Tag: Tennessee foreclosures

This Defective Foreclosure Was the Scariest Thing I Saw on Halloween

I’ve called Tennessee’s non-judicial foreclosure process “a little scary.” It follows a byzantine process, is all paperwork, there’s no judge involved, and a single misstep can lead to your foreclosure being challenged.

Tennessee offers a unique pitfall for the unwary: It’s a “two track” state, meaning that a foreclosing lender must satisfy the requirements of both the Tennessee foreclosure statutes and the requirements agreed to by the parties in the Deed of Trust.

And those two tracks don’t always align.

On that note, let me tell you about the sale of a multi-million dollar property I watched on October 31 .

The Notice of Foreclosure Sale was first published in the Nashville Ledger on October 11, 2024 , and the sale was set for October 31, 2024 at 10AM at the Davidson County Courthouse.

That’s a tight timeline, since Tenn. Code Ann. § 35-5-101(b) requires that “The first publication shall be at least twenty (20) days previous to the sale.” In fact, by my own math, the 10/31 sale date fell on the twentieth day after publication, and I wondered whether, legally, this sale satisfied this statute (maybe, maybe not).

It didn’t matter, because I then read the Deed of Trust.

The Deed of Trust adds an extra day to § 35-5-101(b) minimum and requires that the first publication precede the sale by 21 days. This sale clearly didn’t satisfy that requirement.

About 6 bidders attended the sale, but none of them bid. The bank bought the commercial property for nearly $4 Million, and, in the Trustee’s Deed, recited the following:

Did the foreclosing lender double-check the Deed of Trust text? Is this a valid sale? Did good title convey from this sale? Did the failure to follow the terms of the Deed of Trust chill the bidders’ interest? Would this qualify as an “irregular” sale that would prevent collection on any unpaid debt pursuant to Tenn. Code Ann. § 35-5-117? Lots of interesting issues flowing from this sale.

I don’t like “interesting issues” on my foreclosures. When I prepare a sale notice, I check and double-check everything. When I’ve got a bunch of foreclosures set, you’ll find pen dots all over my calendar, from all the day-counting.

Foreclosures are complicated, and the failure to get it right can result in a challenge from all different directions. A borrower who doesn’t want to lose the property. A buyer who may not receive clear title. A lender who expects you to follow the process. A bankruptcy trustee who wants to blow it all up.

It’s a tricky process, and there’s too much risk when making an error. None of the goblins who visited my house later that night scared me more than what I saw happen at that foreclosure.

One Weird Trick to Avoid a Paperwork Challenge to your Tennessee Foreclosure

In 95% of Tennessee foreclosures, the foreclosing lender has appointed a substitute trustee to conduct the sale but, of those, about 10% mess the process up and conduct a defective sale.

First, some background. When a borrower grants a lien pursuant to a deed of trust, the real property is conveyed to a specific trustee named in the instrument “to hold title to the property in trust” pending the repayment. If there is a default, the trustee can later sell and convey title to the property.

These trustees are generally a closing lawyer or trust officer at the bank, but they are rarely the same lawyer who does the foreclosures for the bank. (Note: There’s no reason that they can’t be same.)

Later, if the bank decides to foreclose, one of the first steps is to appoint a “foreclosure” lawyer to be the successor trustee under the deed of trust. This is done by simply preparing an Appointment of Substitute Trustee, having the lender sign and notarize it, and recording it with the register of deeds in the relevant county.

Sounds easy, right?

Here’s where the mistake happens. When the decision to foreclose is made, the bank (or the lawyers) sometimes rush it out the door and start the foreclosure either before the Appointment of Substitute Trustee is signed or before it is recorded. (Spoiler: One of those is fatal to the foreclosure.)

Under Tenn. Code Ann. § 35-5-114(b)(3), if the Appointment is not recorded by the first publication date, there is specific “savings” language that must be included in the foreclosure sale notice. This text says, basically, that, even though the appointment hasn’t been recorded, the lender “has appointed the substitute trustee prior to the first notice of publication as required by Tenn. Code Ann. § 35-5-101…”

As a result, it’s still a valid sale, as long as that text is included. But, as this text also suggests, it may not be a valid sale if the actual Appointment of Substitute Trustee was not signed until after the foreclosure sale notice was published. If that’s the case, a court may find that the successor trustee was a stranger to the property at the time he or she issued the sale notice. (And strangers have no power to start a sale.)

Tennessee foreclosure statutes are non-judicial, which means it’s all just paperwork, but there’s an exact sequence of steps that must be followed.

This particular error is an easy one to avoid, but also an easy one to make. Many creditors want to foreclose quickly, which requires the lender and its counsel to satisfy strict publication deadlines to get the sale notice published and to obtain a sale date.

In doing so, they can often overlook the necessity of getting the initial paperwork executed in advance (whether it’s the rush of getting the sale notice to the local newspaper or the simple hassle of finding a notary for the appointment of substitute trustee).

As we have seen in recent cases, the failure to follow the technical requirements of Tennessee law and deeds of trust can result in a challenge to a foreclosure. It’s all paperwork, but make sure you get it right.