The Tennessee Appellate Court in FirstBank v. Horizon Capital Partners, LLC, et al., No. E2013-00686-COA-R3-CV (Tenn. Ct. App. Feb. 3, 2014), confirmed that a borrower, in attempting to avoid liability for a post-foreclosure deficiency owed under the foreclosed deed of trust, has a high evidentiary threshold to overcome the rebuttable prima facie presumption that the sale price obtained through foreclosure is equal to the fair market value of the property at the time of the sale.
T.C.A. § 35-5-118, entitled “Deficiency judgment sufficient to fully satisfy indebtedness on real property after trustee’s or foreclosure sale,” is part of Tennessee’s non-judicial foreclosure statutory scheme. Section 35-5-118(a) provides that, in an action brought by a creditor to recover a balance still owing on an indebtedness after a trustee’s or foreclosure sale of real property secured by a deed of trust or mortgage, the creditor shall be entitled to a deficiency judgment in an amount sufficient to satisfy fully the indebtedness.
Absent a showing of fraud, collusion, misconduct, or irregularity in the sale process, the deficiency judgment shall be for 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. The creditor shall be entitled to a rebuttable prima facie presumption that the sale price of the property is equal to the fair market value of the property at the time of the sale. See Section 35-5-118(b).
To overcome the prima facie presumption, the debtor must prove by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of property at the time of the foreclosure sale. See Section 35-5-118(c).
In the FirstBank case, FirstBank held a foreclosure sale on three separate notes, secured by three separate parcels of property, one of the parcels developed with a home, and the other two remaining undeveloped. Following the foreclosure sale, and subsequent sale of each of the three lots, a deficiency remained owing to FirstBank. FirstBank filed a complaint seeking a deficiency judgment; the defendants arguing that the amount sought in deficiency should be reduced, asserting that the sale price obtained was materially less that the fair market value of the properties at the time of the foreclosure sale.
Following FirstBank’s motion for summary judgment and argument by the parties, the trial court found that the defendants failed to establish that the sale price of the property was materially less than the fair market value at the time of the foreclosure sale. The value of the property sold at a foreclosure sale is not looked to in a deficiency case unless there is a charge of fraud in the manner of sale or a charge that it was grossly inadequate.
The Appellate Court upheld the trial court’s ruling, determining that the issue in deficiency actions is the fair market value of the property at the time it is sold. The Court refused to presume that an appraisal price equaled the fair market value of the property at the time of the foreclosure sale.
The Court in FirstBank held that the defendants, not FirstBank, were tasked with establishing that the property sold for materially less than the fair market value at the time of the foreclosure sale, citing Duke v. Daniels, 660 S.W.2d 793, 794 (Tenn. Ct. App. 1983) (where foreclosure sale is properly held, the sale price is conclusively presumed to be the value of the property sold; unless, the sale price is so grossly inadequate to shock the conscience of the Court).
Gross inadequacy is merely a method by which one attempts to prove fraud with the aid of a presumption. Without there being at least a charge of fraud in the pleadings it would be inadmissible as the required claim or defense (as the case may be) of fraud must be pleaded and must be pleaded with specificity, not generally. Duke, supra, at 795.
The Appellate Court’s opinion in FirstBank continues the high burden placed on defendants in opposing deficiency judgment cases. The Court reaffirmed that there is no bright-line percentage, above or below which the statutory presumption is rebutted. Instead, a court determining a deficiency judgment dispute considers the percentage difference, the condition of the property, and any other factors that may provide information concerning the marketability of the property.
A foreclosure sale price will only be deemed materially less when the difference in price is significant. See GreenBank v. Sterling Ventures, LLC, No. M2012-01312-COA-R3-CV (Tenn. Ct. App. Dec. 7, 2012), cited with approval by the Appellate Court in FirstBank. “The term “materially less” still represents a pretty substantial difference. It’s a very difficult burden for a debtor to overcome. The debtor has to show a strong difference, a material difference.” Id. (The determination of materially less regarding a foreclosure sale price is to be made on a case-by-case basis under the particular facts presented. Courts cannot establish a bright-line percentage, above or below which the statutory presumption is rebutted).
A defendant’s claim as to the fair market value at the time of the foreclosure must be corroborated, and there must be evidence regarding the development and the economic climate in the surrounding area. Mere assertions will not suffice. The FirstBank decision continues the defendant’s burden to overcome with admissible evidence the validity of the foreclosure sale price by establishing a material difference in the price obtained compared to the fair market value.
The Court in FirstBank also upheld the right of the party seeking deficiency to an award of attorneys’ fees, finding that an award of attorneys’ fees, where expressly contemplated in the loan documents, complies with the American Rule that a party is entitled to attorneys’ fees if provided by statute or agreement.