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Cutshaw v. Hensley

Court of Appeals of Tennessee, Knoxville

July 29, 2015

WILLIAM WAYNE CUTSHAW ET AL.
v.
KENTON D. HENSLEY ET AL.

Session February 25, 2015

Appeal from the Chancery Court for Greene County No. 20110260 Douglas T. Jenkins, Chancellor

Jerry W. Laughlin, Greeneville, Tennessee, for the appellants, William Wayne Cutshaw and Tincy Faye Cutshaw.

David L. Robbins, Johnson City, Tennessee, for the appellees, Kenton D. Hensley and Pamela F. Hensley.

Charles D. Susano, Jr., C.J., delivered the opinion of the court, in which D. Michael Swiney and John W. McClarty, JJ., joined.

OPINION

CHARLES D. SUSANO, JR., CHIEF JUDGE

I.

The property at issue is approxmiately half an acre, improved with a building used as a gas station, convenience store, and deli-type restaurant. The Cutshaws bought the property in 1996 for $34, 125. They made significant improvements, including installing new gas pumps and rewiring the building's electrical system. The Cutshaws operated their business as Glendale Market & Deli until they sold it to the Hensleys in 2009. Buyer Pamela Hensley is the niece of seller Tincy Faye Cutshaw. William Wayne Cutshaw testified that Kenton Hensley approached him about buying the property. Mr. Hensley conversely testified that Mr. Cutshaw "come to me and and said that he was ready to retire and he was wanting to sell the store."

The parties agreed on a sales price of $215, 000. It is undisputed that the sales price included the sale of equipment and inventory used in the operation of the business, as well as the right to continue using the Glendale name. The parties closed the deal on August 17, 2009. The Hensleys paid $29, 000 down and executed two promissory notes, one in the amount of $11, 000 and the other for $175, 000. The $11, 000 note was paid in the fall of 2009. The $175, 000 note was secured by a deed of trust on the property.

The Hensleys struggled to operate the business profitably. They listed the property for sale in November of 2010 but were unable to sell it. The Hensleys made their last payment to the Cutshaws in January of 2011. The Cutshaws sent them a notice of default in June of 2011. The property was sold at a foreclosure sale on August 17, 2011. The Cutshaws were the high bidders and received the property back for $20, 000.

On September 8, 2011, the Cutshaws filed this action seeking to collect the balance owed on the $175, 000 note. Meanwhile, on October 5, 2011, the Cutshaws sold the property to Phillip Fletcher and Sharon Fletcher for $89, 000, all of which was paid in cash.

A bench trial was held on July 1, 2014. Three witnesses testified - Mr. Cutshaw, Mr. Hensley, and Gail Landers, a real estate broker who listed the property for the Hensleys in 2010. The trial court entered its final judgment on July 17, 2014, finding and holding in pertinent part as follows:

Although the [Hensleys] requested that the Court determine that the terms of the contract were unconscionable and wanted this Court to rescind the contract, the Court is disinclined to do so, since there appears, from the evidence presented, testimony as a whole, and the findings in this case, to be a valid contract.
The Court finds that the parties agreed to the value of the commercial establishment, and agreed that fair market value was $215, 000.00. The Court finds this number to be representative of fair market value for this property, since the buyer was willing to pay the seller that amount.
The Court also finds that after the Hensleys removed equipment and inventory from the building, that it retained a value very near $215, 000.00 and when sold again in 2011, the fair market value was at or near $215, 000.00.
If the Court reviews T.C.A. §35-5-118 regarding Deficiency Judgments, the Court notes that in paragraph (c), if the debtor can prove by a preponderance of the evidence that the foreclosure sale yielded an amount "materially less than the fair market value of the property, " the deficiency shall be the total amount of the indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale as determined by the Court.
The Court finds, through Mr. Cutshaw's testimony, that the property sold at the foreclosure sale was "materially less than the fair market value, " as he stated he bought it at the foreclosure sale for $20, 000.00.
Therefore, the Court acknowledges that the deficiency was $171, 620.30 and the costs of the foreclosure sale were $2, 000.00 totaling to $173, 620.30; while the fair market value of the property is $215, 000.00.
Using the formula pursuant to T.C.A. §35-5-118(c), the Court will deduct the fair market value of $215, 000 from the deficiency judgment of $173, 620.30 which leaves a negative balance equating to a balance of zero ($0.00) dollars.
Therefore, the Judgment awarded to the [Cutshaws] is in the amount of zero ($0.00) dollars.

(Numbering in original omitted.) The trial court also declined to award attorney's fees to either party. The Cutshaws timely filed a notice of appeal.

II.

The issues before us are whether the trial court erred in (1) finding the fair market value of the property to be $215, 000 at the time of the foreclosure sale, and (2) declining to award the Cutshaws a reasonable attorney's fee as provided by the terms of the promissory note.

III.

In this non-jury case, our standard of review is de novo upon the record of the proceedings below; however, the record comes to us with a presumption of correctness as to the trial court's factual determinations, a presumption we must honor unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d); Wright v. City of Knoxville, 898 S.W.2d 177, 181 (Tenn. 1995). There is no presumption of correctness as to the trial court's legal conclusions. Kendrick v. Shoemake, 90 S.W.3d 566, 569 (Tenn. 2002); Campbell v. Florida Steel Corp., 919 S.W.2d 26, 35 (Tenn. 1996).

IV.

This deficiency judgment action is governed by Tenn. Code Ann. § 35-5-118, which provides in pertinent part as follows:

(a) In an action brought by a creditor to recover a balance still owing on an indebtedness after a trustee's or foreclosure sale of real property secured by a deed of trust or mortgage, the creditor shall be entitled to a deficiency judgment in an amount sufficient to satisfy fully the indebtedness.
(b) In all such actions, absent a showing of fraud, collusion, misconduct, or irregularity in the sale process, the deficiency judgment shall be for the total amount of indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale. The creditor shall be entitled to a rebuttable prima facie presumption that the sale price of the property is equal to the fair market value of the property at the time of the sale.
(c) To overcome the presumption set forth in subsection (b), the debtor must prove by a preponderance of the evidence that the property sold for an amount materially less than the fair market value of property at the time of the foreclosure sale. If the debtor overcomes the presumption, the deficiency shall be the total amount of the indebtedness prior to the sale plus the costs of the foreclosure and sale, less the fair market value of the property at the time of the sale as determined by the court.

The Cutshaws argue that the Hensleys should be precluded from arguing that the foreclosure sale price was materially less than fair market value, because the Hensleys did not expressly make such an allegation in their answer or other pleading. We disagree. Clearly, both sides knew and argued that Tenn. Code Ann. § 35-5-118 was the controlling authority. Both the Cutshaws and the Hensleys presented proof and argument to the trial court regarding the fair market value of the property at the time of the foreclosure sale. The record reflects that both parties, and the trial court, understood that fair market value was at issue under the statute, and thus the issue was fairly tried by implied consent. See Tenn. R. Civ. P. 15.02; McLemore v. Powell, 968 S.W.2d 799, 803 (Tenn. Ct. App. 1997).

The initial, and fundamental, issue in this deficiency judgment action is whether the trial court erred in finding the fair market value of the property at the time of the foreclosure sale to be $215, 000. See Capital Bank v. Brock, No. E2013-01140-COA-R3-CV, 2014 WL 2993844 at *6 (Tenn. Ct. App. E.S., filed June 30, 2014) ("[T]he issue in deficiency actions is the fair market value of the property at the time it was sold"), quoting Lost Mtn. Dev. Co. v. King, No. M2004-02663-COA-R3-CV, 2006 WL 3740791 at *8 (Tenn. Ct. App. M.S., filed Dec. 19, 2006) (emphasis in Capital Bank). The trial court's valuation of property is a determination of fact, to which a presumption of correctness attaches in our review, unless the evidence preponderates otherwise. We review the evidence presented at trial pertaining to the property's fair market value.

Mr. Cutshaw testified as follows regarding his negotiations with Mr. Hensley over the price for the 2009 sale from the Cutshaws to the Hensleys:

Q. Do you recall whether or not there was an appraisal done when the store was sold ...

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