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R & J of Tenn., Inc. v. Blankenship-Melton Real Estate, Inc. - 166 S.W.3d 195 (Tenn. Ct. App. 2004)

Rule:

Tennessee follows the "rebuttable presumption rule" which governs a creditor's failure to comply with Tennessee's version of the Uniform Commercial Code. Under Tennessee law, in the event the creditors foreclose upon security interest in collateral and conduct a commercially unreasonable sale, there is a presumption that the debtor is damaged to the extent of the deficiency claimed. The fact of an unreasonable sale does not result in the extinguishment of any deficiency whatsoever. This presumption shifts the burden of proving to the creditor the amount that should reasonably have been obtained through sale conducted according to the law. The presumption is a presumption of law, and is a burden shifting device, requiring the party who is in a better position, to go forward with the evidence. Where evidence is presented sufficient to rebut the presumption, creditors are entitled to recover the deficiency. It is the burden of the secured party to rebut this presumption and failure to rebut the presumption with evidence of fair market value in the record results in denial of the secured party's claims for deficiency judgment.

Facts:

On February 23, 2000, Walden Blankenship ("Mr. Blankenship"), as acting president of Blankenship-Melton Real Estate, Inc. ("Blankenship-Melton"), entered into a loan transaction with the Bank of Henderson County (the "Bank"). In exchange for the Bank loaning Blankenship-Melton $ 40,133, Blankenship-Melton executed a security agreement granting the Bank a security interest in a 1999 Bryant boat, a New Holland tractor, a 1999 Ford F150 truck, and a 1994 mobile home. The agreement called for Blankenship-Melton to pay off the loan by June 18, 2000. The collateral used to secure the loan was purchased by Blankenship-Melton prior to entering into the loan. At the time the loan agreement was entered into in February of 2000, the Bank estimated the value of all of the collateral to be at least $ 40,000. Contemporaneously with the execution of the promissory note, Mr. Blankenship executed a guaranty agreement promising to remain personally liable on the promissory note owed to the Bank.  In addition, Larry Melton and his son, Steve Melton, the secretary of Blankenship-Melton, also executed personal guarantees to secure the loan. At some point, the loan went into default. Johnny Melton, the majority shareholder and president of R & J of Tennessee, Inc. ("R & J" or "Appellee"), purchased the promissory note from the Bank at a time Blankenship-Melton was already in default on the loan, and the Bank had already begun to institute foreclosure proceedings on the collateral. In June of 2002, Johnny Melton, acting as agent for R & J, began the foreclosure process. On June 11, 2002, Johnny Melton sent a notice to Mr. Blankenship indicating that the collateral would be sold at a public sale ten days later. On the date of the public sale, only Johnny Melton, on behalf of R & J, and Larry Melton were present, and only Johnny Melton placed a bid on the collateral. Consequently, R & J was able to purchase the collaterals. Johnny Melton, on behalf of R & J, filed a lawsuit against Mr. Blankenship in the General Sessions Court of Henderson County, seeking a deficiency judgment in the amount of $ 13,388 pursuant to the personal guaranty. The general sessions court found in favor of Mr. Blankenship, and R & J appealed the decision to the Circuit Court of Henderson County. Following a de novo bench trial, the circuit court entered a deficiency judgment against Mr. Blankenship in the amount of $ 10,847. Mr. Blankenship appealed asserting that he was not given proper notice of the public sale.

Issue:

Was Walden Blankenship given statutorily sufficient notice regarding the public sale of the collateral by the secured party?

Answer:

No.

Conclusion:

In deciding the case, the Court of Appeals noted that  § 47-9-611(b) did not require R & J to prove that Walden Blankenship actually received the notice. However the Court held the notice was insufficient as it was not sent in a reasonable manner as required by § 47-9-611 because R & J sent the notice and then conducted the sale 10 days later without any indication if the notice actually reached Walden Blankenship. The Court also held that the evidence showed that the sale was not held in good faith or in a commercially reasonable manner as required by Tenn. Code Ann. §§ 47-1-203 and 47-9-610(b) (2003) because in addition to inadequate notice, R & J failed to offer a reasonable explanation as to why he waited more than seven months to conduct the sale and allowed his relatives to continue using the collateral, which caused them to depreciate faster. Furthermore, the Court noted that R & J never advertised the sale in a public newspaper, utilized an experienced auctioneer, or used an independent appraiser. The court reversed and remanded the case, noting that because of the inadequate notice, Walden Blankenship might be entitled to statutory damages under Tenn. Code Ann. § 47-9-625.

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