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Tennessee: Nonjudicial Foreclosure is NOT Barred by Compulsory Counterclaim Rules

Posted By USFN, Tuesday, September 12, 2017
Updated: Tuesday, August 29, 2017

September 12, 2017 and November 6, 2017


by Jerry Morgan

Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

This article appeared in the USFN e-Update (Sept. 2017 ed.) and is reprinted here for those readers who missed it.

In Threadgill v. Wells Fargo Bank, N.A., No. E2016-02339-COA-R3-CV (Aug. 1, 2017), the Tennessee Court of Appeals has confirmed that a lender does not lose its rights to conduct a nonjudicial foreclosure if it declines to file a foreclosure action as a compulsory counterclaim.

Borrower’s Lawsuit #1
In a 2011 case, a pro se borrower brought an action against Wells Fargo in order to stop a foreclosure of the property. The borrower filed the action in his capacity as trustee of the trust that owned the property. The borrower alleged breach of contract, misrepresentations, and violations of the Tennessee Consumer Protection Act, the Home Loan Protection Act, and the federal Truth in Lending Act. The circuit court granted summary judgment in favor of Wells Fargo, ruling that Wells Fargo had complied with the deed of trust, as well as the foreclosure statutes, and had committed no deceptive or unfair act.

The borrower appealed, and the Court of Appeals determined that it lacked jurisdiction, holding that a non-attorney trustee may not represent a purportedly pro se trust and, therefore, the notice of appeal signed by the non-attorney trustee was insufficient to initiate an appeal. [ELM Children’s Educational Trust v. Wells Fargo Bank, N.A., 468 S.W.3d 529 (Tenn. Ct. App. 2014).] The Tennessee Supreme Court denied permission to appeal.

Borrower’s Lawsuit #2
Two weeks after the Supreme Court’s denial, the borrower filed a new pro se action, this time in his individual capacity, alleging virtually the same claims against Wells Fargo. In his amended complaint, he asserted that if res judicata barred his second complaint, then the court must also find (by declaratory judgment) that any note or debt that Wells Fargo sought to enforce by foreclosure or otherwise is null, void, and unenforceable pursuant to Tenn. R. Civ. P. 13.01, which sets forth Tennessee’s compulsory counterclaims procedure.

The trial court disagreed. The court held that the parties and the issues alleged by the borrower were the same, meaning the borrower’s new claims were barred by res judicata. However, the trial court further held that a nonjudicial foreclosure is, by definition, nonjudicial, and therefore is not required to be raised in the lower court as a counterclaim.

Appellate Court’s Review
On appeal, the borrower interestingly conceded that res judicata barred his claims. Nonetheless, he contended that Wells Fargo, in response to the first lawsuit, was required by Rule 13.01 to bring a foreclosure action as a compulsory counterclaim. The Court of Appeals agreed with the trial court that such a compulsory counterclaim was not required.

The Court of Appeals noted that Rule 13.01 requires a party to state as a counterclaim “any claim, other than a tort claim, which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim …” As the appellate court recognized, the purpose of the second lawsuit “is to persuade the trial court to declare that the note and deed of trust are invalid under [Rule 13.01].”

The Court of Appeals observed that the Tennessee “legislature has determined that the public policy of the state is to allow foreclosures through non-judicial sale [citing CitiMortgage, Inc. v. Drake, 410 S.W.3d 797, 808 (Tenn. Ct. App. 2013)]” and further remarked that nonjudicial foreclosure was the “almost exclusive means of foreclosure in the [s]tate,” [citing Dickerson v. Regions Bank, No. M2012-01415-COA-R3-CV (Tenn. Ct. App. 2014)]. As a result, so long as the lender complies with the applicable statutes and the terms of the deed of trust, it does not have to resort to a judicial forum to foreclose.

The court next recognized that no Tennessee appellate court had yet addressed the precise issue of whether a nonjudicial foreclosure must be brought as a compulsory counterclaim. However, the Court of Appeals found that numerous jurisdictions had addressed the situation and had decided that similar rules of procedure regarding compulsory counterclaims do not bar subsequent nonjudicial, or power of sale, foreclosure proceedings.

The Court of Appeals agreed with the reasoning of these other jurisdictions and held that, in Tennessee, the compulsory counterclaim rule does not prohibit a lender from pursuing a subsequent nonjudicial foreclosure. The court noted that “to hold otherwise would be to allow a defaulting borrower to force a lender into court, and severely curtail if not eliminate its ability to pursue non-judicial foreclosure as otherwise permitted by Tennessee law.”

While not expressly addressed in this case, it is certainly arguable that allowing a borrower to compel a lender to forego its remedy of nonjudicial foreclosure (through the compulsory counterclaim rules) would be to unilaterally alter the terms of the deed of trust, which specifically permit nonjudicial foreclosures. At any rate, the Threadgill decision confirms that a lender’s ability to pursue a subsequent nonjudicial foreclosure in Tennessee is not defeated by compulsory counterclaim rules.

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September e-Update and Autumn USFN Report

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