When Is A Foreclosure Sale Of Real Property Final In Tennessee?

The finality of a foreclosure sale of real property often times becomes the threshold issue brought before a Bankruptcy Court upon the filing of a Chapter 13 case. Was the real property “property of the estate” under 11 U.S.C. § 541(a) at the time of the filing of the Chapter 13 case; therefore, allowing the Debtor to cure the prepetition default pursuant to 11 U.S.C. § 1322(b)(5) and resume the continuing monthly payments to the lender; or, was the foreclosure sale finalized prior to the filing and the Debtor divested of all ownership interest?

The mere “fall of the auctioneer’s hammer” at a non-judicial foreclosure sale is not a final sale under Tennessee Law.   Under Tennessee law, there are two prerequisites for finalizing a non-judicial sale. The first prerequisite is satisfaction of the statute of frauds and the second is exchange of consideration. In Re Johnson, 215 B.R. 988 (Bankr. W.D. Tenn. 1997).

“It has been well established and settled for many years in Tennessee that the statute of frauds must be satisfied before a foreclosure sale is deemed final and a binding contract exists.” In re Williams, 247 B.R. 449 (Bankr. E.D. Tenn. 2000) To satisfy the statute of frauds, as necessary under Tennessee Code Annotated § 29-2-101(a)(4), there must be a writing which evidences “an existing and binding contract.”   Black v. Black, 202 S.W. 2d 659 (Tenn. 1947) The written memorandum must contain the essential terms of the contract, expressed with such certainty that they may be understood from the terms of the memorandum itself, without need for further verbal explanation.  In Blair v. Brownson, 197 S.W.3d 681 (Tenn. 2006), the Court found that a Trustee’s Deed constituted a memorandum expressed with sufficient certainty to satisfy the statute of frauds requirement. The Trustee’s Deed need not be recorded, but prepared in a recordable form and executed before the statute may be determined to be satisfied. In the Tennessee real estate context, the reference to a memorandum “signed by the party to be charged” had been interpreted to mean signed by “the owner of the realty, rather than the party attempted to be charged or held liable.” Tennessee is only one of two states in which the Courts have clarified this language as requiring only the seller’s signature as necessary for a valid contract to sell land.  
The second essential provision which must be satisfied for the non-judicial foreclosure sale to be final and enforceable is the exchange of consideration. In most circumstances this is simply the exchange of a Trustee’s Deed to the real property for the purchase price bid at the foreclosure sale.  However, courts have held that a credit bid at the foreclosure sale is consideration and adequate to satisfy the requirement of “exchange of consideration.” In Re Johnson, supra.

When both conditions set forth above are met, the foreclosure sale is valid and enforceable; and, the real property shall not become property of the estate under 11 U.S.C. § 541(a). However, the automatic stay of 11 U.S.C § 362(a) remains in effect and the lender must obtain stay relief to proceed under the law to obtain possession of the real property from the Debtor.