Tennessee Foreclosure Deficiency Statute; Is 86% the New Magic Number for Calculating Foreclosure Bids?
In response to the thousands of foreclosures of commercial and residential real estate that have taken place across Tennessee over the last few years, the legislature overhauled the Tennessee Deficiency Statute, which governs a lender’s collection of the balance owed by a borrower after foreclosure occurs. The Tennessee deficiency law, which is codified at Tenn. Code Ann. Section 35-5-118, provides generally as follows:
- Subsection (a) confirms that Lenders are entitled to deficiency judgments in Tennessee.
- Sub-section (b) defines a deficiency judgment as “the total amount of indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale" and codifies the principle that a sale at public auction creates a rebuttable presumption that the sale price of the property is equal to the fair market value of the property at the time of sale.
- Subsection (c) provides that a debtor can overcome the presumption set forth in subsection (b) by a “preponderance of the evidence” showing that the property sold for an amount "materially less" than the fair market value of the property at the time of the foreclosure sale. If the debtor overcomes the presumption, the deficiency will be "the total amount of indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale as determined by the court."
Most of my lender clients already calculate their foreclosure bids based on a formula. I would say the most common formula is to bid the lesser of: (i) the loan balance (which includes all foreclosure costs and expenses as well as attorneys’ fees); and (ii) the current fair market value of the property (based on an updated appraisal or broker opinion letter) discounted by the estimated carrying costs during the marketing period to sale the property (if this isn’t already included as part of the appraisal or opinion). Based on this formula, most lenders already comply with the above formula laid out by the Tennessee Deficiency Statute.During the last 2 years, there has been some uncertainty regarding what "materially less" actually means as used in sub-section (c) of the Tennessee Deficiency Statute. The Tennessee Code does not currently define this term. Recently, the Tennessee Court of Appeals heard a case, Greenbank v. Sterling Ventures, L.L.C., No. M2012-01312-COA-R3-CV, 2012 WL 6115015 (Tenn. Ct. App. December 7, 2012), interpreting the meaning of “materially less” as used in the statute. In that case, the bank bid $667,400 for the property at foreclosure. The debtor argued that the actual value was somewhere between $735,000 and $750,000. Even assuming the property was worth $750,000, the court opined that a bid of $667,400 (or 89% of the “fair market value”) was not materially less than fair market value of the property at the time of the foreclosure sale. The court stated that in order to be “materially less,” there would have to be a “significant” or a “pretty substantial difference.” The court approvingly cited to another case, State of Franklin Bank v. Riggs, No. E2010-01505-COA-R3-CV, 2011 WL 5090888 (Tenn. Ct. App. Oct. 27, 2011), that held that a foreclosure bid equal to 86% of appraised value was not “materially less” than fair market value. Furthermore, probably most important for lenders is that provided the bank bids at least 86% of the borrower’s claimed fair market value, the lender will very likely win at summary judgment.Practice Pointers:
- Lenders who want to maximize any potential deficiency against the debtor parties will likely now multiply their appraised value by 86% (or more) when determining their foreclosure bid. Given the strong language used in the opinion, it is likely a lender could bid much lower than 86% and withstand judicial review.
- Lawyers should remind their lender clients that the bid should be 86% of whatever the highest alleged value by the borrower might be in order to win on summary judgment.
- For lenders who don’t obtain current appraisals prior to the foreclosure, it may be advisable to incur the cost of an update to establish a reliable benchmark for calculation of the foreclosure bid. The updated appraisal may come in handy if the foreclosure bid is challenged. The appraisal may also give the lender more confidence to use an aggressive bid strategy by discounting from fair market value. Assuming the lender can actually collect on an ultimate deficiency (big if), the lender may actually make money on the investment in an updated appraisal.