Tag: real property foreclosure sale

New Tennessee Court of Appeals decision provides advice for foreclosures of real property developments

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.

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.”