Banking Law Alert – August 2016 Edition

GIVE NOTICE TO GUARANTORS OF COLLATERAL SALE

A recent case decided this year by the Tennessee Court of Appeals emphasizes the importance of a Bank providing notice to all involved parties when selling collateral securing its loans upon default.  In the case of Regions Bank v. Thomas, the Court did not allow the Bank to collect a deficiency judgment owed to the Bank on its notes after the sale of collateral.  The Court found that the Bank failed to provide proper notice of the sale of collateral to guarantors of the loan.

Pursuant to the Tennessee Code, guarantors who have not granted any security interest in collateral are deemed to be "secondary obligators" under the definitions in the Code.  The trial court determined that the Bank should be awarded a judgment for the deficiency balance measured on the fair market value of the collateral at the time it was sold.  However, the Court of Appeals held that the Bank had provided no evidence that it would not have received an amount equal to the total loan balance owed if it had given the proper notice.  The Court placed the burden on the Bank to overcome the presumption that if proper notice has been provided to all parties then the Bank would have received payment in full at the sale of collateral.

OUR COMMENT:  A Bank could almost never prove what the Court required, since the guarantors could always claim that they could have bid enough on the property at the collateral sale to pay the debt or could have obtained another bidder who would have been willing to bid enough to pay the debt in full.

Therefore, it is extremely important to be sure that when collateral is sold, notice is provided to all obligors on the note and all guarantors and owners of the collateral.