Supreme Court Clarifies Law When Bank Sells Loan Collateral Without Proper Notice

October 16, 2017

The Supreme Court of Tennessee issued guidance on the steps courts should follow when a creditor sells collateral used to obtain a loan, but does not provide the required notice of the sale. The case involved a bank loan that was used to purchase an airplane, with the plane itself and additional guarantors securing the transaction. When the debtor failed to maintain insurance, the bank, Regions Bank (“Regions”), placed the loan in default, and the resulting accelerated payments were not made. The bank filed suit against the guarantors. While that action was pending, Regions also repossessed the plane and spent money to make it flightworthy and marketable. Regions then ultimately sold the plane at a private sale for less than the amount owed to Regions.

The Supreme Court of Tennessee’s opinion provides guidance on the application of the rebuttable presumption rule under Uniform Commercial Code Article 9, as adopted by Tennessee. Under the presumption, if the creditor fails to provide sufficient notice to the debtor and guarantors of the pending sale of collateral, a rebuttable presumption is created. This presumption, unless rebutted by the creditor, provides that the amount of proceeds received from the sale are presumed to be equal to the total amount owed to the creditor.

In a prior appeal, the Court of Appeals determined that Regions failed to provide sufficient notice of the private sale and remanded the case to the trial court to determine if Regions could rebut the presumption. Regions did not appeal this initial decision. On remand, the trial court concluded that Regions had rebutted the presumption and awarded Regions a deficiency judgment. In this second appeal, the Court of Appeals disagreed and held that Regions, in order to rebut the presumption, must affirmatively introduce evidence to negate a debtor’s or guarantor’s ability or motivation to redeem or purchase the collateral. The Court of Appeals determined that Regions had not done so, so it reversed the deficiency judgment the trial court had awarded to Regions. The Supreme Court granted Regions’ request to appeal the decision of the Court of Appeals.

In its decision, the Supreme Court addressed the issue of how a creditor may rebut the presumption by proving that the amount the creditor would have received at a sale if the creditor had given proper notice was less than the amount outstanding to the creditor. The Court concluded that resolution of this issue was a fact question for the trier of fact, in this case the trial court, to decide. The Court expressly rejected the Court of Appeals’ evidentiary requirement regarding proof negating a debtor’s or guarantor’s ability or motivation to redeem or purchase the collateral. The Court then spelled out the proper procedures for a trial court to utilize to resolve this issue. Additionally, the Court found several inconsistencies and factual errors in the evidence cited to determine the fair market value of the plane.

The case was remanded to the trial court so the trial court can revisit its prior determination based upon the guidance provided in this opinion.

To read the unanimous opinion in Regions Bank v. Thomas D. Thomas, authored by Chief Justice Jeff Bivins, go to the opinions section of TNCourts.gov.