A “conscience shocking, inadequate price” will not void an otherwise valid tennessee foreclosure

As long time readers know, Tennessee has a nearly ten year old foreclosure deficiency statute that closely scrutinizes real property foreclosure sale prices. The law is found at Tenn. Code Ann. §  35-5-118, and I argued the first opinion discussing the statute.

Long story short, a foreclosing creditor may be prohibited from pursuing its deficiency balance where the foreclosed property sells “for an amount materially less than the fair market value of property at the time of the foreclosure sale.”

Well, what about situations where there’s no deficiency balance owed? Does the foreclosure sale price have any impact on the validity of the sale?

The quick answer is “no,” says the Tennessee Court of Appeals in McKenzie v. Brandywine Homeowners’ Association (W2018-01859-COA-R3-CV, Tenn. Ct. Apps., June 12, 2019).

In that case, the HOA foreclosed on an otherwise lien-free piece of real property pursuant to its $4,445.90 HOA lien. Presumably, with no other liens and no other bidders, the HOA had no reason to outbid itself, and the HOA purchased the property for $4,445.90. After the owner challenged the validity of the sale (due to the low price), the trial court wrote:

The foreclosure sale price shocks the Court’s conscience; however, pursuant to Brooks v. Rivertown on the Island Homeowner Association, Inc., No. W2011-00326-COA-R3- CV, 2011 WL 6034781 (Tenn. Ct. App. Dec. 6, 2011), applying Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984), a conscience-shocking foreclosure sale price standing alone, absent some irregularity in the foreclosure sale, is not sufficient grounds for setting aside a lawful foreclosure sale.

In the end, the Court of Appeals followed this reasoning from Holt: “If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price, for a court of equity to set aside the sale. ”

The take-away is this: The “materially less than fair market” analysis under Tenn. Code Ann. §  35-5-118 only applies to attacks on deficiency judgments, not the validity of underlying sales. If the sale is valid in every other way (notice, timing, the publication, etc.), there is no express or implied requirement under the law that the foreclosure sale generate any minimum price.

This makes sense. If the HOA were required to artificially bid up the property (when no other party, including the owner, appeared), then the HOA would be simply paying that equity over to the owner. If the foreclosure is otherwise effective, the Tennessee statutes places the burden of protecting that equity on the property owner. There are a number of places under the Tennessee statutory schemes where actual protections like this are imposed, such as sheriff’s sales (which must generate 50% of fair market value). There are no such protections in the foreclosure statutes.

As this opinion acknowledges this: “If the rule is to be altered, it must be done by the High Court, not this Court.”

Good Article on Tennessee’s Post-Foreclosure Deficiency Statute

This month’s Tennessee Bar Association Journal has a good article on the new post-foreclosure deficiency statute, Tenn. Code Ann. § 35-5-118, titled “Deficiency Judgments after Foreclosure Sales.”

The article provides a detailed review of the cases construing that very ambiguous statute, which was enacted in 2010 and became effective September 1, 2010. Here’s what I wrote about the new law, back in 2010.

As you’ll recall, I litigated and won the first ever case construing the new law, in December 2012. My case was the GreenBank v. Sterling Ventures case, which is analyzed in the article.

If you’re a banker, a bank lawyer, or a defense lawyer helping some borrower clients, be sure to look at this article. It’s a weird law, and, as the last few paragraphs of the article suggest, there’s still a lot of things that are unknown/unclear about how Tennessee courts are going to apply it in the future.