Tennessee Detainer Actions: Not Just for Tenants and Landlords

What if you own real property, but someone else has possession of the property, and you want them gone? You evict them. But, as you’ll see under Tennessee statutes, they don’t call it an “eviction” lawsuit; they call it a “detainer” lawsuit.

The statute in Tennessee is Tenn. Code Ann. § 29-18-104, titled “Unlawful Detainer.” That statute provides:

Unlawful detainer is where the defendant enters by contract, either as tenant or as assignee of a tenant, or as personal representative of a tenant, or as subtenant, or by collusion with a tenant, and, in either case, willfully and without force, holds over the possession from the landlord, or the assignee of the remainder or reversion.”

These detainer actions are generally brought in general sessions court, where, as I’ve noted before, you can exceed the $25,000 jurisdictional limit. Also, even though general sessions appeals are very easy on most matters, they are complicated and expensive in general sessions court.

So, if you’re a landlord, you’re probably reading that statute and thinking it’s exactly what you need, right? But, what about if you’ve purchased the property, either by a typical sale or a foreclosure? In that case, you’re not a landlord, and the defendant isn’t entering by contract (i.e. lease). Does a different statute apply?

No, said the Tennessee Court of Appeals in Federal National Mortgage Association v. Danny O. Daniels, W2015-00999-COA-R3-CV (Dec. 21, 2015).  There, the Court noted that the Deed of Trust will create “a landlord/tenant relationship … between the foreclosure sale purchaser and the mortgagor in possession of the property,” and, as a result, “constructive possession is conferred on the foreclosure sale purchaser upon the passing of title; that constructive possession provides the basis for maintaining the unlawful detainer.”

In such a case, a plaintiff must prove: (1) its constructive possession of the property (i.e. ownership of the property); and (2) its loss of possession by the other party’s act of unlawful detainer.

In short, the detainer statutes in Tennessee aren’t well crafted. Sometimes they reference landlords and tenants; sometimes they don’t. Courts have a tendency to construe statutes as written and to assume that the legislature means what it says when it uses specific words. That’s bad news for the foreclosure sale purchaser, who isn’t a landlord and who isn’t dealing with a tenant.

Here, however, it’s clear that the legislature should have proofread the statutes a few more times. Fortunately, Tennessee courts have applied the statutes in a broader sense.

 

Tennessee Court of Appeals Issues First Opinion Examining Text of Tennessee Deficiency Statute

Remember two years ago, when I wrote about the new Tennessee deficiency judgment statute? That statute, Tenn. Code Ann.  § 35-5-118, was designed to provide a defense to post-foreclosure deficiency lawsuits where the creditor failed to bid the actual “fair market value” of property at foreclosure. At the time, I said:

For most lenders, this new law should not have any practical impact. While you might imagine there would be various horror stories of lenders bidding $10,000 to buy a half-million property, in reality, most lenders were already calculating their foreclosure bids by starting at what the fair market value of the property is, and then subtracting sale expenses and carrying costs. The most prudent lenders have a standard procedure in place for all foreclosures, and many go the expense to order pre-foreclosure appraisals.

The reason I’m quoting myself so much is because the Tennessee Court of Appeals decided last week that my interpretation is correct. I take credit for this opinion, because I argued this case before the Court.

The case is GreenBank v. Sterling Ventures, et. al. , decided on December 7, 2012, (full text here). If you represent banks and creditors, particularly in foreclosures and collections, you must read this case and consider how your clients’ foreclosure bidding strategies compare with the Court’s decision.

This opinion is significant because it’s the first decision critically examining the text of Tenn. Code Ann. §35-5- 118 and deciding what “materially less” means.  While that term sounds official, the phrase “materially less” has never been used in any other Tennessee statute or court opinion. Ever. As a result, a court deciding whether a foreclosure sale price is “materially less” than fair market value is faced with a completely blank slate.

At the trial court level, the Chancery Court had found, at summary judgment and as a matter of law, that a foreclosure sale price ranging between 88% and 91% of the Defendants’ highest alleged value was not “materially less.”  On appeal, the Court agreed, explaining that the legislative history and goals of the new statute clearly indicated that a foreclosure bid price at 89% of the highest property value was not “materially less.”  (The Court actually went a step further, based on a prior decision, and found that 86% would suffice.)

The matter was appropriate for decision at the summary judgment stage, because, even accepting the Defendants’ facts as true, the foreclosure sale price was still 89% of the Defendants’ highest values and, thus, was not “materially less” than fair market value under Tenn. Code Ann. §35-5- 118(c).

Here are my two take-aways from this decision:

  1. A foreclosure bid of 86% is going to withstand this defense, so tell your bank clients to bid at least 86% of the highest alleged value (whether that be your appraisal, the defendant’s appraisal, or the tax card value).
  2. Under the right facts, a creditor can prevail over a §35-5-118(c) defense at the summary judgment stage.  The first time I saw this statute, my greatest concern wasn’t that my client would win or lose on this argument, but, instead, that this statute created a factual issue that would cause delay and require a trial (and, thus, I couldn’t prevail on a motion for summary judgment). This case shows that you can win such a motion.

This opinion is creditor-friendly, but not overly so. Keep in mind, a bank conducting a foreclosure must still bid at least 86% of a property’s highest value. Taking into account costs of the foreclosure, the costs of “owning” property, and other administrative costs associated with foreclosure, I question whether we’ll see a later opinion on different facts that affirms a lower percentage (65%-75%).

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.

New CLE Speaking Engagement: The Essentials of Foreclosure Defense, September 22, 2011

My law partner, Tucker Herndon, and I have been invited by LawReviewCLE to speak at their upcoming seminar The Essentials of Foreclosure Defense. This seminar will be on September 22, 2011, in Nashville at the DoubleTree Hilton.

While we generally represent foreclosing creditors in the foreclosure process, the seminar organizers recognized that “bank lawyers” are probably some of the most knowledgeable about avenues to attack, stop, or stay a foreclosure. They’re right: after probably 500 foreclosures over the past 4 years, we’ve seen it all.

As a result, we’ll be speaking about trends in foreclosure litigation, including lawsuits to stay or enjoin foreclosures, as well as well consensual agreements to avoid foreclosures, like loan modifications, short sales, and deeds in lieu of foreclosure.

Finally, we’ll review the powers of Bankruptcy Courts to stop a foreclosure and, in some cases, attack a creditor’s lien rights.

This should be a lively seminar on an obviously topical area of law. We hope you’ll consider signing up. There will be a Q & A session at the end, and, if you ever wanted to ask a bank lawyer about foreclosures, this is your chance.

Your Legislature Gets One Right: Revised Tenn. Code Ann. § 35-5-101 Allows Postponement of Foreclosure Sales

There are a number of reasons why a lender would postpone a foreclosure sale, but the most common is that the borrower and lender are trying to resolve the default and avoid the sale. This usually involves the payment of enough money to bring it current (or “current enough”). These efforts often fail, because time runs out, and the lender doesn’t want to incur the expense of cancelling and later re-publishing the sale notice.

In the past, Tennessee law has been unclear as to, first, whether a published sale can be postponed, and, second, whether the lender needs to re-run the Sale Notice publication for a postponement.

As to the first question, most lenders look at their mortgage instrument, to see whether there is express language allowing adjournment. Absent that, the lender will not postpone the sale.

As to the second, there has been no real consensus, other than a vague “it depends on how long the postpone is for.”

In this past session, the Tennessee Legislature provided an answer, in changes to Tenn. Code Ann. Sec. 35-5-101, effective July 1, 2011, which allow for postponements for up to one year after the initial sale date and require certain notices to the borrower.

This is a law that should be good for both borrowers and lenders. It provides lenders with some assurance that they can slow the process down and negotiate with their borrowers, but without the risk of introducing a defect into their sale process. For borrowers facing potential foreclosure, it provides more time to get the issues resolved.

A rare case where everybody wins.

Homeowners Remain Frustrated with Short Sale Process, and New Legislation Unlikely to Correct Issues

The Washington Post ran a story on the rise of short sale home transactions, along with the disappointment and frustrations home owners have with the process.

Generally, a “short sale” of a house is a sale for a purchase price that is less than the amount of the debt owed to the bank on the property. In order to do this, the home owners must obtain an agreement from their bank or lien-holders that the liens on the property will be released in exchange for the proceeds generated by the sale. Since the proceeds will not pay off the lender in full, the seller cannot force the bank to accept the deal–it can only be done with approval by all lien-holders.

And there’s the difficulty. In this foreclosure crisis, banks are overwhelmed with short sale proposals, all of which must be reviewed to determine if the “short sale” price is reasonable and better than the bank can do at foreclosure. In almost all cases, the prices will be better. But, still, the approval process requires that a bank officer agree to release the lien rights for something less than the bank is entitled to under its lien, which isn’t a decision that a bank can quickly make.

The most common complaint from sellers is that this process takes far too long, especially when there’s a buyer waiting who can simply move on to another house. In response, some law makers have filed legislation, HR 6133, that would require expedited processing and responses to short sale proposals.

This new legislation is unlikely to solve these issues, because who is to determine what is the proper timing to process short sales? Ten days? A month? And what’s the proper penalty? A forced sale? Release of the lien or deficiency rights?

I doubt that the legislators want to force their own terms onto what should be a typical “business decision” by the banks, and, if they do, there’s the risk that the lenders will simply respond immediately…with a “No” to all requests.

Negative Equity May be New Culprint in Foreclosure Crisis

Negative equity drastically increases foreclosure risk. This Christian Science Monitor article notes that the current focus of existing home mortgage modification programs–reductions in monthly payments and interest rates–is misplaced, because the real culprit may be the fact that so many people simply owe far more than their houses are worth.

While lenders may be willing to shave down monthly payments and interest, should they also be willing to shave off tens of thousands of dollars of principal on loans? Does the cost of foreclosure outweigh a discount on the debt?

The above article reminds me of the Tennessean’s 2009 article that the “Making Home Affordable” Modification Program wasn’t helping the foreclosure crisis as expected.

So far, the federal programs look to cure certain symptoms, but can’t seem to reach all of the problem, sort of like plugging a hole and then having another leak spring up.