Defaulted Real Estate Loan Remedies in Tennessee

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Defaulted Real Estate Loan

Remedies in Tennessee

Nelwyn Inman Jay Ebelhar

ninman@bakerdonelson.com jebelhar@bakerdonelson.com

423.752.4405 901.577.8204

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3 www.bakerdonelson.com

Tennessee – Deed of Trust

Consensual real estate liens are granted through a trust instrument in which an interest in property is transferred to a trustee for the benefit of the lender

Contents of Deed of Trust

• Parties to Deed of Trust:

− “Grantor” is borrower

− “Grantee” is trustee named

therein

− “Beneficiary” is lender

• Description of property and related

interests in which lien is granted

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Contents of Deed of Trust

(continued)

• Define what obligations are secured by

deed of trust

• Waiver of equity of redemption, any

statutory right of redemption, and other rights of redemption by the borrower

• May have requirements in additional to

those in statute such as additional or longer publication of notice of sale

Contents of Deed of Trust

(continued)

• May specify location of sale; sales typically occur at courthouse

steps

• Must define events of default which trigger power of sale

• May provide remedies in addition to power of sale such as

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Pitfalls: Deeds of Trust

• Deed of Trust must be signed by all holders of an interest in the

property (if individual, includes spouses with marital interest)

• Signatures of grantors must be properly acknowledged by a notary

under seal

• Deed of Trust must be recorded with register of

deeds in county where property is located

Recording Tax

• Tax of 11.5¢ per $100 of indebtedness

• Must state “Maximum Amount of Indebtedness for Tennessee

Recording Tax Purposes is $________”

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Recording Tax

(continued)

• Due only once: if paid on deed of trust, not due for subsequently

filed or recorded fixture filing, UCCs, assignment of rents and leases, or modifications which secure same debt

• Declaration required:

MAXIMUM PRINCIPAL INDEBTEDNESS FOR TENNESSEE RECORDING TAX PURPOSES IS $-0. NO NEW

INDEBTEDNESS. TAX PREVIOUSLY PAID ON DEED OF TRUST RECORDED AT BOOK ____, PAGE ____ IN OFFICE OF

REGISTER OF DEEDS OF ________ COUNTY, TN.

Actions Upon Default

• Send notice of default/acceleration to obligors (right to cure only if

required by loan documents)

• Appoint Substitute Trustee – must be recorded with register of

deeds; gives new trustee duties of original trustee

• Order updated title report

• Be sure loan documents and deed of trust

properly assigned to the current holder.

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Title Issues

• Confirm all interests held in real estate

• Holder of fee simple and leaseholds

• Easements, restrictions, covenants, etc.

• Senior liens – title insurance claim if deed of trust is insured as first

lien

• Junior liens – judgment liens, materialman liens, liens les pendens –

must be noted in notice of sale

Title Issues

(continued)

• Real estate taxes – county or municipal taxes and assessments

prime other liens

• IRS liens – special notice of foreclosure required under federal law if

junior

• Tennessee Department of Revenue tax liens for sales and

employment related taxes – special notice of foreclosure required under state law if junior

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Pitfalls: Title Issues

• “Meth lien” – not a real lien but notice filed

by law enforcement that real property was site of meth production

• Tennessee Department of Environment

and Conservation – notice of hazardous substance

• County or municipal government

assessment for clean-up (cost of mowing, trash removal, etc.)

Foreclosure – Non-Judicial

• Total time to foreclose: approximately 30 days

• Advertisement – notice of sale published three times in newspaper

circulated in county where the property located

• First publication – 20 days before sale

• Notice of Sale – send directly to obligors on or before the first date

of publication by registered or certified mail to property address or last known mailing address

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Foreclosure – Non-Judicial

(continued)

• Place of sale – in the county where property located

• Time – between 10 AM and 4 PM

• Notice must list interested parties – if interest is to be eliminated by

foreclosure and of record ten days prior to first publication, must list lien in notice of sale

• Judgment liens – valid for ten years

Foreclosure – Tax Liens

• Additional statutory notice must be given to the Tennessee

Commissioner of Revenue and District Director of the IRS not less than 25 days prior to date of the sale. After a foreclosure sale in which the notice of priority is given, taxing authority has 120 days right to redeem the foreclosed property.

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Conduct of Sale

• Adjournment – one or more times as long as sale held within one

year of original sale date to a specific date and time announced at the date, time, and location of each scheduled sale

• Adjournment more than 30 days – notice of the new date, time, and

location must be mailed no less than 10 calendar days prior to the sale date via regular mail to the debtor and co-debtor

• No further publication required

Conduct of Sale

(continued)

• Terms of sale stated in notice and/or announced at sale

• Credit bidding allowed

• Creditor may bid and assign bid to third party

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Trustee’s Deed

• Deed from trustee under deed of trust to winning bidder (or its

assignee) transfers property

• Recording Tax for Trustee’s Deed – $3,700 per $1 million value

• Affidavit must be made in deed stating value of property

How a debtor can stop the foreclosure sale

• Bankruptcy stops a sale of debtor’s property

• Injunctions to stop foreclosure:

Tenn. Code Ann. § 29-23-202

“The party applying for relief in such case shall distinctly state how, when and to whom the debt

or any part of the debt secured aforementioned has been paid, or any circumstances of fraud

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Typical defenses to foreclosure

• Defect in foreclosure process

• Servicing error

− misapplication of payments

− rejection of payments

− unauthorized establishment of escrow account

− failure to honor loan modification

− failure to offer loan modification

− dual tracking

− misrepresentation regarding date of sale

• Lack of standing to enforce deed of trust

Receiverships

• Receivership is an action in equity for safekeeping, management,

collection, and disposition of property

• Statutory authority and case law give court wide discretion to fashion

the relief granted

• Prior consent to appointment of receiver by borrower in loan

documents given great weight, but not absolute

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Receiverships

(continued)

• Injunctive relief usually sought in conjunction with receivership to

compel cooperation of borrower and agents with receiver

• Temporary restraining order to freeze assets can be obtained under

compelling circumstances where assets are being dissipated – 15 day maximum duration

• Receivers can sell property but need court approval

• Preserve right for lender to proceed with remedy of foreclosure

Deficiency

• Statute of limitations – two years after sale

• Absent fraud, collusion, misconduct or irregularity in the sale

process – deficiency shall be total debt plus costs of sale, less fair market value of the property at the time of the sale

• Rebuttable presumption that the bid price is equal to the fair market

value at the time of the sale

• To overcome presumption, debtor must show that property sold for

amount materially less than the fair market value of the property at the time of sale

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Deficiency

• What is “materially less”?

− Case by case – rough analysis of the percentage difference and

condition of the property and “any other factors”

− Evidence of a difference of 11%, 14%, 16% and 20% between

appraised values and sale prices has been deemed insufficient to establish a material difference and therefore overcome the presumption

• Hazard insurance proceeds

Deficiency

(continued)

• Decide whether you are going to pursue prior to conducting the sale.

• Hire an appraiser who has testified and been accepted as an expert

before by other courts.

• Have the appraisal dated to the date of the foreclosure sale.

• Get a detailed appraisal.

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Collection of Money Judgment

• Garnishment

− Tenn. Code Ann. § 26-2-201, et seq.; Tenn. R. Civ. P. 69.05

• Writ of Execution

− Tenn. Code Ann. § 26-1-101, et seq. & 26-3-101, et seq.; Tenn.

R. Civ. P. 69.06(1)

• Execution or Judgment Lien (Personal vs. Real Property)

− Tenn. Code Ann. § 26-1-101,

et seq. & 26-3-101, et seq.; Tenn. R. Civ. P. 69.06 & 69.07

Collection of Money Judgment

(continued)

• Garnishment

− All property, debts and effects of a judgment debtor in the

possession or under the control of a third party shall be liable to satisfy the plaintiff’s judgment. Tenn. Code Ann. § 26-1-202.

− Effective way to execute on money due to debtor (i.e., wages and

money owed to debtor presently and in the future) and money that the debtor has in a bank or investment account.

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Collection of Money Judgment

(continued)

• Writ of Execution: An order directing the sheriff to levy upon and sell

the judgment debtor’s personal property

− Property sold by auction, subject to 20-day waiting period for

debtor to claim exceptions

− Subject to superior lienholders

Collection of Money Judgment

(continued)

• Execution and Judgment Liens

− Execution lien – attaches to personal property upon filing

memorandum or abstract of judgment in register’s offices within 60-days of judgment

− Judgment lien – attaches to real property upon filing certified

copy of judgment in register’s office of county where land is located

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Collection of Money Judgment

(continued)

• Exemptions

− Personal property to the aggregate value of $4,000

− Necessary and proper wearing apparel and receptacles

− Family portraits and pictures

− Family bible and school books

Collection of Money Judgment

(continued)

• Exemptions

− Proceeds of accident, health, life or disability insurance

− Social Security benefits, unemployment compensation

− Alimony

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Collection of Money Judgment

(continued)

• Homestead exemption

− $5,000 for real property owned by the debtor and used by debtor

or spouse or dependent as a principal residence; $7,500 aggregate for individuals who jointly own principal residence

− $25,000 for debtor who has 1 or more minor children in debtor’s

custody on real property owned by debtor and used by debtor as principal residence

− Individuals 62 years of age or older:

 $12,500 on debtors’ residence;

 $20,000 aggregate for married couple of one is younger than

62

 $25,000 aggregate for married couple both age 62 or older.

Guarantor Liability

• Tennessee does not favor guarantors and will construe a guaranty

against the guarantor.

• Guarantees on a commercial contract are special contracts in

Tennessee law. In order to facilitate the extension of credit, Tennessee does not favor guarantors and will construe a guaranty against the guarantor as strongly as the language will permit.

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Nelwyn Inman Jay Ebelhar

ninman@bakerdonelson.com jebelhar@bakerdonelson.com