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.

Last Chance to Learn: Creditors’ Rights in Tennessee: 10 Collection Strategies

A quick reminder: Tomorrow, June 6, 2013, I’ll be teaching the CLE  presented by M. Lee Smith Legal Publishers called Creditors’Rights in Tennessee: 10 Collection Strategies.

This is a one hour audio seminar, that will cover the usual Tennessee collections lawyer song and dance. Things like:

  • Things to consider prior to declaring a loan in default and filing a collections lawsuit
  • Issues in deciding between Chancery Court and General Sessions Court
  • Importance of knowing your Statute of Limitations
  • Making sure you Sue the Right Party
  • Judgment Liens and why they work
  • Fraudulent Transfers
  • Overview of bankruptcy issues, including preferences and Trustee avoidance actions
  • Common roadblocks to collecting money, including domestication of foreign judgments

It’s one hour of CLE credit, and, hopefully, what I teach you during seminar will put some money in your clients’ pockets.

New Tennessee Legislation Imposes Contempt Sanctions on Judgment Debtors Who Don’t Notify Creditors of New Employment

As a creditor rights attorney, I’m always looking for new developments in the law that gives me any advantage.

Recently, I saw that the Tennessee Legislature is considering a new law that gives creditors an unfair advantage.

I’m talking about Public Chapter 187, on wage garnishments, which would create the new Tenn. Code Ann. § 26-2-225. The statute provides, in part, that:

… A judgment debtor whose salaries, wages or other compensation are subject to a garnishment shall notify the judgment creditor who filed the writ of garnishment within ten (10) days, as computed in § 1-3-102, of obtaining any new employment. Notice to the judgment creditor shall be by certified mail and shall include the name, address and telephone number of the new employer. A judgment debtor who fails to provide notice of new employment in compliance with this section is in contempt of court and, upon the court making a determination of contempt, may be punished the same as contempt of court in a judicial proceeding. …

Under this proposed law, any debtor whose wages are being garnished must notify the creditor within 10 days, via certified mail, of any new employment.

As a creditor’s lawyer, sure, I understand why this law would be helpful: when a debtor switches jobs it can take months for me to figure out where they work. But, I’m surprised that  the Legislature would waste this energy to get involved in this collections cat-and-mouse game.

Frankly, even noting my creditor-friendly bias, I think this law goes a little far. An affirmative requirement that  the debtor send written notice, via certified mail, seems so onerous that I predict that a General Sessions Court would hesitate to impose h a contempt charge.

This is just a strange law, all around.

Adequate Protection Considerations in the Middle District of Tennessee Bankruptcy Courts

Despite using the same Bankruptcy Code, Bankruptcy Courts often have a broad range of practices on how the exact same statutes can apply.

While most creditors’ lawyers will call any Bankruptcy Court “debtor-friendly,” one way that the Bankruptcy Courts in the Middle District of Tennessee are markedly different than others is the threshold of proof required for creditors to receive “adequate protection” payments from the debtor.

Adequate Protection refers to payments made by the debtor to the creditor, generally, to compensate the creditor for the use of the creditor’s collateral. The statutory precedent is 11 U.S.C. § 361(1), which allows the debtor to make a “cash payment” to the extent that the automatic stay “results in in a decrease in the value of [the creditor’s] interest in the property.” In layman’s terms, if the bankruptcy stay hurts or impairs the value of your collateral, you may be entitled to a cash payment (or an alternate/replacement lien).

In some districts, like the Middle District of Georgia, the Bankruptcy Courts allow the resumption of contract payments to a secured creditor, without a deep analysis of depreciation.

The Middle District of Tennessee takes a different approach. Here, a secured creditor is only entitled to adequate protection in the amount that it can prove depreciation of its lien. So, with a car, the creditor would get compensation for the loss of value from the Debtor’s use of the collateral. (It’s substantially more difficult with real property, where depreciation is may be impossible to prove.)

In order to obtain Court approval and avoid an objection from the U.S. Trustee, the creditor will typically need to hire an appraiser to go look at the vehicle and assess the value and his estimate of how much wear and tear/depreciation is imposed on the car on a monthly basis. Then, the Court would order monthly adequate protection payments in that amount.

As an aside, this practice isn’t for the debtor’s benefit; it’s actually designed to protect unsecured creditors from arbitrary loss of cash/income from the Bankruptcy Estate.

As a creditors attorney operating in the Nashville Bankruptcy Courts, this a conversation I have a lot with outside counsel. It’s a hard lesson to teach, especially when the Courts in their backyard take the opposite approach.

What is a Scire Facias (Specifically, What Does it Mean When an Employer gets a Scire Facias on a Judgment against an Employee)?

“Scire Facias” means, on a very general level, “to show cause.” It’s a Writ (known as a “Writ of Scire Facias”) that a judgment creditor can file in various instances. Specifically, a judgment creditor will file a Scire Facias on conditional judgments where the employer has failed to answer wage garnishments.

This happens most often on wage garnishments and bank levies. The procedure is that, once the employer has failed to file an Answer or other response to a Wage Garnishment, the Plaintiff files a Conditional Judgment that grants a “conditional” judgment against the employer for the amount of the Judgment against the Defendant.

It is called “conditional” because the Judgment isn’t final until the Plaintiff prepares and serves on the employer a “Scire Facias” directing the employer to appear and “show cause” (i.e. explain) why they failed to file an answer to the wage garnishment.

There are three general outcomes:

  1. The employer doesn’t appear and the Judgment goes final against the employer;
  2. The employer appears and has no good explanation for the failure, and a judgment (or consensual payment) in some amount is reached (Note: The employee lying to the employer about the status of the debt is not a defense for the employer–the employer has to comply with the response obligations under the law); and
  3. The employer appears and presents some good reason, such as the garnishment was defective, the Defendant was not employed during the relevant timeline, or there was another garnishment.

Regarding item number 3, that’s not always a good and sufficient response, since a garnishee should always answer legal process, but a Court will accept a late answer in that situation, unless there is a showing of collusion or a pattern of failure to respond.

Mark Your Calendars: Tennessee Bar Association to host Creditors Rights 101 Webcast on April 17, 2013

On April 17, 2013, the Tennessee Bar Association has asked me to present a webcast CLE called “Creditor Rights 101: 10 Collection Strategies Every Lawyer Should Know.”

This is part of the TennBarU series, designed to give Tennessee general practitioner attorneys an overview of issues in Tennessee creditor rights. Discussion will include:

• Pre-Lawsuit Considerations
• Statute of Limitations Issues
• Jurisdiction and Venue Selection
• Judgment Enforcement Options
• Basic Bankruptcy Issues
• Common Roadblocks to Collecting Money

And, don’t forget, your Tennessee Bar Association membership gets you 3 hours of free CLE.

Is it Bankruptcy Fraud to Dismiss a Case Where Your Plan is to Incur More Debt and then Refile?

I’ve done collections law too long to think of it in moral terms. I don’t think a person who doesn’t pay his bills is necessarily “bad” (though some are). Sometimes, I think the creditor is equally at fault for lending money or providing services to these poor folks.

But, I recently saw a Bankruptcy pleading  that stopped me dead in my tracks.

It was a Motion to Voluntarily Dismiss Chapter 7 Bankruptcy Case, which is a filing a debtor makes to stop his bankruptcy case. People want out of bankruptcy for a number of reasons, but this one took the cake.

In it, the Debtor asked the United States Bankruptcy Court  to dismiss his Chapter 7 because he wanted to, basically, wait a few more months to run up some more medical bills. Then, after that, he’d re-file his case and discharge those new debts.

The exact text from the Motion is this:

1. The Debtor filed a Chapter 7 bankruptcy on November 6, 2012.

2. The Debtor’s meeting of creditors is set for December 12, 2012.

3. Since the filing of this case, the Debtor has incurred extensive medical care and expects to have a surgery and additional medical care in the coming months.

4. The Debtor, therefore, desires this chapter 7 proceeding be voluntarily dismissed.

Without a doubt, that’s a tough situation for the Debtor, facing medical bills that he can’t pay.

But, what about that doctor or hospital who will be asked to provide those services? This is as close as “pre-meditated” default and bankruptcy as it gets.

The Bankruptcy Code allows a creditor to oppose discharge for some debts that are incurred immediately before Bankruptcy, including those incurred via fraud or bad intent. But, to do that, the creditor has to file a lawsuit to claim that the debt shouldn’t be discharged and that’s a burdensome, costly process.

In case you’re wondering, the Motion was granted.

Long story short, some doctor is going to provide goods and services in the near future that certainly will never be paid.  Yikes.

 

My Thoughts on “What To Do When a Creditor Knocks” from the Wall Street Journal

This weekend’s Wall Street Journal ran a article on how to respond to bill collection efforts, called “When Bill Collectors Knock.”  The article mixes good advice with a little bad advice. Here’s my bounce.

Good advice:

Take the call. It is virtually impossible to resolve a problem without addressing it head on. The best way for borrowers to handle a debt they can’t pay is to talk with the lender as soon as possible. Then they should work out a plan to keep the debt current with a smaller payment or to seek a temporary delay until they can pay something.

This is good advice. I talked about the importance of communicating with creditors in an earlier post. The worst thing a debtor can do is be silent, as that invites collection.

Unrealistic advice:

Keep detailed records. Staying on top of debt can be tough. But keeping records and careful notes can pay benefits if borrowers are sued.

I agree that it helps to keep payment records and copies of old invoices, but how realistic is that, particularly with debts that are years old?

But this is better:

Know the rules. Every state puts a limit on how long a creditor is able to pursue borrowers in court.

Your best focus, however, could be records showing your past payment. In Tennessee, the statute of limitations on debt collections is six years from the date of default. If you can provide that it’s been more than 6 years since your default, you may be able to obtain a dismissal of any action.

Bad advice:

Negotiate. Because debt is bought at a discount, collectors should be willing to bargain, perhaps accepting just a fraction of what is owed. If borrowers can come up with the money, they should be able to negotiate a settlement of 50 cents to 65 cents for each dollar owed…

Earlier, the article suggests that most unpaid debt collectors are collecting debts that they paid a mere four cents on the dollar for. So, the article suggests, you should haggle for payments in the range of 50 cents on the dollar.

While this may be true for some debts, in my experience, it’s not as common as the anecdotal stories suggest. The creditors I represent don’t buy debt and so any talk of ten cents on the dollar is a waste of time. Plus, even if a creditor has paid a small amount for a debt, that doesn’t mean that they will accept a small amount to settle, especially if the creditor perceives the debt can be collected in full.

Don’t get me wrong. I always say “Money Talks,” but if you’re making a low ball offer, you have to back it up with proof that your offer is the best you can do, and that requires proof of a debtor’s finances, other debts, etc.

My take-away this this: Over-communicate; Confirm that the debt isn’t over 6 years old (in Tennessee); and Money Talks (or, at least, proof of that the money you’re offering is the most the creditor will otherwise get).

What I Don’t Like About the New Post-Judgment Interest Rate Statute in Tennessee (Everything)

I am pretty sure that somewhere in the volumes of Creditors Rights 101, I’ve written about the new statute changing the interest rate to be charged on judgments, which went into effect on July 1, 2012. I can’t find it, so here’s a quick primer.

Once upon a time, interest on judgments was simply 10% (here’s a copy of the old statute). The beauty of the old statute was three-fold. One, it was easy math to compute 10% interest. Two, it was a fixed rate and it never changed, making long-term calculations easier. Three, ten percent is a creditor “friendly” rate, so Defendants were motivated to pay off the Judgment or refinance it.

The new statute is Tenn. Code Ann. § 47-14-121.  This statute not only lowers the post-judgment statutory interest rate, but it throws simplicity out the window.

Here’s the relevant text:

…the interest rate on judgments per annum in all courts, including decrees, shall:

(1) For any judgment entered between July 1 and December 31, be equal to two percent (2%) less than the formula rate per annum published by the commissioner of financial institutions, as required by § 47-14-105, for June of the same year; or
(2) For any judgment entered between January 1 and June 30, be equal to two percent (2%) less than the formula rate per annum published by the commissioner of financial institutions, as required by § 47-14-105, for December of the prior year.
Do you see what I mean about the lack of simplicity?Looking at that, can you tell me what the interest rate is?
The legislature must have known that they were going to completely confuse people, because the statute contains a sub-part at Tenn. Code Ann. § 47-14-121 (b) designed to make the math easier:

(b) To assist parties and the courts in determining and applying the interest rate on judgments set forth in subsection (a) for the six-month period in which a judgment is entered, before or at the beginning of each six-month period the administrative office of the courts:

(1) Shall calculate the interest rate on judgments that shall apply for the new six-month period pursuant to subsection (a);
(2) Shall publish that rate on the administrative office of the courts’ website; and
(3) Shall maintain and publish on that website the judgment interest rates for each prior six-month period going back to the rate in effect for the six-month period beginning July 1, 2012.

 

So, rather than requiring parties to do their own math, the administrative office of the courts will do the math for you and will post the the current (and historical) statutory interest rates to its website. That page of the website can be found here. As of today, the rate is 5.25%.

There’s an “opt-out” in the statute, if the “judgment where a judgment is based on a statute, note, contract, or other writing that fixes a rate of interest within the limits provided in § 47-14-103 for particular categories of creditors, lenders or transactions, the judgment shall bear interest at the rate so fixed.” Tenn. Code Ann. § 47-14-121 (c).
Here are my concerns:
  • The math got a lot more difficult. Instead of the nice, round 10%, we’re now using a variable rate of 5.25% (as of today).
  • There appears to be an obligation to research and modify the rate every six months. Payoffs just got a lot more difficult.
  • By lowering the rate to a very Defendant friendly 5.25%, the legislature removed some incentive to pay off judgments. Frankly, I wonder if you can get a rate better than 5.25% from your bank. I’d rather pay off VISA at 24% than a judgment creditor.
  • Creditors with oppressively high contract rates will now be motivated to stick with those high rates (24%), rather than cut the Defendant a break and let it default to the statutory rate.
My strategy in response will be to always plead my contract rate of interest in my Complaint and ask that the contract (or default) rate be awarded in my Judgment. Invariably, that rate is going to be higher than 5.25%, and that rate will not require modifications every six months.
A final note, keep in mind that the legislature did not modify Tenn. Code Ann. § 47-14-123, which sets the pre-judgment rate of interest at 10%.

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).