When a lender forecloses on a parcel of property, it is not
unusual for the property to sell for an amount that is less than the amount
owed. In that instance, the lender often seeks a judgment for the difference or
the deficiency. In Tennessee, a statute directs that the deficiency judgment
shall be the total amount of the debt less the fair market value of the
property at the time of the sale. (Tenn. Code Ann. Section 35-5-118.)
The sale price at the foreclosure is presumed to be the fair
market value absent fraud or irregularity in the sale process. But, the debtor
can overcome that presumption by showing that the sale price is “materially
less” than the fair market value of the property.
In Cutshaw v. Hensley,
No. E2014-01561-COA-R3-CV (Tenn. Ct. App. July 29, 2015), the court of appeals
held that a price at the foreclosure sale that was 78% less than the fair
market value of the property was “materially less.” That conclusion is not
surprising. The court of appeals found that the fair market value was the price
that the lender (who purchased the property at the foreclosure sale) sold the property
49 days later.
Generally, Tennessee courts have held that the purchase
price received after the foreclosure sale is not determinative of fair market value
on the date of sale. In this case, however, the court noted: (a) the absence of
an appraisal, (b) the short period of time that elapsed, and (c) the lender’s
admission that no significant changes to the property were made during the
interim period. These factors made the subsequent sale price relevant and
determinative.
So, when conducting a foreclosure sale, a lender should
obtain an appraisal of the property contemporaneously with the sale if the
lender wishes to obtain a deficiency judgment.
