- Property Value at Time of Sale Determines Adequacy of Bid at Foreclosure Sale
- Court Respects Cross-Default Provision to Support Lender
- Court May Confiscate Passports of Debtors Believed to be Flight Risks
- Tip of the Month: Revised Foreclosure Legislation in DC Satisfied Title Industry Concerns
Property Value at Time of Sale Determines Adequacy of Bid at Foreclosure Sale
A Tennessee court recently decided that a court should look at the value of a property at the time of a foreclosure sale to determine whether a lender’s bid at a foreclosure sale is grossly inadequate.
Fifth Third Bank made a $600,000 construction loan to Dial Properties, LLC. The loan was evidenced by a promissory note secured by a deed of trust to real property in Tennessee, and further secured by the guaranties of three individuals. On the date of the note’s maturity, both Dial Properties and the guarantors (collectively “Dial”) failed to pay Fifth Third despite the bank’s demand. On August 3, 2009, the real property securing the loan was foreclosed and Fifth Third’s credit bid of $500,000 was the winning bid at the subsequent foreclosure sale. Fifth Third presented evidence indicating the amount of total remaining indebtedness (the deficiency plus accrued interest) was $177,573.85, and sought judgment in its favor against Dial Properties and the guarantors in an amount reflecting the deficiency, interest, reasonable collections costs and court costs.
The main issue in the lawsuit was the amount owed to Fifth Third. Dial submitted an appraisal from May 2009 valuing the property at $625,000. Dial also submitted a document labeled 2009 Form 1099-A, which listed Fifth Third as a lender, indicating that the fair market value of the property was $625,000. Based largely on this evidence of the property’s value, Dial argued that Fifth Third’s bid at the foreclosure sale provided the bank an impermissible windfall because it was “grossly inadequate” and “substantially less than the known value of the property.” The court noted that under Tennessee law “without a claim of irregularity of some sort, the value of property at a foreclosure sale will not be looked into and will be presumed to reflect the property’s fair market value; a defendant, however, may take up the burden of overcoming this presumption by claiming gross inadequacy.” Fifth Third argued that Dial had not met its burden of proof because an appraisal showing a higher value than what Fifth Third paid for the property at a foreclosure sale was not sufficient evidence of gross inadequacy.
The court agreed with Fifth Third. Citing relevant Tennessee law, the court noted that “only the value of a property at the time of the foreclosure sale is relevant to whether a lender’s bid is grossly inadequate.” In this case, the only appraisal cited was completed more than two months prior to the foreclosure sale. Given that the appraisal was completed in May and the foreclosure sale occurred in August, the court questioned whether Dial had in fact offered evidence of the property’s value at the time of the sale. In addition, the court noted that Tennessee law recognizes that the price a property fetches at a forced sale is only 50% of the property’s true value. In this case, Fifth Third’s bid was 80% of the appraisal value – further evidence that the possible higher value provided in the appraisal was not conclusive evidence that Fifth Third’s bid was grossly inadequate.
This case is cited as Fifth Third Bank v. Dial Properties, LLC, et al., No. 3:09-cv-01202 (M.D. Tenn. 02/10/11).
Court Respects Cross-Default Provision to Support Lender
An Indiana court recently rejected a borrower’s claim that its lender was in default under a loan agreement when it refused to extend the maturity date of the loan. The borrower argued that its debt service coverage ratio justified the loan extension under the terms of the loan agreement. Without having to decide whether it agreed with the borrower’s calculations, the court relied on an ill-advised admission of the borrower to support the lender’s position that the terms of loan agreement justified its refusal to extend the maturity date, which meant that all related projects funded under the loan agreement were in default.
Multiple lenders made loans totaling $50 million to individual project entities of Broadbent Development, one of which was Fleming Island Shoppes. Fleming Island intended to develop a retail project involving the acquisition of land, construction of a retail center and development of six outlots. Four notes evidenced the constituent project loans to Fleming Island. The loan agreement for the Fleming Island project also incorporated the terms of the Master Loan Agreement governing the multiple projects. A significant provision of the loan agreement was that the borrower would be allowed to extend the majority date beyond the original 36-month term for an additional 60 months “so long as no event of default has occurred or such project has a debt service coverage ratio of not less than 1.20 to 1.00.” The loan agreement also contained a cross default provision whereby a default under one project loan would create a default under the other project loans.
A month before the original loan maturity date, Fleming Island sought an extension based on its calculation of a debt service coverage ratio of precisely 1.20/1. The lender refused based on its assessment that the borrower had excluded the debt service of the outlot loan from the equation’s denominator, and had overstated the project’s revenues, thereby falsely overstating the requisite ratio. Because the lender refused to extend the maturity date, the loans relating to the Fleming Island project all fell into default and the lender sought to collect on Mr. Broadbent’s personal guaranty. The parties then sought judgment of their respective rights from the court.
The borrower argued that the outlot debt service should not be included in the ratio because the outlot loan was different in nature from the others. In order to bolster its argument that this loan be excluded in the calculation, however, it asserted that it erred in originally requesting an extension of the outlot loan because it did not have a right to extend it under the loan agreement. The court seized on that admission to conclude that the debt service ratio calculation was irrelevant. Without a formal extension of the outlot loan, and considering the borrower’s statement that it was not entitled to an extension of that loan in the first place, the outlot loan was inarguably in default. That being the case, the cross default provisions of the loan agreement meant that the other three project-related loans were automatically in default, thereby eliminating the basis for an extension. In this case, the court relied on the borrower’s ill-considered admission, together with the plain language of the loan agreement, to enter judgment for the lender.
This case is cited as Fleming Island Shoppes, LP, et al. v. the Huntington National Bank, et al (S.D. Ind. 02/01/11).
Court May Confiscate Passports of Debtors Believed to be Flight Risks
The 7th U.S. Circuit Court of Appeals recently ruled that federal courts may confiscate the passport of a debtor who is believed to be a flight risk.
Bank of America won a $39 million judgment against Pethinaidu and Paramewari Veluchamys after they defaulted on $39 million in debts owed to Bank of America. After the judgment was ordered, Bank of America quickly sought to locate the Veluchamy’s assets, and a federal judge ordered the couple to turn over financial records showing their assets.
The Veluchamys delayed their response to the judge’s order for three months, asserting protection under the Fifth Amendment. The judge rejected their defense and ordered them to comply with the citations.
The court soon discovered that the Veluchamys had transferred about $20 million of their assets to India. The couple had also diluted or transferred ownership of their non-moveable U.S. assets.
Bank of America requested an emergency order compelling the Veluchamys to produce the funds that they had transferred overseas. The court obliged and also ordered the couple to relinquish their passports until the assets were reclaimed.
The Veluchamys appealed, claiming that a judgment-debtor's passport can be seized only if the court finds the judgment-debtors in contempt and where the record establishes a demonstrated history of flight. However, the 7th Circuit affirmed the sanction, finding it within the court's "broadly construed" authority to ensure that assets are located, seized and applied to a judgment, noting: “We think the power to order a party to produce funds includes the power to exercise some minimal control over the party subject to that order--but only when doing so is necessary to protect the court’s ability to enforce the underlying order and prevent the loss of assets.”
The court further clarified that the power to seize a judgment-debtor’s passport would only apply in appropriate circumstances: "In the lion's share of cases, the debtor will not have moved assets to a locale beyond the court's jurisdiction, and thus the court's other powers--especially its power to order the holding financial institution itself to freeze the assets--will be enough to safeguard the court's ability to enforce a production order.”
The case is cited as Bank of America, N.A. v. Veluchamy, No. 11-1704 & 11-705 (7th Cir. 06/16/11).
Tip of the Month: Revised Foreclosure Legislation in DC Satisfies Title Industry Concerns
Regulations issued on May 25, 2011 regarding the "Saving D.C. Homes from Foreclosure Emergency Amendment Act of 2010" affected the ability to obtain title insurance on foreclosed properties. Many title insurance underwriters announced that due to concerns regarding insurability of title under the law and the regulations, they would not insure foreclosure sales or subsequent sales of residential properties foreclosed upon after the effective date of the Act. Fortunately, the D.C. Council enacted emergency and temporary legislation to address the concerns of the title industry.
Specifically, the Act was amended to provide that a mediation certificate, once issued, “shall serve as conclusive evidence that all other provisions of the Act and implementing regulations have been complied with and can be relied upon by a bona fide purchaser and a bona fide purchaser’s lender or assigns”. This means, that, so long as a mediation certificate is filed in the case of a residential property, title insurers will insure the transaction (so long as all of the other formalities of foreclosure sale are complied with to the satisfaction of the title underwriter).
In connection with the amendment, the definition of “residential property” was broadened to include all one to four family residential dwellings, regardless of whether the dwelling is owner occupied. In addition, even though the recordation of the mediation certificate serves as conclusive evidence of compliance with the Act regarding bona fide purchasers, the borrower retains the right to assert a claim of fraud or monetary damages against the borrower’s lender.
While this legislation is temporary, the D.C. Council probably will introduce permanent legislation in the fall.
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