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TN: Appellate Review Relating to Purchase at Foreclosure Sale while Short Sale Discussions are Ongoing

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, November 21, 2016

November 29, 2016

by Kate Lachowsky
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Mississippi, Tennessee)

A recent opinion of the Tennessee Court of Appeals holds that once a mortgagor defaults, absent an agreement between the mortgagor and mortgagee to delay foreclosure to permit a short sale, the mortgagee has the right to proceed with foreclosure. Further, knowledge of ongoing short sale discussions between the mortgagor and mortgagee does not prevent a third-party purchaser from bidding and purchasing real property at a foreclosure sale.

In 2013 Jorge and Madelyn Alfonso (plaintiffs) owned real property in Sevier County, Tennessee. They experienced difficulty in making their mortgage payments owed to CitiMortgage, Inc. (Citi), resulting in default. In hopes of avoiding foreclosure on their property, the plaintiffs worked with Citi to pursue a short sale. According to their complaint, the plaintiffs had buyers for the short sale ready to close on the sale of their property and Citi “slow-dragged talks on a prospective short sale.” Alfonso v. Bailey, 2016 Tenn. App. LEXIS 569 (Tenn. Ct. App. Aug. 9, 2016). The plaintiffs alleged that Citi made excuses as to why the short sale could not be completed, including the need for an “internal document” that was allegedly never generated or acknowledged by Citi.

During these short sale discussions, the foreclosure action progressed and one of the defendants was informed by the plaintiffs’ agent that a short sale was pending and that it was expected that the foreclosure sale would be postponed. On October 1, 2013, the plaintiffs’ property was sold to three investors (defendants) who attended the foreclosure sale and were the highest bidders.

In February 2014 the plaintiffs sued Citi and the investor-defendants in the Chancery Court for Sevier County (trial court) seeking declaratory relief and damages arising from the following ten claims: (1) violation of the Tennessee Consumer Protection Act; (2) fraudulent misrepresentation; (3) fraud; (4) unjust enrichment; (5) civil conspiracy; (6) inducement of breach of contract; (7) breach of contract; (8) tortious interference with contract rights; (9) intentional interference with contract rights; and (10) fraudulent concealment.

Citi filed a motion to dismiss in April 2014, which the trial court granted. In its June 2014 order, the trial court found that the plaintiffs failed to state any of their ten claims and dismissed all of them with prejudice. Further, the trial court found that the plaintiffs did not identify any wrongful activity on the part of Citi and that even though the plaintiffs were engaged in short sale discussions with Citi, the bank had the right to pursue foreclosure under the terms of the security instrument executed by the plaintiffs. Ultimately, the trial court held that “Citi had no legal duty to complete a short sale, or to even discuss the same.”

The plaintiffs filed a motion to alter or amend judgment as to the trial court’s June 2014 order, which was denied by an order entered on September 18, 2014. The plaintiffs did not appeal this final order and Citi was not a party on appeal; rather, the plaintiffs pursued the case against the third-party purchasers. The defendants filed a motion to dismiss and the trial court granted their motion, holding that the plaintiffs’ complaint “failed to state a claim against the Defendants upon which relief could be granted.” The plaintiffs timely appealed this order to the Court of Appeals of Tennessee at Knoxville and raised the following issue on appeal: whether the trial court erred in granting the defendants’ motion to dismiss.

Appellate Review
The Court of Appeals reviewed the trial court’s legal conclusions regarding the adequacy of the complaint de novo without a presumption of correctness (citing Lind v. Beaman Dodge, Inc., 356 S.W.3d 889, 895 (Tenn. 2011); Highwoods Props., Inc. v. City of Memphis, 297 S.W.3d 695, 700 (Tenn. 2009)).

On appeal, the plaintiffs asserted that their complaint alleged facts sufficient to withstand a motion to dismiss for failure to state a claim upon which relief may be granted. In the Court of Appeals’ opinion, the court explained that in the plaintiffs’ brief on appeal, “Plaintiffs summarize their argument as follows: ‘Plaintiffs, facing foreclosure, had entered into a contract for a short sale … [Defendants] … were made aware that Plaintiffs believed the foreclosure was postponed, and proceeded to purchase the property at foreclosure, inducing the contract for short sale to be breached resulting in a higher deficiency, damages, incurred by Plaintiffs.’” As the appellate court noted, “Merely reciting claims or the elements of claims does not suffice in order to withstand a motion to dismiss. A party must allege facts in support of the claims that if taken as true would sustain those claims. Conclusory recitations of the elements of claims are inadequate.” In response, the defendants correctly contended that they had no duty to refrain from purchasing the property at the foreclosure auction.

The appellate court pointed to a June 2014 order in which the trial court explicitly held: “‘Absent such an agreement or contractual obligation, Citi had no legal duty to complete a short sale, or to even discuss the same.’ That order was made final pursuant to Rule 54.02 of the Tennessee Rules of Civil Procedure and has not been appealed. It therefore represents the law of the case ….” Because the plaintiffs did not have a written contract with Citi concerning a short sale, Citi had the right to proceed with foreclosure under the terms of the security instrument and the defendants were free to bid and purchase the subject property. Accordingly, the Court of Appeals affirmed the judgment of the trial court.

From a practical standpoint, requiring mortgagees to provide time for short sales may be overly burdensome, costly, and can result in lengthy delays to foreclose. Often times, mortgagees are amenable in working with mortgagors when it comes to short sales; however, mortgagees frequently require proof of funds and a copy of a signed contract before agreeing to the postponement of a foreclosure sale.

The Alfonso case is not unusual because most standard security instruments are silent as to short sales, which renders the plaintiffs’ claims of breach of contract, fraud, and intentional interference with contract rights to be far-reaching. Similarly, knowledge of short sale discussions or other types of loss mitigation negotiations between the mortgagor and mortgagee should not bar interested parties from bidding and purchasing real property. The Court of Appeals pointed out that the plaintiffs cited no law suggesting otherwise.

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