The ability to recover the full amount of a loan deficiency after foreclosure requires careful attention by lenders. The Tennessee Court of Appeals, in Greenbank v. Sterling Ventures, LLC, (Dec. 7, 2012), recently interpreted Tennessee's statute, adopted in 2010, governing deficiency judgments following a foreclosure sale. The statute provides borrowers a greater chance of minimizing the deficiency judgment than the prior law. The statute directs courts to use the foreclosure sale price in its deficiency determination, unless the borrower proves that the property sold for "materially less" than the property’s actual "fair market value." Prior to the 2010 amendment, borrowers had to prove that the sale price was "grossly inadequate" compared to the fair market value. If a borrower is successful, the court decides the fair market value to credit the indebtedness.

The Court decided there was no intent of the legislature to abandon the presumption that the sale price represents fair market value. Although the new statute is "more consumer friendly," the standard continues to require "a pretty substantial difference" between the foreclosure price and the fair market value. Additionally, "fair market value" under the statute was intended to reflect the property’s condition on the sale date and the context of the sale. Thus, the type of appraisal and the conditions and terms of the sale are critical to the fair market value determination.

To maximize deficiency judgments and minimize legal proceedings: (a) appraisals should reflect liquidation value as of the date of foreclosure; (b) a lender should maintain a record of pre-foreclosure information relevant to the property’s value, including any efforts to sell or market the property; and (c) a foreclosure/auction sale should be considered for certain properties. In planning its course of action, the terms of the appraisals should be carefully considered, as well as any additional variables that could affect the fair market value.