers.
This group always puts on great seminars on relevant topics, and the faculty looks really strong.
My portion is going to be presented on December 10, at 2pm to 3pm, titled “A Primer on Real Estate Liens.” Here’s the full agenda.