Background
In April 2023, a residential real estate closing in Murfreesboro, Tennessee went awry when payoff funds meant for the Tennessee Housing Development Agency (“THDA”) — which services mortgages under the trade name Volunteer Mortgage Loan Servicing (“VMLS”) — were wired to an incorrect bank account. The closing agent, Closed Nashville LLC, had received wiring instructions forwarded by co-title agent Watauga Title & Escrow Co. that turned out to be inaccurate. THDA and VMLS threatened foreclosure when the funds never arrived, prompting Chicago Title Insurance Company (“CTIC”), the owner’s title insurer, to pay the claim to stave off the foreclosure.
CTIC sued Closed Nashville for indemnification, and Closed Nashville filed a third-party complaint against THDA, VMLS, Watauga, and Old Republic, alleging negligent cybersecurity failures that led to the misdirected wire. Closed Nashville argued that THDA’s sovereign immunity had been waived both by a “sue and be sued” clause in THDA’s enabling statute, Tenn. Code Ann. § 13-23-115(24), and by THDA’s alleged engagement in commercial rather than governmental activity — a theory drawn from the U.S. Supreme Court’s analysis of the TVA in Thacker v. Tennessee Valley Authority, 587 U.S. 218 (2019).
The Williamson County Chancery Court denied THDA’s motion to dismiss, accepting the Thacker-based commercial-activity argument. THDA and VMLS obtained an extraordinary appeal under Tenn. R. App. P. 10, and the Court of Appeals granted it.
The Court’s Holding
The Court of Appeals reversed, holding that THDA and VMLS retain sovereign immunity and that the chancery court erred in denying the motion to dismiss. The court ruled that the “sue and be sued” language in Tenn. Code Ann. § 13-23-115(24) does not, by itself, constitute an explicit waiver of sovereign immunity under Tennessee law. Under the Tennessee Constitution and established state precedent, a waiver of sovereign immunity must be expressed in “plain, clear and unmistakable terms” and must specify the manner in which suit may be brought — requirements that a generic “sue and be sued” clause does not satisfy.
The court further held that Tenn. Code Ann. § 9-1-103(a) expressly forecloses the argument: that statute provides that “any law authorizing an agency, board, or entity to sue or be sued shall not constitute a waiver of sovereign immunity,” and it protects all state appropriations — including THDA’s funds — from judgment or legal process. The court rejected the appellees’ contention that the statute’s reference to “incorporated entities performing the state’s governmental functions” left an opening for a commercial-activity exception, finding that THDA plainly performs governmental functions: it is legislatively created, tax-exempt, governed by state officials, dependent on state appropriations, and carries a statutory mission focused on affordable housing for low- and moderate-income Tennesseans.
The court also declined to transplant the federal Thacker commercial-activity framework into Tennessee sovereign immunity law, noting that federal precedent is instructive but not binding when interpreting state law. The court preserved one avenue for suit: THDA may still be named as a respondent before the Tennessee Claims Commission within the categories that body recognizes.
Key Takeaways
- A “sue and be sued” clause in a Tennessee state agency’s enabling statute does not waive sovereign immunity — Tennessee requires an explicit, plain-language waiver that also specifies the forum and manner of suit.
- Tenn. Code Ann. § 9-1-103(a) independently bars such claims: it expressly states that any law authorizing an agency to sue or be sued does not constitute a waiver, and it shields all state appropriations from legal process.
- The federal Thacker commercial-activity test for TVA-style entities does not govern Tennessee sovereign immunity analysis; state courts apply state constitutional and statutory standards.
- THDA’s mortgage-servicing operations do not strip it of sovereign immunity — its statutory mission, state funding, tax exemption, and government governance structure mark it as a governmental, not commercial, actor.
Why It Matters
This decision clarifies that title companies, closing agents, and other real estate professionals cannot look to THDA or VMLS as a deep pocket when wire fraud or misdirected payoff funds cause losses at closing. The ruling reinforces that Tennessee’s sovereign immunity framework is more resistant to commercial-activity exceptions than its federal counterpart, and that creative pleading strategies imported from federal TVA jurisprudence will not overcome the state’s explicit statutory bar.
For the title insurance industry, the practical consequence is stark: losses arising from erroneous THDA payoff instructions will need to be resolved among the private parties — closing agents, title agents, and their insurers — without recourse against the state agency. Practitioners should treat THDA wiring instructions with heightened verification protocols and confirm that indemnity chains among private parties are airtight before closing transactions involving THDA-held liens.