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Tennessee's Foreclosure Process
by W. Scott Rose
Foreclosing on a deed of trust requires compliance not only with the terms of the deed of trust but with certain specific requirements of Tennessee and federal law. Failure to comply fully with the deed of trust and applicable law can lead to litigation, an unextinguished lien, or an unanticipated redemption of the property after foreclosure. Failure to comply with the terms of the deed of trust can also cause the foreclosure sale to be set aside, and failure to comply with the statutory requirements makes the trustee guilty of a Class C misdemeanor and civilly liable for any damages, see Tenn. Code Ann. § 35-5-107. So, what are the steps to avoid these dire consequences?
As deeds of trust often modify or add to the statutory requirements, the foreclosure process should always begin with a review of the deed of trust. As a practical matter, the reviewing attorney will often first read the deed of trust in order provide notice of default and acceleration. The language of the deed of trust determines whether such notice is required, the manner of such notice, and the timing of such notice. After the cure period has passed, the lienholder is ready to initiate foreclosure proceedings.
Unless the original trustee will be conducting the foreclosure, the lienholder will appoint a substitute trustee. This is accomplished by recording a Notice of Appointment of Substitute Trustee at the Register of Deeds Office. Naturally, the deed of trust should be consulted for any special procedures regarding the appointment of a substitute trustee.
The trustee (or substitute trustee) should then obtain a title search at least 25 days, but no more than 30 days, before the sale. The purposes of the title search are (1) to verify the lienholder's priority position, (2) to determine whether any state or federal tax liens exist, and (3) to compile a service list of parties with an interest in the property. Conducting the title search after the appointment of the substitute trustee also provides confirmation that the Notice of Appointment of Substitute Trustee appears in the chain of title.
The 25-30-day window for the title search is the product of nearly identical state and federal statutes concerning tax liens. For a foreclosure sale to extinguish tax liens, the state and federal statutes require the foreclosing party to provide notice to the taxing authority for any tax lien recorded more than 30 days before the foreclosure sale. See Tenn. Code Ann. § 67-1-1433(b)(1); 26 U.S.C. § 7425(b)(1). Notice must be sent by registered or certified mail or by personal service to the Tennessee Commissioner of the Department of Revenue or the United States Secretary of the Treasury at least 25 days before the sale. Tenn. Code Ann. § 67-1-1433(b)(2); 26 U.S.C. § 7425(c)(1) (state and federal regulations include additional requirements, see Tenn. Comp. R. & Regs. § 1320-2-1-.35; 26 C.F.R. § 400.4-1; IRS Pub. 786). Accordingly, it is important that the foreclosing party time its title search to occur 25 to 30 days before the foreclosure sale and then, if there is a tax lien, immediately send notice to the taxing authority.
When the trustee or substitute trustee sends notice to the taxing authorities (or determines that notice to the taxing authorities is not required because there are no tax liens), the trustee or substitute trustee should simultaneously send notice to all lienholders and any other person who has an interest in the property. Actually, there is no statutory requirement that the foreclosing party send the foreclosure notice to lienholders. The statutes require only that the foreclosing party send notice to the debtor and any co-debtor by registered or certified mail return receipt requested, to the mailing address of the property and the last known address of the debtor and co-debtor, on or before the first date of publication. See Tenn. Code Ann. § 35-5-101(e). However, the Due Process Clause of the United States Constitution may require service to the other lienholders. See Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983) (holding that a senior lien holder, as a matter of due process, has a constitutional right to personal or mailed notice of a tax sale). Accordingly, sound practice is to send notice to the debtor(s), co-debtor(s), guarantor(s), and all lienholders at the same time notice is sent to the taxing authorities.
The statutes contain requirements about the contents of the notice. see Tenn. Code Ann. § 35-5-104. To summarize, the foreclosing party must (1) give the names of the parties interested, (2) describe the land in brief terms, including the street address if available, (3) mention the time and place of sale, and (4) identify tax liens. See Tenn. Code Ann. § 35-5-104(a). "Parties interested" include "the record holders of any mortgage, deed of trust, or other lien which will be extinguished or adversely affected by the sale." Tenn. Code Ann. § 35-5-104(d). The identification of the tax liens should affirmatively state that the required notice to the taxing authority has been given and that the property sold will be subject to the taxing authority's right of redemption. See Tenn. Code Ann. § 35-5-104(a)(4)-(9).
The foreclosure notice must run in the newspaper published in the county where the sale is to be made at least three times before the day of the sale. Tenn. Code Ann. § 35-5-101(b). The first notice must run at least 20 days before the sale. Id. Because notice to the debtor(s) and co-debtor(s) must be sent on or before the first date of publication, see Tenn. Code Ann. § 35-5-101(e), the best practice is for all notices to be mailed before the first publication. The paper should be one of general circulation in the county.
The foreclosure sale must occur between 10:00 a.m. and 4:00 p.m. Tenn. Code Ann. § 35-5-109. Since the sale will not close on the courthouse steps at the conclusion of the auction, it is good practice for the trustee to have the successful bidder sign a simple contract for the sale of real estate. The trustee should also make a written report of the sale and keep it on file. After closing, the trustee should record a trustee's deed in the Register of Deeds Office.
For 120 days after the sale, the United States and the State of Tennessee may redeem the property if the property was subject to a federal or state tax lien. 26 U.S.C. § 7425(d)(1); Tenn. Code Ann. § 67-1-1433(c)(1). The United States and State of Tennessee's redemption price is the amount paid by the purchaser at the foreclosure sale plus interest on the amount paid at 6% from the date of the sale, and the United States must also pay expenses. See 28 U.S.C. § 2410(d); Tenn. Code Ann. § 67-1-1433(c)(2). The mortgagor and any junior lienholders may exercise a right of redemption for up to two years after the sale. Tenn. Code Ann. § 66-8-101 et seq. However, the mortgagor and junior lienholders' right of redemption, unlike the taxing authorities' right of redemption, can be (and almost always is) waived in the deed of trust. |
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