Tennessee Reports


(Tenn.App. 12-19-2006) LOST MOUNTAIN DEVELOPMENT CO. v.
M2004-02663-COA-R3-CV. Court of Appeals of Tennessee, at
Nashville. February 22, 2006 Session. Filed on December
19, 2006.

[EDITOR’S NOTE: This case is unpublished as indicated by the
issuing court.] 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

PATRICIA J. COTTRELL, J., delivered the opinion of the
court, in which WILLIAM C. KOCH, JR., P.J., M.S., joined.
WILLIAM B. CAIN, J., filed a concurring 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.

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

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.[fn2] 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.[fn3] 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.”[fn4] 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
price for a court of equity to set aside the sale.” Id.
(emphasis added).

Mr. Smith points out that the Holt v. Citizens Central Bank
holding did not deal directly with the propriety of a
deficiency judgment after a sale at foreclosure, but only
with what might be required to set the sale aside. He
accordingly contends that it should not be construed as
controlling authority for this case. He also argues that
where the original owner purchases the property at
foreclosure for a fraction of its actual value and is made
whole by the purchase, the court should not grant him an
unconscionable windfall by ordering the debtor to pay him a
deficiency judgment.

Mr. Manfull argues to the contrary that Mr. Smith’s
argument has been foreclosed by this court’s opinion in
McDill Columbus Corp. v. the Lakes Corporation, No.
03A01-9112CV00445, 1992 WL 115576 (Tenn.Ct.App. June 1,
1992) (perm. app. denied Oct. 26, 1992). In that case, the
holder of a note had paid $700,000 at foreclosure for a
campground complex, and sued for a deficiency of almost
$550,000 on the note. At trial, the debtor presented an
appraisal that valued the property at the time of
foreclosure at over $2 million. The proof also showed that
the creditor offered the property for sale at a price of
$1.9 million. The trial court ruled in favor of the
plaintiff and granted it a judgment for the deficiency,
accrued interest, and expenses. On appeal, this court noted
that the debtor did not prove any fraud or bad faith on the
part of the creditor, and we cited the rule set out in Holt
v. Citizens Central Bank, supra, declaring that the
decision in that case was “broad enough to embrace the
issues in the case at bar.” McDill, 1992 WL 115576 at *2.

However, Mr. Smith counters by citing another opinion of
this court which appears to retreat from our holding in
McDill, at least in part. B & H Investments v. Brooks, No.
W1999-01252-COA-R3-CV, 2000 WL 1141566 (Tenn.Ct.App. Aug.
10, 2000) (no Tenn. R. App. P. Rule 11 application filed)
involved a debtor who borrowed about $20,000 to purchase a
piece of property. After he defaulted on the note, the
creditor foreclosed and purchased the property itself for
$6,000. The creditor then allegedly sold the property for
$18,000 and subsequently obtained a $16,000 deficiency
judgment against the debtor in the trial court. Because the
record was incomplete, we remanded the case to the trial
court for a determination of whether the property was
actually sold, and if so for what price.

In doing so, we cited our holding in McDill, that if a
contract so permits, a creditor will be allowed to recoup a
deficiency as a matter of legal right “unless there is bad
faith or fraud in connection with the foreclosure.”
However, we went on to say that “. . . the court disfavors
deficiency judgments when the party has been made whole and
seeks a windfall.” B & H Investments at *2 (citing the case
of Union Joint Stock Land Bank of Louisville v. Knox
County, 97 S.W.2d 842, 846 (Tenn.Ct.App. 1936).

Mr. Smith is asking this court to take the next step and
declare that it would be inappropriate for a court to award
a deficiency judgment under circumstances that would
unjustly enrich the creditor. He reasons that it would not
violate the Holt rule to disallow a deficiency judgment
where the foreclosing party does not need such a judgment to
be made whole, or where some irregularity outside of the
sale itself would make it inequitable for the creditor to
receive a windfall. Mr. Smith argues that under the trial
court’s interpretation of the law, it might be
hypothetically possible for a creditor who was careful to
make sure the foreclosure proceeding was free of defects to
bid only $1 for property worth $100,000 at the foreclosure
sale, recover the property, and also obtain a $99,999
deficiency judgment against the debtor.


This court must follow the dictates of the Tennessee
Supreme Court as set out in Holt v. Citizens Central Bank,
supra. However, we agree with Mr. Smith that Holt addressed
the requirements for setting aside a foreclosure and did
not involve a suit for deficiency judgment. While the
McDill and B & H Investments opinions are persuasive
authority, we are not bound to follow them. Tenn. R. Sup.
Ct. 4 (H)(1).

Before deciding whether we should adopt the Holt rule for
deficiency judgment cases, thereby agreeing with McDill, or
establish some other standard such as those used in other
states, we think it prudent to identify what Tennessee law
on this subject was prior to Holt. That exercise will tell
us what the law currently is if Holt made no change in the
law of deficiency judgments.

Prior to Holt, the relevant rules on deficiency judgments
after a foreclosure sale of real property were: (1) the
value of the property sold is not looked to in a deficiency
case unless there is a charge of fraud in the manner of
sale or a charge that the sales price was grossly
inadequate; (2) in the absence of an allegation of
irregularity in the sale, there is a presumption that the
price brought at the public sale is the fair market price
of the property; and (3) where gross inadequacy is claimed,
the burden of overcoming the presumption attached to a sale
free of irregularity is on the defendant against whom a
deficiency judgment is sought. Duke v. Daniels, 660 S.W.2d
793, 795 (Tenn.Ct.App. 1983).

Thus, a debtor could raise the issue of inadequacy of the
foreclosure sales price as a defense to an action to
collect the difference between the amount owed and the
foreclosure proceeds. In that situation, the issue before
the court is “the value of the real estate at the time of
the foreclosure.” Id., 660 S.W.2d at 794. What the Duke
opinion makes clear, however, is that there are certain
guidelines that must be applied by the court, including the
presumption that attaches where the defendant does not
allege any illegality, fraud or impropriety in the manner
of the sale. Nonetheless, the debtor is entitled to present
evidence about the fair market value of the property at the
time of the sale so as to attempt to overcome the
presumption and prove that the sale price was grossly

The principles set out in Duke are consistent with earlier
cases, such as Erwin Nat. Bank v. Riddle, 79 S.W.2d 1032
(Tenn.Ct.App. 1934), wherein the court held that the decree
of the trial court operated to give the debtors credit for
the approximate value of the property at the time of sale.
Id., 79 S.W.2d at 1041. The court discussed the proof of
market value considered by the trial court and its
resolution of the matter by persuading the lender to reduce
its deficiency judgment request. Id., at 1040-41. Erwin was
a deficiency judgment case where no challenge to the
conduct of the sale was made. Its primary relevance is that
the court allowed proof as to the fair market value of the
property, as distinguished from the amount paid for the
property at the foreclosure sale, so as to decide the
propriety of the amount of the deficiency judgment.

Similarly, in Brown v. Eckhardt, 129 S.W.2d 1122
(Tenn.Ct.App. 1939), the trial court heard from many
witnesses, including appraisers, as to the value of the
real property as of the date of the foreclosure sale. That
proof was relevant because the debtors alleged that the
amount bid by the creditor at the foreclosure sale was
inadequate and “[t]he inadequacy, if any, must be
determined on the basis of the real value of the land at
the time of the sale and its relation to the total debt
against the property” in the purchaser’s hand.[fn6] Id.,
129 S.W.2d at 1128.

While the standard set out in Duke v. Daniels has been
expressed in different ways,[fn7] no court has directly
overruled it. In Orlando Residence, Ltd. v. Nashville
Lodging Co., 104 S.W.3d 848, (Tenn.Ct.App. 2003), which was
not a deficiency judgment action per se, this court cited
both Duke v. Daniels and Holt for the proposition that
conclusive effect is given to the foreclosure sale price
absent some evidence of “irregularity, misconduct, fraud or
unfairness on the part of the trustee or mortgagee.”


We have concluded that Holt did not address the deficiency
judgment situation and did not mention Duke v. Daniels or
any other deficiency judgment case, and there is no other
controlling authority that changes the rules explained in
Duke. Consequently, the question we must decide is whether
to adopt the McDill statement that the Holt rule should be
applied to actions for deficiency judgment as well as
actions to set aside a foreclosure sale, thereby overruling
Duke v. Daniels. Even if we decide not to follow McDill, we
can also consider whether to adopt a rule from another
jurisdiction that modifies Duke v. Daniels.[fn8]

We begin with the Holt decision itself. There are a number
of important reasons to limit the bases upon which a
foreclosure sale may be set aside. Traditionally, the
courts have imposed higher burdens upon parties seeking to
rescind a deed or other transaction or to set aside or vary
the terms of recorded instruments. The Court in Holt was
particularly concerned with the vagueness and variability of
the old rule and in providing a greater degree of
reliability and certainty to parties who purchased land at
a foreclosure sale. Those reasons do not apply with equal
force to a post-foreclosure suit for deficiency judgment
where the creditor was the only bidder at the foreclosure
sale and no parties are involved in the deficiency action
other than the creditor and debtor.

Additionally, the Holt rule speaks in terms of
“irregularity, misconduct, fraud, or unfairness on the part
of the trustee or mortgagee.” (emphasis added) See also
Orlando Residence, Ltd. 104 S.W.3d at 855 (including
unfairness on the part of the mortgagee as a basis for
avoiding the conclusive effect of the sales price). In
states where fairness of the sale or unfair actions by the
creditor can be raised in defense of a deficiency judgment,
the foreclosing creditor’s failure to bid the fair value
may be a factor in determining unfairness. National Canada
Corporation, 868 P.2d 1131, 1134-35 (Colo.Ct.App. 1993)
(holding that under Colorado authority the sales price is
conclusive unless the debtor pleads and proves that the sale
was “not conducted in a strictly fair manner,” and a
creditor’s failure to bid the fair value together with
other factors may be evidence of unfairness).

Absence of irregularity in the conduct of the sale may be a
good reason to refuse to set aside a foreclosure sale,
especially in view of the other interests that may have
attached after the sale. However, unfairness in the conduct
of the sale is not the only kind of unfairness that may
result from a foreclosure sale to the creditor who was the
sole bidder. That situation creates the possibility of
unfairness in the price that is bid, no matter how strictly
the technicalities relating to a foreclosure sale are
followed. Thus, allowing a debtor to raise the inadequacy
of the sale price, as an indication of unfairness on the
part of the mortgagee, is not inconsistent with the quoted
language from Holt or contradictory to its goals.

The goal of fairness underlies the deficiency judgment
approach taken by the Restatement (Third), which is based
on determination of the fair market value of the land,
because that approach:

. . . enables the mortgagee to be made whole where the
mortgaged real estate is insufficient to satisfy the
mortgage obligation, but at the same time protects against
the mortgagee purchasing the property at a deflated
price, obtaining a deficiency judgment and, by reselling
the real estate at a profit, achieving a recovery that
exceeds the obligation. Thus, it is aimed primarily at
preventing the unjust enrichment of the mortgagee. This
section also protects the mortgagor from the harsh
consequences of suffering both the loss of the real estate
and the burden of a deficiency judgment that does not
fairly recognize the value of that real estate.

§ 8.4, comment a.

The fairness concept has been incorporated in other
situations involving foreclosure sale, and courts have
adopted rules to protect debtors from unfairness in a
creditor purchase at foreclosure and to prevent the
creditor from receiving a double recovery. See Penn Mutual
Life Ins. Co. v. Cleveland Mall Associates, 916 F. Supp.
715, 716-17(E.D. Tenn. 1996); Whitestone Savings and Loan
Assoc. v. Allstate Ins. Co., 270 N.E.2d 694 (N.Y. 1971).
This court has stated:

Property should bring its fair market value at
foreclosure sales. Mortgagees who bid in the property for
the full amount of the debt must have determined that the
property was worth at least as much as the debt since
reasonably prudent lenders would not purchase property
for more than its fair market value and would not
imprudently relinquish their right to pursue a deficiency
against the mortgagor. Allowing mortgagees to purchase
property for the full amount of the debt to assert that
the property is actually worth less than their bid
undermines the integrity of the foreclosure sale itself
and creates the possibility of fraud or of a double
recovery when the mortgagee seeks the proceeds of any
insurance on the property.

First Investment Co. v. Allstate Ins. Co., 917 S.W.2d 229,
231 (Tenn.Ct.App. 1995). Although the factual situation
addressed in First Investment Co. is different from that in
deficiency judgment situations, the goal of fairness should
apply equally to both situations.

In addition, Mr. Smith makes another argument on the basis
of the Holt decision itself. He observes that in rejecting
the “conscience-shocking” standard, the Holt court adopted
a rule that had previously been enunciated by the courts of
Texas and North Carolina. See Jinkins v. Chambers, 522
S.W.2d 614 (Tex.App. 1981); Swindell v. Overton, 302 S.E.2d
841 (N.C.App. 1983), and cited those opinions with
approval. He asserts that in both those states, however, the
kind of deficiency judgment granted in this case would have
been prohibited by operation of other features of the law,
specifically statutes.[fn9]

We have concluded that Holt does not govern the issue in
this case. We also respectfully decline to adopt the McDill
holding that the Holt opinion was “broad enough to embrace
the issues in the case at bar.” To the extent McDill can be
read to impose limitations on defenses to deficiency
actions that are greater than those enunciated in Duke v.
Daniels, we must also disagree with that holding and decline
to adopt it herein. Instead, we conclude that Duke v.
Daniels sets out the well established law in this area, and
the principles discussed therein apply to resolution of the
case before us.

We see no need to attempt to alter or tweak the Duke v.
Daniels standards. That approach is similar to the one
adopted by the Restatement of the Law of Property. The
applicable Restatement provision defines the deficiency as
the difference between the mortgage obligation and the
“fair value” of the foreclosed real estate. RESTATEMENT OF
THE LAW (THIRD) OF PROPERTY (Mortgages) § 8.4,
Reporter’s Note to Comment a. The section on actions for
deficiency after foreclosure provides:

(a) If the foreclosure sale price is less than the unpaid
balance of the mortgage obligation, an action may be
brought to recover a deficiency judgment against any
person who is personally liable on the mortgage obligation
in accordance with the provisions of this section.

(b) Subject to Subsections (c) and (d) of this section,
the deficiency judgment is for the amount by which the
mortgage obligation exceeds the foreclosure sale price.

(c) Any person against whom such a recovery is sought may
request in the proceeding in which the action for a
deficiency is pending a determination of the fair market
value of the real estate as of the date of the
foreclosure sale.

(d) If it is determined that the fair market value is
greater than the foreclosure sale price, the persons
against whom recovery of the deficiency is sought are
entitled to an offset against the deficiency in the amount
by which the fair market value, less the amount of any
liens on the real estate that were not extinguished by
the foreclosure, exceeds the sale price.

§ 8.4 (Foreclosure: Action for a Deficiency).[fn10]

The Restatement provision differs from the Duke v. Daniels
analysis in that it does not use the foreclosure sales
price as the beginning point and the presumptive fair
market value.[fn11] Whatever procedural rules or burdens of
proof apply, under both analyses the issue in deficiency
actions is the fair market value of the property at the time
it was sold. Thus, the fundamental principle is that the
deficiency judgment should reflect the difference in the
fair market value, if it is greater than the sales price,
and the amount still owed. We think this principle is
well-grounded and promotes the goal of fairness.

Further, although other approaches may be used, including
those imposed by statute, we think the use of the sales
price as the presumptive fair value, with the debtor having
the burden of raising its inadequacy and overcoming the
presumption by proof is also sound. As indicated, the
approach to deficiency judgments varies among the states.
PROPERTY have compiled those variances and explained them,
and we copy that explanation here since it fully and
accurately covers the area:

Several states continue to adhere to the common-law rule
that when a foreclosure sale does not yield at least the
amount of the mortgage obligation, the mortgagee is
entitled to a deficiency judgment measured by the
difference between the foreclosure price and the mortgage
obligation. Under this approach, the foreclosure sale
price is the conclusive measure of the amount to be
applied to the obligation unless the mortgagor can prove
that the foreclosure process itself was defective. See,
e.g., New England Sav. Bank v. Lopez, 630 A.2d 1010 (Conn.
1993) (power of sale foreclosure only); Garland v. Hill,
357 A.2d 374 (Md. 1976); Drannek Realty Co. v. Nathan
Frank, Inc., 139 S.W.2d 926 (Mo. 1940); Lindell Trust Co.
v. Lieberman, 825 S.W.2d 358 (Mo.Ct.App. 1992); Rhode
Island Depositors’ Economic Protection Corp. v. Macomber,
658 A.2d 511 (R. I. 1995); McDill Columbus Corporation v.
The Lakes Corp., 1992 WL 115576 (Tenn.Ct.App. 1992); Fitch
v. Buffalo Federal Savings & Loan Ass’n, 751 P.2d 1309
(Wyo. 1988); Abrams v. Federal Deposit Ins. Corp., 5 F.3d
1013 (6th Cir.1993) (Kentucky); Resolution Trust Corp. v.
Carr, 13 F.3d 425 (1st Cir.1993) (Massachusetts). Cf.
Resolution Trust Corp. v. Holtzman, 618 N.E.2d 418
(Ill.App.Ct. 1993) (foreclosure sale should be confirmed
and deficiency judgment entered unless “the terms of sale
were unconscionable, . . . the sale was conducted
fraudulently or . . . justice was not otherwise done.”).

At the opposite extreme, some states flatly prohibit
deficiency judgments in certain contexts. Some statutes
bar a deficiency judgment after a power of sale
foreclosure. See Alaska Stat. 34.20.100; Ariz. Rev. Stat.
§ 33-814(E); West’s Ann. Cal. Code Civ. Proc.
§ 580(d); Mont. Code Ann. § 71-1-317; Wash.
Rev. Code Ann. § 61.24.010, 040, 100. In addition,
several state statutes prohibit a deficiency judgment
after the foreclosure of a purchase money mortgage. See
Ariz. Rev. Stat. § 33-729(A); West’s Ann. Cal. Code
Civ. Proc. § 580(b); Mont. Code Ann. §
71-1-232; N.C. Gen. Stat. § 45-21.38; Or. Rev.
Stat. § 88.070; So. Dak. Cod. Laws §§
44-8-20 to 44-8-25. A few of these states apply the
deficiency prohibition to vendor purchase money mortgagees
only. See Mont. Code Ann § 71-1-232; N.C. Gen.
Stat. § 45-21.38.

The Uniform Land Security Interest Act (ULSIA),
promulgated by the National Conference of Commissioners on
Uniform State Laws in 1985, permits deficiency judgments
in general, but prohibits them as to purchase money
mortgages given by mortgagor-occupants of residential
real estate to vendors or third party lenders. ULSIA
§ 511(b). See Mixon and Shepard, Antideficiency
Relief for Foreclosed Homeowners: ULSIA Section 511(b), 27
Wake F. L. Rev. 455 (1992).

This section not only rejects each of the foregoing
limitations on deficiency judgments, but also the
traditional common-law view that the foreclosure sale
price should be automatically applied in measuring
deficiency judgments. Instead, the section adopts the
approach of the numerous states that through legislation
or judicial decision define the deficiency as the
difference between the mortgage obligation and the “fair
value” of the foreclosed real estate. See Ariz. Rev. Stat.
§ 33-814 (“fair market value” as of the date of
sale); West’s Ann. Cal. Code Civ. Proc. §§
580a (“fair market value” as of date of sale in power of
sale foreclosure), 726(b) (“fair value” as of sale date in
judicial foreclosure); Colo. Rev. Stat. Ann. §
38-38-106 (“fair market value”); Conn. Gen. Stat. Ann.
§ 49-14(a) (“actual value” as of date title vested
in mortgagee in strict foreclosure); Ga. Code Ann.
§ 44-14-161 (“true market value” as of sale date);
Idaho Code § 6-108 (“reasonable value”); Kan. Stat.
Ann. § 60-2415 (“fair value”); Me. Rev. Stat. Ann.
tit. 14, § 6324 (“fair market value” at time of
sale); Mich. Comp. Laws Ann. § 600.3280 (“true
value” at time of sale); Minn. Stat. Ann. § 582.30,
subd. 5(a) (“fair market value”); Neb. Rev. Stat. §
76-1013 (“fair market value” as of sale date); Nev. Rev.
Stat. §§ 40.455-40.457 (“fair market value” as
of sale date); N.J. Rev. Stat. § 2A:50-3 (“fair
market value”); N.Y. Real Prop. Acts. § 1371 (“fair
and reasonable market value” as of sale date); N.C. Gen.
Stat. § 45-21.36 (“true value” as of sale date);
N.D. Cent. Code §§ 32-19-06, 32-19-06.1
(“fair value”); Okla. Stat. Ann. tit. 12, § 686
(“fair and reasonable market value” as of sale date); Pa.
Stat. Ann. tit. 42, § 8103 (“fair market value”);
S.C. Code Ann. § 29-3-700 et seq. (“true value”);
S.D. Codified Laws Ann. § 21-47-16 (“fair and
reasonable value”); Tex. Prop. Code Ann. § 51.003
(“fair market value” as of sale date); Utah Code Ann.
§ 57-1-32 (“fair market value”); Wash. Rev. Code
Ann. § 61.12.060 (“fair value”); Wis. Stat. Ann.
§ 846.165 (“fair value”).

A few states appear to have adopted the fair value
approach through judicial decision. Florida courts have
significant flexibility in determining whether to use the
foreclosure price or the fair market value in measuring
the deficiency. See First Union National Bank of Florida
v. Goodwin Beach Partnership, 644 So.2d 1361
(Fla.Dist.Ct.App. 1994); Howell v. Gaines, 608 So.2d 64
(Fla.Dist.Ct.App. 1992); Mizner Bank v. Adib, 588 So.2d
325 (Fla. Dist. Ct. App. 1991) (party seeking deficiency
judgment must present competent evidence that the
mortgage indebtedness exceeds the fair market value of
the property); G. NELSON & D. WHITMAN, REAL ESTATE
FINANCE LAW § 8.3 (3d ed. 1994). But see Federal
Deposit Insurance Corp. v. Hy Kom Development Co., 603
So.2d 59 (Fla.Dist.Ct. App. 1992) (deficiency judgment
based on foreclosure sale price “is the rule rather than
the exception” unless fraud or other inequitable conduct
infects the sale process). In Mississippi, in a deficiency
proceeding, the mortgagee “must give the debtor fair
credit for the commercially reasonable value of the
collateral.” Shutze v. Credithrift of America, 607 So.2d
55, 65 (Miss. 1992). The Montana Supreme Court has used
its inherent equitable powers to require that fair market
value of the foreclosed real estate be the measure in a
deficiency proceeding. See Trustees of the
Wash.-Idaho-Mont.-Carpenters-Employers Retirement Trust
Fund v. Galleria Partnership, 780 P.2d 608, 614 (Mont.
1989) (“When the fair market value of property is
determined by the District Court, that figure would be the
basis of a deficiency judgment, if any”). Vermont, a
strict foreclosure state, requires that the value of the
foreclosed real estate be applied to the mortgage
obligation. See Licursi v. Sweeney, 594 A.2d 396, 398 (Vt.
1991) (The property was valued by the court far in excess
of the amounts owed. There is no deficiency, and the
plaintiff cannot recover).

Reporter’s Note to Comment a.

We see no reason to modify or tweak the holding of Duke v.
Daniels in light of the varying approaches surveyed.
Consequently, we hold that the trial court should have
applied the analysis set out in Duke v. Daniels to the
deficiency action below.


Mr. Smith raised as a defense the allegations that (1) the
foreclosure sales price was grossly inadequate and (2) that
the creditor unfairly bid that low price, acquired the
land, and sought a deficiency judgment that would
inequitably provide him a windfall. According to Duke v.
Daniel, Mr. Smith then had the burden of overcoming the
presumption that the price was fair. Duke v. Daniels, 660
S.W.2d at 795. We think the material he provided in support
of his opposition to summary judgment raised a dispute of
fact as to the actual fair value which was sufficient to
foreclose summary judgment for the creditor. Accordingly,
we reverse the grant of summary judgment. Costs of this
appeal are taxed against the appellees, William Manful, et

[fn1] Mr. King later learned through discovery that the four
additional signatories to the amended agreement did not
consider themselves members of the Tennessee general
partnership called the Lost Mountain Development Company.
Instead, they contended they were shareholders in a Florida
corporation, named Lost Mountain, Inc., which was created to
act as the managing partner of the Lost Mountain

[fn2] The court’s calculation of damages included the
outstanding balance on the loan, accumulated interest,
taxes, miscellaneous fees, attorney fees of over $133,000,
and liquidated damages of $500,000 pursuant to the amended
purchase agreement.

[fn3] Mr. King was the lender who foreclosed, bought the
property and requested a deficiency judgment. Mr. Manfull
then bought the property and the claim, in effect stepping
into Mr. King’s shoes.

[fn4] An operating limestone mine was formerly located on
the property.

[fn5] Courts in other jurisdictions have interpreted Duke v.
Daniels as permitting the issue of the value of foreclosed
property to be raised in a deficiency judgment action. See,
e.g., Fayette County National Bank v. Lilly, 484 S.E.2d
232, 238 (W.Va. 1997). Others have cited it for
establishing a presumption that the sales price is fair, and
the debtor must show gross inadequacy to overcome that
presumption. National Canada Corporation, 868 P.2d 1131,
1134-35 (Colo.Ct.App. 1993). The court in National Canada
also equated the Duke holding with Colorado authority that
the sales price is conclusive unless the debtor pleads and
proves that the sale was “not conducted in a strictly fair
manner” and if the sale was unfair, the amount of the
deficiency is to be determined by the factfinder.

[fn6] Although it is not entirely clear, it appears that the
inadequacy of the foreclosure sales price was raised in
connection with an argument to set aside the sale. However,
the court did not place the comments quoted in the context
of a ground for setting aside the sale as distinguished
from a reason to reduce or deny a deficiency judgment.

[fn7] For example, in a case focusing on damages sustained
through misrepresentation in the purchase of a home, this
court cited Duke for the proposition that the foreclosure
bid, absent any irregularity in the foreclosure itself, is
the best evidence of value at the time of the sale. Perry
v. Flatford, No. 03A01-9609-CH-00305, 1997 WL 44438
(Tenn.Ct.App. Feb. 5, 1997) (perm. app. denied June 30,
1997). The court added, “It is well-nigh conclusive.” Id.,
at * 3. In Albin v. Union Planters National Bank, 660
S.W.2d 784, 786 (Tenn.Ct.App. 1983), the master and trial
court determined that the foreclosure sales price was the
fair market value, and although the opinion does not detail
the evidence below, it remarks that the record of proof on
all the issues was voluminous and that none of the master’s
findings were precipitously made. In holding that the trial
court was not required to hear evidence of a later sale of
the property by the foreclosing lender, this court stated
such evidence would only be material if the foreclosure
sale price had been so low as to shock the conscience. Id.

[fn8] The parties have made some arguments based on
authority from other states, and we have conducted research
into the question of how other states approach deficiency
judgments, having been informed that Tennessee was not in
the majority (if the Holt holding applies to deficiency
judgments). We will discuss those findings later.

[fn9] For example, under Texas law, a party against whom a
deficiency judgment is sought may move the court to
determine the fair market value of the real property at the
time of the foreclosure sale. V.T.C.A. Property Code
Section 51.003. If the court finds that the fair market
value was greater than the foreclosure sale price, the
debtor or debtors are entitled to an offset against the
deficiency, in the amount by which the fair market value
exceeded the sale price. V.T.C.A. Property Code Section
51.004. Under North Carolina law, where the holder of a
secured obligation sells the real property at foreclosure
and becomes the purchaser of the secured property at the
foreclosure sale, the mortgagor is allowed to prove the
reasonable value of the foreclosed property, and to use
such value as a defense in deficiency suits. N.C.G.S.A.
Section 45-21.36. Most significantly, however, where a
foreclosure of mortgaged property is for the remaining
balance on a note executed as part of a purchase money
transaction, “the mortgagee or trustee or holder of the
notes secured by such mortgage or deed of trust shall not be
entitled to a deficiency judgment. . . .” N.C.G.S.A.
Section 45-21.38. According to Mr. Smith, North Carolina
recognizes that purchase money loans are different from
other loans secured by real estate because the value of the
property is evidenced by the arms-length transaction giving
rise to the loan. Since the present case arose from a
purchase money transaction, he argues that if this case had
been tried under North Carolina law Mr. Manfull would have
been found to have no cause of action against him at all.

[fn10] We do not purport to adopt the Restatement, but
merely point out that Tennessee law is not inconsistent
with its major provisions.

[fn11] The Restatement also defines fair market value as
specifically excluding the impact of the foreclosure.
§ 8.4, comment c (Defining ‘fair market value’),
which may be different from the approach taken by Tennessee
courts, which have specifically recognized that prices at
forced sales are frequently lower than if a voluntary sale
had been negotiated. See Holt v. Citizens Central Bank, 688
S.W.2d at 416.