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.”

Does Tenn. Code Ann. § 35-5-118(d) Support a Two Year Statute Limitation on Any Creditors with a Lien? It Could Depend on Your Judge.

I received an interesting question/comment on this 2013 post, (in)artfully titled “Don’t forget that Tenn. Code Ann. § 35-5-118(d) also has a two year statute of limitations on collection of foreclosure deficiency.” The question is this:

If first and second mortgage on property and first mortgage holder forecloses and not enough from sale to pay anything on second mortgage, is amount owed to second mortgage holder considered a deficiency balance so that second mortgage holder must bring action within 2 years under TCA 35-5-118(d)?

The statutory text doesn’t expressly address this issue. In fact, subpart (a) only references the generic term “creditor” (which could apply to any and all lien creditors). Then, when referencing a foreclosure sale, it doesn’t reference a specific creditor’s sale, but, instead, says “after a trustee’s or foreclosure sale of real property secured by a deed of trust or mortgage…” (which, again, could describe a sale by any and all lien creditors).

When I look at that text, I see so many places where a specific, limiting reference to that specific creditor could have been made, but no such limitation is included in the text. I might have said: After that creditor’s foreclosure sale of real property secured by that creditor’s deed of trust…

Now, if you take the entire statute as a whole, there’s a reasonable inference that the two year limitation of actions only applies to the “creditor” who actually engages in the foreclosure process. Subpart (b) references aspects of the sale process that “the creditor” will be impacted by (suggesting that the statute applies to one creditor, i.e. the creditor who foreclosed, and not all creditors).

Having dealt a lot recently with new statutes or with amended statutes with hastily amended text, I’ve seen how the Legislature can sometimes introduce a fix to correct one problem and, inadvertently, cause 3 new ones.

This seems to be that. Here, the original legislative intent appears to be to require that foreclosing creditor to take quick action, not impose a statute of limitations on creditors who had no active role in the foreclosure.

But, some judges take a liberal, progressive stance on legislative interpretation. Depending on what county you find your client in, this very well be an argument to make. If you’re in front of a debtor-friendly judge who views a judge’s role to be one that works backwards from the judge’s preferred outcome…well, this statute could support that judge’s inclination.

New Tennessee Opinion on Foreclosure Deficiency Follows Creditor-Friendly Precedent

One of my greatest victories was the favorable opinion I obtained for a client in GreenBank v. Sterling Ventures, et. al. , decided on December 7, 2012.

I blogged about it here, but to recap: That case was the first consideration of a foreclosure deficiency attack under Tenn. Code Ann. §35-5- 118(c). Under that statute, a borrower can argue that a foreclosed property sold for “materially less” than fair market value and, under §35-5- 118(c), a court can deny a deficiency judgment to the foreclosing creditor.

In an opinion issued this past Friday, the Court of Appeals revisited the statute in Capital Bank v. Oscar Brock, No. E2013-01140-COA-R3-CV – Filed June 30, 2014 (see full text here).  The case followed the established precedent of Sterling Ventures and its progeny.

This new case is notable in two respects:

  1. Courts can and will resolve §35-5- 118(c) issues at the Summary Judgment level,  where it is only a matter of applying the valuations against the foreclosure bid price. In fact, this new opinion weighs some of the evidence, in finding that the defendants valuations were were “formed
    months or even years before or after the time the Property was sold at foreclosure.” This was a major victory in the original Sterling Ventures case, since borrowers want to make these issues a “fact” question, forcing a trial and delay of judgent.
  2. Courts continue to look at percentages when determining what “materially less” means. Sterling  Ventures and the later opinions all say the courts want to avoid setting a “bright-line percentage, above or below which the statutory presumption is rebutted.” That has basis in the legistlative history of the statute, where the lawmakers used “material” based on its usage in child custody cases. Nevertheless, the courts continue to apply a percentage test; in this case, spread was 15.8% and the sale was upheld.

This Court shot down a number of other arguments, including: those based on the amounts of several post-foreclosure appraisals; based on the Bank’s ultimate sale-listing price; and an argument that the Bank committed “fraud” by bidding a lower amount when it planned  to market the property at a higher amount.

The ultimate take-away on this remains the same as in the past.

  • Get an appraisal at or near the time of the proposed sale.
  • Bid an amount that is reasonably tied to the amount of your appraisal (or other reliable/admissible valuation).
  • Summary Judgment is a proper way to proceed, provided the foreclosing creditor was cautious and acted with this statute in mind.