Lost Mountain Development Co. v. Rufus, No. M2004-02663-COA-R3-CV (Tenn. App. 12/19/2006), M2004-02663-COA-R3-CV.
| Decision Date | 19 December 2006 |
| Docket Number | No. M2004-02663-COA-R3-CV.,M2004-02663-COA-R3-CV. |
| Parties | LOST MOUNTAIN DEVELOPMENT CO. v. RUFUS KING v. MATTHEW B. KEZAR, ET AL. |
| Court | Tennessee Court of Appeals |
Appeal from the Chancery Court for Franklin County; No. 16,818; Jeffrey F. Stewart, Chancellor.
Judgment of the Chancery Court Reversed.
John C. Cavett, Jr., Chattanooga, Tennessee, for the appellant, Bemis Smith
Brad A. Lampley, Nashville, Tennessee; Peter J. Mackey, Bradenton, Florida, for the appellees, William Manful, et al.
William B. Cain, J., filed a concurring opinion.
OPINION
This case involves a creditor's entitlement to a deficiency judgment after a foreclosure sale in which the creditor was the only bidder, and in which he paid considerably less for the large tract of mountaintop property than the debtor alleged it was worth. The trial court awarded the creditor's successor-in-interest a deficiency judgment of over $4 million, holding that in accordance with the rule of Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984), the debtor should not be permitted to challenge the legal presumption that the value of the property at the time of foreclosure was equal to the sale price because there was no evidence of "irregularity, misconduct, fraud or unfairness on the part of the mortgagee." Since the Holt case did not involve a deficiency judgment, we believe it is inapplicable. After examining both the law of Tennessee and that of other jurisdictions, we conclude that the trial court should have permitted the defendant to challenge the presumption by attempting to prove that the sale price was grossly inadequate. We accordingly reverse.
On March 6, 2000, Rufus King sold a 4,650 acre tract of mountaintop land in Franklin County, Tennessee, to Lost Mountain Development Company, a group of Florida investors organized as a Tennessee general partnership. The purchase price was $4,600,000. The Lost Mountain partners planned to divide a portion of the property into five and ten acre lots, and sell the lots as part of a private gated community. They hoped that the beauty of the property's hardwood forests and its proximity to state parks, golf courses, the University of the South, and other attractions would make their venture successful.
The partnership paid Mr. King $150,000 at closing and gave him a promissory note for the balance. The note carried an interest rate of 8% and was to be paid off in 29 monthly installments. It was secured by a deed of trust on the property. Four Lost Mountain partners, Matthew Kezar, Ken McKeithen, Mark Ogles and Bemis Smith also executed personal guaranties on the note.
Unfortunately for the partnership, it was unable to pay the scheduled installments. After it missed five payments, Mr. King began foreclosure proceedings. The parties then renegotiated the terms of the loan, and Mr. King cancelled his foreclosure efforts. The partnership paid $800,000 in cash under an amended agreement to catch up with back interest, with the remainder to be applied to the principal.
In order to obtain the cash for the refinancing, the partners had borrowed $500,000 from another Florida investor, William Manfull. Aside from the four original partners of Lost Mountain Development Company, four additional individuals signed the amended agreement on behalf of Lost Mountain Development Company, including Mr. Manfull.1
The new payment schedule included interest-only monthly installment payments of about $25,000, and a single balloon payment of $3,838,593 due on May 1, 2001. The Lost Mountain partnership apparently managed to make the monthly payments, but was unable to make the balloon payment. The default again left Lost Mountain's property interest subject to possible foreclosure.
On October 11, 2001, Lost Mountain filed a complaint against Rufus King in the Chancery Court of Franklin County. The complaint, which Mr. King characterized as a preemptive strike, alleged fraud, negligent misrepresentation and breach of contract on his part, and asked the court to enjoin foreclosure. Although foreclosure was enjoined for a time, the injunction was eventually dissolved.
Rufus King responded to the complaint on October 31, 2001 with an answer, a counter-complaint against Lost Mountain, and a third party complaint against the eight individuals who had signed the amended agreement. Lost Mountain subsequently filed for bankruptcy protection under Chapter 11, after which Mr. King filed a motion for partial summary judgment against the four signatories to the original agreement on their personal guaranties and against the eight signatories to the amended agreement on their third party liability. He argued that the automatic stay in bankruptcy did not prevent him from pursuing individual partners who remained jointly and severally liable under Tennessee law.
The parties managed to resolve some of their differences, resulting in dismissal of the Chapter 11 proceeding and dismissal with prejudice of Lost Mountain's claims against Mr. King. The injunction against foreclosure was dissolved, and Mr. King was the only bidder in the May 30, 2003 foreclosure sale on the courthouse steps. He bid $1.1 million for the property, and he then filed a motion for summary judgment in Chancery Court asking for a deficiency judgment in the amount of approximately $ 4 million.
Prior to the hearing of the summary judgment motion, William Manfull purchased the property in question from Mr. King (with the exception of several hundred acres, which Mr. King retained) as well as Mr. King's deficiency claim, paying a total of $2,975,000. Mr. Manfull then moved the court to be substituted for Mr. King as counter plaintiff/third party plaintiff, based on the assignment of Mr. King's rights. The trial court granted his motion.
Mr. Manfull reached settlements with six of the third party defendants prior to hearing, and he released them from liability. He then proceeded against Bemis Smith, the sole remaining individual defendant. The hearing on the summary judgment motion was conducted on May 13, 2004. In its final order of summary judgment, the court found that Mr. Smith "has not presented evidence of `irregularity, misconduct, fraud or unfairness on the part of the mortgagee' to overcome the legal presumption that the value of the property at the time of foreclosure is equal to the sale price." The court accordingly awarded Mr. Manfull a judgment against Bemis Smith in the amount of $4,426,135.2 This appeal followed.
For the purposes of this appeal, there is no dispute as to the facts material to the summary judgment issue. We are called upon to determine a question of law: whether the court may deny or reduce a deficiency judgment to a lender who buys property at a foreclosure sale solely on the basis of inadequacy of price, if no fraud, collusion, irregularity or unfairness is proven in regard to the conduct of the sale.3 Mr. Smith does not allege that there was any irregularity in the foreclosure sale itself, but he contends that the court can and should deny a deficiency judgment in situations where to grant such a judgment would result in a windfall for the lender and be highly inequitable to a borrower.
Mr. Smith argues that the Lost Mountain property was worth far more than the $1,100,000 that Mr. King paid for it at foreclosure. He points to a detailed appraisal report that valued the land at $4,000,000. That appraisal does not include the value of minerals or other resources on the land, upon which an independent mineral appraisal placed a minimum value of $9,000,000, "based on probable mineral and stone reserves."4 Mr. Smith notes that Mr. Manfull put the land up for auction, and published an advertisement for the property which stated "timber study shows over $2,000,000 in timber." Further, Mr. King signed a sworn statement as a creditor in Lost Mountain's bankruptcy proceeding that his collateral was worth $4,180,000.
The trial court relied on the case of Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984) in reaching its judgment, and both parties agree that the Holt case must be considered in any discussion of their respective legal rights. In that case, Hoyte Holt defaulted on a note held by the defendant bank, which was secured by a deed of trust on a Murfreesboro property. The bank foreclosed on the property, and it was sold to a bona fide purchaser for $8,600, which was apparently just about enough to extinguish the debt. The purchaser sold the property ten days later for $ 30,000. There was no evidence of fraud or collusion between the bank and either purchaser.
Mr. Holt filed suit to set aside the foreclosure sale on the ground of inadequacy of price. The trial court refused to set aside the sale. This court reversed, relying on established precedent that required a court of equity to set aside a foreclosure sale where the price is so inadequate as to shock the conscience of the court.
The Tennessee Supreme Court granted permission to appeal and ruled that the "conscience-shocking" rule was impractical and should be abandoned. The court reasoned that the standard for what might shock the conscience of the court was so vague in theory and variable in practice that under that rule no buyer or seller could feel comfortable with title to real estate acquired at a foreclosure sale if the sale brought less than the appraised value of the property. Id., 688 S.W.2d at 416. The court accordingly announced a new rule as follows: "If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or mortgagee that caused or contributed to an inadequate...
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