Tag: Tennessee Deficiency Statute

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.

A Filed, but Not Served Complaint, May Not Prevent the Statute of Limitations from Expiring under Rule 3

The Court of Appeals issued an interesting case yesterday to remind us all about the importance of prompt service of process. This case is Amresco Independence Funding, LLC v Renegate Mountain Golf Club, LLC (Tenn. Crt. Apps., Mar. 31, 2015, No. E2014-01160-COA-R3-CV), and the full text can be found here.

The basic facts are that the Plaintiff filed a collection lawsuit against Defendant, but did not obtain valid and timely service of process of the Complaint. Then, after the statute of limitations expired and after one year from the date that the original Summons was issued, the Defendant filed a Motion to Dismiss. In the Motion, the Defendant argued that any new Summons would not relate back to the Complaint filing date and, as a result, the lawsuit was too late.

This is a good argument. Under Tenn. Rule. Civ. P. 3:

If process remains unissued for 90 days or is not served within 90 days from issuance, regardless of the reason, the plaintiff cannot rely upon the original commencement to toll the running of a statute of limitations unless the plaintiff continues the action by obtaining issuance of new process within one year from issuance of the previous process or, if no process is issued, within one year of the filing of the complaint.

The Court of Appeals agreed with this analysis and upheld the dismissal.

So, as a rule of thumb, don’t think that because you filed your lawsuit that all your statute of limitations issues go away. Indeed, if you simply file the lawsuit and then don’t obtain service of process, your time-sensitive claims could potentially expire.

And this isn’t just a rule that penalizes lazy lawyers. I’ve filed lawsuits to satisfy deadlines, but then considered not serving the Summons because the parties were engaged in settlement talks or waiting for a sale or some other event to occur.

Under Rule 3, the mere filing of the lawsuit may not be enough to save your claims.

New Trial Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting “Materially Less”

A few months ago, I argued the first appellate case construing Tenn. Code Ann.  § 35-5-118, which is the new Tennessee post-foreclosure deficiency judgment statute. As you may recall from my blog post about the new law, the statute provides a possible defense to a deficiency action, where the debtor can show “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…”

In layman’s terms, a foreclosed borrower may be able to avoid a judgment for the remaining debt if he can show that the foreclosure buyer drastically under-bid at the foreclosure.

All across the state, this statute has resulted in two fights:

  1. What was the fair market value at the time of the foreclosure? and
  2. Was the foreclosure sale price “materially less” than the fair market value?

A big problem under the statute has been that “materially less” isn’t defined in the statute or anywhere else in Tennessee law.

In the resulting GreenBank v. Sterling Ventures  opinion, the Court of Appeals issued a bank-friendly interpretation,  offering guidance as to what “materially less”  means by saying that a sale price of 86% is not “materially less.”

I’ve heard from a number of bank lawyers since that opinion, complaining that 86% isn’t low enough. I’ve told them, just wait, the Sterling Ventures opinion didn’t set the “floor;” there is room in the statute for lower values, which will be established in future cases (in the Sterling Ventures case, the bid at issue was 88-91%, so it didn’t require the Court to define the lowest possible percentage).

This past week, my firm received another favorable  opinion from the Williamson County Chancery Court. In this Opinion (click to review), the Court recognized this issue, and rightfully upheld lower percentage bid amounts. The Court, following the lead of the Court of Appeals, cites the Holt v. Citizens Central Bank case, which recognized that a 50% recovery at foreclosure is a customary result.

While this doesn’t suggest that 50% is the magic number/floor percentage, this analysis shows a judicial tendency in interpreting the statute at a lower range than most debtors have argued.

With any new law, it takes a few decisions to “battle test” how it works. So far, the parameters of Tenn. Code Ann.  § 35-5-118 are being defined in a way that favors creditors.

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%).

New Tennessee Foreclosure Deficiency Judgment Statute Becomes Effective Soon

In addition to imposing new notice requirements on foreclosing creditors, the 2010 Tennessee Legislature has also passed House Bill 3057, which provides post-foreclosure protections to debtors regarding deficiency balances. This new law becomes effective September 1, 2010.

A “deficiency balance” is the amount of debt remaining after the foreclosure sale proceeds are applied to the creditor’s debt. Because most foreclosures don’t net sufficient proceeds to fully pay the debt, lenders often sue their borrowers to recover this difference.

This new statute allows a debtor to question whether the foreclosure sale price was truly representative of the “fair market value” of the property. Under this law, the debtor can attempt to prove “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…” If successful, the debtor may be able to increase the amount of credit he or she is entitled to.

Additionally, the statute potentially shortens the time to file a lawsuit to recover a deficiency balance, requiring that such actions be brought by the earlier of: two years after the foreclosure; or within the original statute of limitations for suit on the debt.

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 key to avoiding issues under this law is to have some reasonable basis for determining “fair market value” when preparing foreclosure bids, whether it’s the tax records, recent sales, or new appraisals.