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Regions Bank v. Thomas

Supreme Court of Tennessee, Jackson

October 16, 2017

REGIONS BANK
v.
THOMAS D. THOMAS, ET AL.

          April 5, 2017 Session

         Appeal by Permission from the Court of Appeals Circuit Court for Shelby County No. CT00511307 Robert L. Childers, Judge

         We granted this appeal to determine whether the Court of Appeals correctly applied the statutory "rebuttable presumption rule" under Article 9 of the Uniform Commercial Code, as codified at Tennessee Code Annotated section 47-9-626, in reversing the trial court and concluding that the Plaintiff, Regions Bank, was not entitled to recover a deficiency from the Defendants, Thomas D. Thomas, Helen L. Thomas, and The Thomas Family Living Trust. We conclude that both the trial court and the Court of Appeals erred in their respective applications of the "rebuttable presumption rule." Accordingly, the judgment of the Court of Appeals is reversed, the judgment of the trial court is vacated, and this matter is remanded to the trial court for further proceedings as set forth herein.

         Tenn. R. App. P. 11 Appeal by Permission; Judgment of the Court of Appeals Reversed; Judgment of the Trial Court Vacated; Case Remanded to the Trial Court

          David R. Evans and Timothy L. Mickel, Chattanooga, Tennessee, for the appellant, Regions Bank.

          Richard E. Charlton, Memphis, Tennessee, and Kirk L. Clements, Goodlettsville, Tennessee, for the appellees, Thomas D. Thomas, Helen L. Thomas, and The Thomas Family Living Trust.

          Jeffrey S. Bivins, C.J., delivered the opinion of the court, in which Cornelia A. Clark, Sharon G. Lee, Holly Kirby, and Roger A. Page, JJ., joined.

          OPINION

          JEFFREY S. BIVINS, CHIEF JUSTICE

         I. Factual and Procedural History

         This is the second appeal in this case, which arises out of a secured transaction between LGT Aviation, Inc. ("Debtor"), and the predecessor to the Plaintiff, Regions Bank ("Regions"). The pertinent facts are adequately set out in the two prior opinions of the Court of Appeals and are only briefly restated here. See Regions Bank v. Thomas, 422 S.W.3d 550 (Tenn. Ct. App. 2013), perm. app. denied (Tenn. Sept. 11, 2013) ("Regions I"); Regions Bank v. Thomas, No. W2015-00798-COA-R3-CV, 2016 WL 1719325, at *1 (Tenn. Ct. App. Apr. 27, 2016), perm. app. granted (Tenn. Oct. 21, 2016) ("Regions II").

         Debtor borrowed in excess of $2, 300, 000 from Regions' predecessor for the purchase of a 1981 Hawker 700-A aircraft ("Aircraft"), which secured the loan. Defendants Thomas D. Thomas, Helen L. Thomas, and The Thomas Family Living Trust (collectively, "Guarantors") jointly and severally guaranteed the loan. Following Debtor's default by failure to maintain insurance on the Aircraft, Regions accelerated Debtor's payment obligations. Debtor did not repay the accelerated loan, and in October 2007, Regions filed suit against Guarantors, seeking recovery of the outstanding loan balance, interest, costs, and attorney's fees. While suit was pending, Regions repossessed the Aircraft, expended funds to render it flightworthy, and then expended additional funds to render it marketable. Regions ultimately sold the Aircraft at a private sale on December 2, 2008, for $875, 000. Debtor continued to timely make all payments due on the loan until the Aircraft was sold.

         The trial court held a hearing over several days in May 2011, after which it entered judgment in favor of Regions. The trial court found that Debtor had breached the loan agreement and that the breach constituted a default, that Regions had disposed of the Aircraft in a commercially reasonable manner, and that Regions was entitled to recover a judgment for a deficiency in the amount of $1, 642, 771.91, plus pre-judgment interest in the amount of $945.15 per day for 859 days. Guarantors appealed.

         The Court of Appeals affirmed in part and reversed in part. Regions I, 422 S.W.3d at 567. The Court of Appeals affirmed the trial court's conclusion that Debtor had breached the loan agreement and had defaulted by failing to maintain insurance on the Aircraft, that Regions had not waived the breach and default, and that Regions had not acted in bad faith. Id. The Court of Appeals, however, reversed the trial court's finding that Regions had sufficiently complied with the notice requirements of Tennessee Code Annotated sections 47-9-611 and -613, and concluded that Regions' sale of the Aircraft had not been commercially reasonable on this basis. Id. The court vacated the trial court's deficiency judgment and remanded the case to the trial court for further proceedings, including discovery, on the amount of the deficiency, if any, to which Regions was entitled under Tennessee Code Annotated section 47-9-626. Id. at 566-67. The court deemed all remaining issues pretermitted. Id. at 567.

         On remand, no additional discovery was conducted and the trial court indicated that it would decide the case based upon the evidence previously introduced at trial, together with any additional evidence and deposition testimony already obtained but that the parties now wished to introduce. The parties were permitted to and did file proposed findings of fact and conclusions of law. On March 27, 2015, the trial court entered its "Findings of Fact, Conclusions of Law, and Judgment."[1] The trial court concluded that Regions had met its burden to rebut the presumption under Tennessee Code Annotated section 47-9-626 and that Regions was entitled to recover a deficiency in the total amount of $1, 210, 511.51. Regions II, 2016 WL 1719325, at *4. Guarantors again appealed.

         The Court of Appeals reversed. Id. at *1, *11. The Court of Appeals determined that, in order to rebut the presumption under Tennessee Code Annotated section 47-9-626, the burden was on Regions to prove that Guarantors could not have redeemed or purchased the collateral for an amount equal to the sum of the secured obligation, expenses, and attorney's fees had proper notice been provided. Id. at *10. The court further determined that Regions had failed to introduce any evidence to meet its burden of proof in this regard. Id. at *11. Accordingly, the Court of Appeals concluded that Regions had not rebutted the statutory presumption by presenting evidence that the sale of the Aircraft still would have yielded proceeds less than the sum of the secured obligation, expenses, and attorney's fees had proper notice been provided to Guarantors. Id. Therefore, Regions was not entitled to a deficiency. Id. The Court of Appeals further concluded that Guarantors lacked standing to seek any surplus pursuant to Tennessee Code Annotated section 47-9-625. Id. at *6-7.

         Regions filed an application for permission to appeal pursuant to Rule 11 of the Tennessee Rules of Appellate Procedure. We granted the application.

         II. Analysis

         A. Standard of Review

         This case involves the interpretation of a statute, which is a question of law subject to de novo review with no presumption of correctness. See Hardy v. Tournament Players Club at Southwind, 513 S.W.3d 427, 433 (Tenn. 2017). More particularly, it involves the application of a statutory presumption, which is a question of law, which we review de novo with no presumption of correctness. See Borner v. Autrey, 284 S.W.3d 216, 219 (Tenn. 2009). We review the trial court's findings of fact following a bench trial de novo upon the record with a presumption of correctness, "unless the preponderance of the evidence is otherwise." Tenn. R. App. P. 13(d); Cross v. City of Memphis, 20 S.W.3d 642, 644-45 (Tenn. 2000). We review issues related to the admission or exclusion of evidence at trial, including the admission or exclusion of expert testimony, for an abuse of discretion. See Otis v. Cambridge Mut. Fire Ins. Co., 850 S.W.2d 439, 442 (Tenn. 1992), on reh'g (Mar. 29, 1993).

         B. The Rebuttable Presumption Rule

         This case involves a secured transaction governed by Article 9 of the Uniform Commercial Code ("UCC"), as adopted in Tennessee in its revised form effective July 1, 2001. Tenn. Code Ann. §§ 47-9-101 to -709; 2000 Tenn. Pub. Acts 2402-540. This Court previously has explained the scope of UCC Article 9:

Article 9 provides a comprehensive statutory framework governing the secured transaction process, from how a creditor perfects its security interest to how it forecloses on that interest. After default, a secured party may take possession of the collateral and may sell or otherwise dispose of it. Tenn. Code Ann. § 47-9-610(a) (2001). In so doing, "[e]very aspect of [the] disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable." Tenn. Code Ann. § 47-9-610(b) (2001).

Auto Credit of Nashville v. Wimmer, 231 S.W.3d 896, 899-900 (Tenn. 2007). In addition to this requirement of commercial reasonableness in the disposition of the collateral, UCC Article 9 sets forth mandatory requirements regarding the provision of notice. Tenn. Code Ann. § 47-9-611;[2] Auto Credit of Nashville, 231 S.W.3d at 900.[3]

         At this stage of the proceedings, it has been conclusively determined that Regions failed to comply with the notice requirements of Tennessee Code Annotated section 47-9-611 in its disposition of the Aircraft. See Regions I, 422 S.W.3d at 567. This triggered the "rebuttable presumption rule, " as codified at Tennessee Code Annotated section 47-9-626. As codified, the rebuttable presumption rule provides:

In an action arising from a transaction in which the amount of a deficiency or surplus is in issue, the following rules apply:
(1)A secured party need not prove compliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance unless the debtor or a secondary obligor places the secured party's compliance in issue.
(2)If the secured party's compliance is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in accordance with this part.
(3)Except as otherwise provided in § 47-9-628, if a secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with this part relating to collection, enforcement, disposition, or acceptance, the liability of a debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the secured obligation, expenses, and attorney's fees exceeds the greater of:
(A) the proceeds of the collection, enforcement, disposition, or acceptance; or
(B) the amount of proceeds that would have been realized had the noncomplying secured party proceeded in accordance with this part relating to collection, enforcement, disposition, or acceptance.
(4)For purposes of paragraph (3)(B), the amount of proceeds that would have been realized is equal to the sum of the secured obligation, expenses, and attorney's fees unless the secured party proves that the amount is less than that sum.
(5)If a deficiency or surplus is calculated under § 47-9-615(f), the debtor or obligor has the burden of establishing that the amount of proceeds of the disposition is significantly below the range of prices that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.

Tenn. Code Ann. § 47-9-626 (emphasis added). As explained in the relevant comment to this statute:

[Section 47-9-626] establishes the rebuttable presumption rule for transactions other than consumer transactions. Under paragraph (1), the secured party need not prove compliance with the relevant provisions of this Part as part of its prima facie case. If, however, the debtor or a secondary obligor raises the issue (in accordance with the forum's rules of pleading and practice), then the secured party bears the burden of proving that the collection, enforcement, disposition, or acceptance complied. In the event the secured party is unable to meet this burden, then paragraph (3) explains how to calculate the deficiency. Under this rebuttable presumption rule, the debtor or obligor is to be credited with the greater of the actual proceeds of the disposition or the proceeds that would have been realized had the secured party complied with the relevant provisions. If a deficiency remains, then the secured party is entitled to recover it. The references to "the secured obligation, expenses, and attorney's fees" in paragraphs (3) and (4) embrace the application rules in Sections 9-608(a) and 9-615(a).

Tenn. Code Ann. § 47-9-626, U.C.C. cmt. 3; see also Tenn. Code Ann. § 47-9-101, U.C.C. cmt. 4(i).

         One leading treatise has explained the operation of the rebuttable presumption rule as follows:

On a first reading of section 9-626, one may have trouble finding the rebuttable presumption rule; it is buried in 9-626(a)(4). The drafters' plan for the application of 9-626 seems to be as follows. Under subsection (a)(1), the secured party does not need to prove compliance with Part 6 unless its compliance is "placed in issue." Presumably, one needs only to prove the amount received on the sale of the collateral and the amount the debtor owes. The difference between these numbers equals the "deficiency." If the secured party's compliance is put in issue, the creditor then has the burden of showing that the "collection, enforcement, disposition, or acceptance was conducted in accordance with this part." If the secured creditor fails to prove its compliance with Part 6, it suffers the consequence stated in 9-626(a)(4), namely, a presumption that "the amount of proceeds that would have been realized [if the secured creditor had complied] is equal to the sum of the secured obligation, expenses, and attorney's fees . . . ." Of course, if the amount that would have been realized equals the amount owed, there is no deficiency.
How does the secured creditor rebut the presumption arising from the rule by that name? The last clause in subsection 9-626(a)(4) ("unless the secured party proves that the amount received on compliance would be less than that sum") offers redemption to the misbehaving secured creditor. If it proves that a complying sale or other disposition would have brought an amount less than the amount due from the debtor, the secured creditor rebuts the presumption and earns a right to a deficiency judgment measured by the amount that would have been recovered in a complying disposition as the subtrahend in the formula (Owed-Would Have Brought). To understand all this, consider an example. Assume the debtor's total obligation (including costs of sale, etc.) to the creditor is $100, 000.
Assume also that the foreclosure sale produces $10, 000 and the debtor attacks creditor's notice or conduct of the sale. If the creditor proves it complied with Part 6 of Article 9, it recovers the full $90, 000. If the creditor fails to prove it complied, and does not prove what a complying foreclosure sale would have brought, the amount produced by a complying sale is presumed to be $100, 000 and the creditor recovers nothing. If the creditor is found to have violated Part 6, but proves, for example, that a complying sale would have produced only $15, 000, it recovers the difference between its debt and $15, 000, or $85, 000.

4 White, Summers, & Hillman, Uniform Commercial Code § 34:41 (6th ed. Dec. 2015) (emphasis added) (footnotes omitted); see also Hawkland UCC Series § 9-626 [Rev] (June 2016).

         Thus, pursuant to the rebuttable presumption rule, in order to recover a deficiency judgment, Regions was required to rebut the statutory presumption and to prove that, had it given Guarantors the required notice of the sale of the Aircraft, the proceeds from the sale still would have been an amount less than the sum of the secured obligation, expenses, and attorney's fees. Tenn. Code Ann. § 47-9-626(4).

         Messrs. White, Summers, and Hillman suggest that "the drafters [of the UCC] have done an admirable job making the law clear and, at least in business transactions, uniform, " and that "[s]ection 9-626 provides a clear roadmap for judges and lawyers." White, Summers & Hillman, supra, § 34:41 (footnotes omitted). This case suggests, however, that the roadmap contains a significant, unmarked turn. This case raises the question of the proper operation of the rebuttable presumption rule and, more particularly, the proof relevant to, and required or sufficient to, rebut the statutory presumption and permit the recovery of a deficiency under Tennessee Code Annotated section 47-9-626(3) and (4). This question does not appear to have been definitively answered by the drafters of the UCC, by the commentators, or by the courts in this or other states. Moreover, the trial court and the Court of Appeals reached differing conclusions in this case. We endeavor here to answer this question.

         During the trial before the first appeal and remand, the parties introduced evidence relevant to the rebuttable presumption rule. Regions, however, succeeded in precluding Guarantors from introducing evidence regarding what they could and would have done had they received notice of the sale and, particularly, evidence regarding their ability and motivation to redeem or purchase the collateral for an amount equal to the sum of the secured obligation, expenses, and attorney's fees. Guarantors made no offer of proof for the record, and Regions did not introduce any countervailing evidence. Because the trial court determined that Regions complied with the notice requirements under Tennessee Code Annotated section 47-9-611 and determined that the sale of the Aircraft was otherwise commercially reasonable under Tennessee Code Annotated sections 47-9-610 and 47-9-627, the trial court made no findings regarding the rebuttable presumption rule under ...


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