May 10, 2016
by Jerry Morgan
Wilson & Associates, P.L.L.C. (Arkansas, Tennessee)
The Tennessee Court of Appeals has provided guidance on the statutory presumption that a foreclosure sale price is equal to “fair market value.”
In Eastman Credit Union v. Bennett, 2016 Tenn. App. LEXIS 229 (Mar. 31, 2016), the borrower was relocated by his employer and the debt fell into default. Prior to the foreclosure sale, a relocation company offered the lender $158,900 — which was about $10,000 less than the full debt. The lender declined and foreclosed two months later, entering the only bid in the amount of $95,000. Two months after the foreclosure sale, the lender sold the property for $125,000.
The lender filed an action seeking a deficiency judgment of around $53,000, asserting that $95,000 (the foreclosure sale price) was fair market value. Pursuant to Tenn. Code Ann. § 35-5-118(b), a creditor is entitled to a rebuttable prima facie presumption that the sale price of the property at foreclosure is equal to fair market value at the time of the sale.
The borrower contended that the offer of $158,900 from the relocation company two months prior to the foreclosure was fair market value. The trial court, noting the good condition of the foreclosed property and the neighborhood, along with the fact that the lender sold the property two months after the foreclosure sale for $125,000, held that $95,000 was not fair market value, and that the offer made prior to foreclosure of $158,900 was the closest true indicator of fair market value at the time of the foreclosure sale. The Court of Appeals of Tennessee held that the evidence did not preponderate against the trial court’s findings regarding fair market value.
That did not end the inquiry, however, as Tenn. Code Ann. § 35-5-118(c) states that to overcome the rebuttable presumption, a debtor has to prove by a preponderance of the evidence that the foreclosure sale price was “materially less” than the fair market value at the time of the foreclosure sale. Accordingly, the trial court had to determine if the foreclosure sale price of $95,000 was “materially less” than the fair market value of $158,900. If so, the presumption would be overcome, and the borrower’s deficiency liability would be limited to the difference between the total indebtedness prior to the sale (plus the costs of foreclosure) and the fair market value of the property.
The actual foreclosure sale price of $95,000 was 40 percent less than the fair market value of $158,900. The statute does not provide a definition of “materially less.” Moreover, Tennessee courts have not applied a “bright-line percentage” that would represent “materially less.”
The courts look to elements such as the condition of the property and “any other factors that may provide information concerning the marketability of the property and the surrounding area.” Courts have found, for example, that 11 percent less than fair market value was not “materially less,” nor was 15.8 percent less. Another court found that 78 percent less was materially less.
In Bennett, the trial court and the Court of Appeals found that 40 percent was materially less. The appellate court noted the condition of the property and the neighborhood, as well as the testimony from one of the creditor’s witnesses that all that would be needed was a “sales clean” of the property, with no repairs necessary in order to sell.
While this case does not technically break new ground, it does provide creditors with more guidance regarding deficiency judgments post-foreclosure. The judicial decision highlights the importance of striking a reasonable balance between preserving the creditor’s right to pursue a deficiency and protecting a borrower’s rights in determining the fair market value of the property.
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