Don’t Let Your Post-Foreclosure Rights Expire: Tenn. Code Ann. § 35-5-118(d) Imposes a Two Year Statute of Limitations on Deficiency Lawsuits

Last week, a local collections lawyer conceded, in open court, that collection cases rarely have interesting issues involved. This case was different, the lawyer argued, because it involved interpretation of Tenn. Code Ann. § 35-5-118(d), which has not yet been discussed in any Tennessee opinion.

This is the new foreclosure deficiency statute, and I’ve dealt with this law a few different times. Here’s a blog post about the first judicial opinion defining what constitutes a reasonable bid price at foreclosure under the statute.

I’ve also noted that the statute shortens the statute of limitations on pursuing post-foreclosure deficiency lawsuits. Specifically, the statute says:

(d)(1) Any action for a deficiency judgment under this section 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, to collect your debt after a foreclosure, you have to act fast in Tennessee. While two years doesn’t sound like a short time frame, it can be, where the creditor spends time on eviction, selling the property, or even selling the deficiency debt to a third party.

The statute has a September 1, 2010 effective date, so the courts may still be dealing with deficiencies from both the pre-statute and post-statute time periods.

Always be on the look-out for this issue. In the “interesting” case that I mentioned above, the foreclosure occurred in February 2011, with the lawsuit filed in February 2014. In response to this issue, Plaintiff’s counsel confidently cited the general six year statute of limitations on breach of contracts (Tenn. Code Ann. § 28-3-109). The Court rightfully held that the more specific timelines of the foreclosure deficiency statute controlled and dismissed the action.

Who says collection cases aren’t interesting? We made law that day!

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.