Judicial Foreclosures and
Deficiency Judgments in
Tennessee:
Recent Developments
Anthony J.
McFarland
Cynthia N. Sellers
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Residential Foreclosure Statistics - U.S.
 1 in every 411 housing units nationwide
received a foreclosure filing in June 2010
Every three months, 250,000 families enter into
foreclosure
One child in every classroom in America is at
risk of losing his/her home because their parents
are unable to pay their mortgage
Sources: U.S. Foreclosure Trends and Foreclosure Market Statistics,
RealtyTrac; Mortgage Bankers Association www.ForeclosureHelpandHope.org;
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Residential Foreclosure Statistics - U.S.
43% of American households spend more than
they earn each year
52% of employees live paycheck to paycheck
Nearly 42% of all American households do not
have enough in liquid financial assets to support
themselves for at least three months
46% of American households have less than
$5,000 in liquid assets, including IRAs
Source: www.ForeclosureHelpandHope.org
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Residential Foreclosure Statistics - TN
1 in every 693 Tennessee housing units received a
foreclosure filing in June 2010
 Tennessee was #11 nationwide in foreclosure activity counts
in June 2010 (3,981)
 Average Tennessee foreclosure sale price: $100,069
 Top Tennessee counties for foreclosure activity:
#1 – Shelby
#2 - Davidson
7 of top 10 Tennessee counties for
foreclosure activity located in Middle Tennessee
Sources: U.S. Foreclosure Trends and Foreclosure Market Statistics, RealtyTrac
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Residential Foreclosure Statistics
Most lenders and investors do not
make money on foreclosures
Losses generally range from
20¢ to 60¢ on the dollar
Lenders typically lose $50,000 or more on one
foreclosure
Source: Craig Focardi, CMB, Research Director, TowerGroup’s consumer lending
division, cited by Dona Dezube, “Heroic Homerownership”, Mortgage Banking , (June
2006)
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Commercial Foreclosure Observations
Federal Reserve Bank’s July 2010 “Beige Book”:
•Commercial real estate markets “remain weak”, and
“continue to struggle in all twelve Districts”. “The
outlook for commercial and industrial real estate
across the Districts ranged from further declines in
activity to slow growth.”
•Atlanta District:
“Vacancy rates were high across the
District and contacts witnessed downward pressure
on rents. The outlook for the rest of the year remained
negative.”
“I have always felt that when the commercial levee
breaks, there will be a cascade of properties that drive
prices to levels that we have not seen in a very long time,
if ever.” -- Chris Toci, executive director , Capital Markets Group, Cushman & Wakefield of
Arizona, Inc.
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Public Chapter 834: Changes to Notice Requirements
 Adds new section to Title 35: § 35-5-117*
Applies only to foreclosure of “owner-occupied residence”
 Must send notice of right to foreclose 60 days prior to first
publication of notice of a foreclosure sale
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Public Chapter 834: Changes to Notice Requirements
Notice can be sent via regular mail and
is effective upon deposit with the Postal
Service
Must be sent to both the principal
debtor and any co-debtor or guarantor (if
address is different)
Must be sent in a separate mailing
Notice must contain certain language,
set out in the statute (Tenn. Code Ann. §
35-5-117 (f)(4))
The fact that the notice has been given
must be set out in the Notice of
Foreclosure and recited in the deed
conveying title after foreclosure.
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Public Chapter 1001: Post Foreclosure
Deficiency Judgments

Adds new section to
Title 35: § 35-5-117*
Applies to commercial and
owner-occupied foreclosures alike
Reaffirms creditor’s right
to a full deficiency judgment
However, judgment equals total indebtedness prior to
sale plus costs of the foreclosure and sale, LESS the “fair
market value” of the property “at the time of the sale”
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Post Foreclosure Deficiency Judgments:
Prior Law
 Absent fraud, irregularities or illegal conduct, most
courts accepted the foreclosure sales price as the
amount of credit to apply towards the debt
 Some courts applied a “grossly inadequate” test
Practically, very difficult for a debtor to undermine
the foreclosure sales price
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Public Chapter 1001: Post Foreclosure
Deficiency Judgments
Rebuttable presumption that
the sales price = FMV at time of
sale
Debtor can overcome
presumption by proving by a
“preponderance of the
evidence” that the property
sold for “materially less” than
the FMV
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Public Chapter 1001: Post Foreclosure
Deficiency Judgments
If the debtor prevails in
challenging the adequacy of the
foreclosure sales price, the
deficiency judgment shall be the
total debt prior to the sale plus
costs of foreclosure and sale less
the FMV at the time of sale as
determined by the court
Generally, an action to enforce
the deficiency judgment must be
brought within two (2) years of the
date of sale (excluding any
bankruptcy petition period)
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Open Issues Under the New Act
Is it even worth seeking a deficiency judgment?
How do you determine “Fair Market Value”?
Will a contemporary appraisal become a
prerequisite to every foreclosure?
Can you include the appraisal cost as a “cost of
the foreclosure and sale”?
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Open Issues Under the New Act (cont’d)
What value should your appraiser provide you
– “fair value”, “liquidation value” or “investment
value”?
Is “fair value” the same as “Fair Market Value”?
Can you provide your appraiser with
assumptions for purposes of arriving at a “fair
value”? What assumptions should you provide?
Is your appraisal discoverable in litigation?
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Open Issues Under the New Act (cont’d)
How does “materially less” than FMV compare to
“grossly inadequate”?
How much is “materially less” than the fair market
value?
•Based on comparison of size of debt, or value (or
sales price?) of property
•Based on a percentage of value, or actual dollars?
•“Material” to whom – lender or debtor?
Can inclusion of the appraisal cost result in a sales
price “materially less” than FMV?
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Real World Example
Commercial property purchased in 2007 for $3,000,000, with an
associated mortgage of $2,850,000 after a $150,000 down payment.
Loan goes in default with a principal balance of $2,500,000.
Foreclosure, appraisal and sale expenses total $10,000.
Property sells at foreclosure for $1,757,000 (70% of principal loan
balance plus expenses).
 Few, if any, sales of comparable properties have occurred in the
past year.
$1,757,000 / $3,000,000 = 58.5% of original purchase price.
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Real World Example
Did the property sell for “materially less”
than FMV or not?
Would your answer change if the debtor
was independently wealthy?
Would your answer change if the lender
were a relatively small community bank rather
than a large national bank?
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IS THERE A WAY OUT?
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Possible Compliance Options - Loan Documents
Have borrower waive the procedure created by
the statute (such waiver may not be enforceable)
Address “Fair Market Value” in loan documents
•Provide that the FMV of the property will be the
sales price at any foreclosure
•Provide that a percentage of the debt will be FMV
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Possible Compliance Options - Loan Documents
Address “materially less” in the loan documents
•Provide that any difference between FMV and the
foreclosure sales price that is less than “X”% is
considered immaterial
Require borrower to deliver documents regarding
net worth, value of all property (including appraisals),
sale/marketing of collateral upon demand (including
those generated on his/her behalf)
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Other Possible Compliance Options
Premium put on workouts
Proceed against guarantors first
Reduce your debt to judgment before foreclosure
Have debtor undertake sale obligations first
Conduct an auction foreclosure
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Conclusion
Ultimately, the new notice provisions are a trap
for the unwary and careless, not for the
knowledgeable and attentive.
The new post-foreclosure deficiency judgment
provisions, however, are a potential nightmare for
loan underwriters, an opportunity for workout
specialists, and a source of new business for the
plaintiff’s bar.
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